Explanatory Memorandum(Circulated by authority of the Minister Assisting the Treasurer, The Hon. Chris Hurford MP)
The main features of the Bills are as follows:
The Bill provides for the introduction of a comprehensive set of rules for the taxation of retirement and kindred payments.
The new taxation treatment proposed by the Bill is to apply to the following classes of payment made on or after 1 July 1983 :
- those retirement and kindred payments that are generally assessable as to 5 per cent of the amount paid under the existing law - this category includes payments from superannuation funds upon retirement through age or invalidity or upon other cessation of employment, "golden handshakes" and other severance payments, contractual termination payments, payments for unused sick leave and payments in compensation for loss of office or employment;
- certain amounts that have their origin in untaxed income and are not taxed at all under the existing law - this category includes payments in full or partial commutation of pensions and most classes of annuity, payments of residual capital values of such pensions and annuities, distributions made from superannuation funds in accordance with fund rules during an employee's service, and termination payments made by 2 or more instalments; and
- payments from funds - to be known as "approved deposit funds" - established as repositories for amounts which would otherwise be subject to the new rules, but which are freed from tax when deposited in such a fund within 90 days of receipt.
The changes will not apply to capital sums paid under covenants in restraint of trade or as compensation for loss of income through personal injury, payments that benefit the widow, widower or other dependants of a deceased person and amounts received on retirement or termination of employment in lieu of annual leave or long service leave. Payments of these kinds will remain subject to the existing law.
Where a payment is one to which the new rules apply - referred to in the Bill as an "eligible termination payment" - only that part of the payment that is referable to periods of service or fund membership after 30 June 1983 will be subject to the new tax treatment. The part referable to service or membership up to 30 June 1983 (the "before 1 July 1983 component") will continue to be taxed on the basis of the existing law. If, however, the "before 1 July 1983 component" is less than the amount the taxpayer could have expected to receive had he or she retired on 30 June 1983, that amount and not the calculated "before 1 July 1983 component" will continue to be taxed under the previous rules.
The standard "before/after" apportionment rule will be that the "before 1 July 1983 component" is the proportion of the payment that the period of a taxpayer's service or fund membership up to 30 June 1983 bears to the total period of service or fund membership. The total period may include periods of employment prior to fund membership and, where there has been a full transfer of benefits between funds or between a fund and the issuer of an annuity, will include periods of membership of the earlier fund or funds. Periods when moneys are held in an approved deposit fund are included as are, in the case of payments that are commutations or residual capital values of pensions or annuities, the periods of entitlement to those pensions or annuities. Where a retirement amount is only partially preserved by transfer to another fund, the proportion of the period up to 30 June 1983 to be used in the application of the "before/after" formula in relation to the payment from the second fund will equal the proportion of the "before 1 July 1983 component" of the first payment that is preserved.
The "before/after" formula will be varied where a premature termination of employment giving rise to an eligible termination payment occurs by reason of the taxpayer's physical or mental incapacity to engage in that employment. Where this occurs a notional period of service from the date of retirement to the date that would have been the taxpayer's normal retirement date will, in effect, be treated as part of both the total period of service and the component of that period up to 30 June 1983. As a result, the part of the payment that relates to both the actual period to 30 June 1983 and the notional period of service after invalidity retirement will continue to be taxed under the pre-existing rules - that is, only 5 per cent of that portion of the retirement amount is to be included in assessable income.
Payments subject to the new taxing rules may consist of four separate components :
- the part - the "before 1 July 1983 component" - referable to service or fund membership up to 30 June 1983. This part is to be taxed on the basis of the existing law. That means that, generally, 5 per cent of the amount will be included in assessable income, but in certain circumstances a lesser amount or no amount will be assessable. For example, if the payment results from the commutation of an annuity the "before 1 July 1983 component" could be expected to be tax-free. Again, if the payment is made by a paragraph 23(ja) or section 79 fund (self-employed or non-employer supported employee funds), in accordance with the fund's rules, the "before 1 July 1983 component" will be tax-free to the extent it is attributable to pre-20 August 1980 contributions and assessable as to 5 per cent on the balance of the "before 1 July 1983 component";
- contributions by the employee/fund member after 30 June 1983 - "undeducted contributions" - that have not attracted a tax deduction. This component is to be free from tax;
- the part of the eligible termination payment that is referable to the period of service/membership after 30 June 1983, reduced by the component referred to in paragraph (b) above (the "after 30 June 1983 component"). The "after 30 June 1983 component" is included in full in assessable income, but a tax rebate will apply, where necessary, to ensure that:
- the "after 30 June 1983 component" of a payment received before the taxpayer reaches 55 years of age is taxed at a flat rate of 30 per cent; and
- the first $50,000 of the "after 30 June 1983 component" of a payment received at age 55 or later is taxed at 15 per cent, with the balance taxed at 30 per cent. The $50,000 threshold applies only once for each taxpayer. If a taxpayer receives one payment with an "after 30 June 1983 component" of less than $50,000, the balance of the $50,000 may be applied to the "after 30 June 1983 component" of a later payment;
- the part of an eligible termination payment upon the bona fide redundancy of an employee (a "bona fide redundancy payment"), a payment under an approved early retirement scheme involving the rationalisation or reorganisation of an employer's operations, or an invalidity payment. This component - the "concessional component" - is to be included in assessable income only as to 5 per cent. The concession for bona fide redundancy and early retirement payments will apply to such part of the eligible termination payment as exceeds the amount that would have been received had the employee resigned on the date of the retrenchment or early retirement.
Whether or not an eligible termination payment is accorded the tax treatment set out above will depend upon the extent, if any, to which the payment is "rolled-over" by way of payment to any of the following :
- a superannuation fund for the provision of superannuation benefits for the taxpayer or his dependants in the event of the taxpayer's death;
- an approved deposit fund maintained by an "approved trustee"; or
- a life assurance company, friendly society, trade union or other employee association for the purchase of an annuity for the benefit of the taxpayer or his or her dependants in the event of the taxpayer's death.
Any part of any of the above four components of an eligible termination payment may be "rolled-over" in this manner. To the extent to which a component of an eligible termination payment is "rolled-over", that amount will be exempt from tax unless and until it is returned to the taxpayer in a taxable form. Undeducted contributions will, as earlier explained, be exempt whether or not they are "rolled-over". That part of a component not "rolled-over" will attract the treatment described earlier, relevant to the particular component.
A taxpayer will generally have 90 days from the date of the eligible termination payment in which to make a "roll-over" payment. The "roll-over" period in relation to a termination payment made before the date of commencement of the Bill is the period beginning when the payment was made and ending 90 days after commencement date. The Commissioner of Taxation will have the power to extend the "roll-over" period in special circumstances.
Where the otherwise fully assessable "after 30 June 1983 component" is used in the purchase of an annuity or pension, the amount of that component will not, because it has been treated as tax-free when "rolled-over", be allowable as a deduction when the annuity or pension is received. That is, it is not to be treated as "undeducted purchase price". The other components of an eligible termination payment, if used to purchase an annuity or pension, will, however, form part of the undeducted purchase price.
An approved deposit fund will be a trust fund established as an indefinitely continuing fund for approved purposes. Approved purposes will be to receive on deposit amounts of eligible termination payments, to deal with those amounts in accordance with rules that are contained in the Bill, and to repay those amounts with accumulated earnings on request not later than the sixty-fifth birthday of the depositor. If, at the time an amount is "rolled-over" into an approved deposit fund, the fund is maintained by an approved trustee the "rolled-over" part of the eligible termination payment is freed from tax.
An "approved trustee" of an approved deposit fund is a trustee that is:
- a life assurance company;
- a bank;
- certain financial corporations - including building societies and credit unions;
- a trade union or other employee association;
- a friendly or benefit society;
- a trustee/executor corporation; or
- a body that is, or is included in a class of bodies that is, prescribed by regulation.
If an approved deposit fund is maintained at all times during a year of income by an approved trustee as an indefinitely continuing fund for approved purposes and with approved rules, the income of the fund is to be exempt from tax. The Commissioner is to have a discretion to disregard non-compliance with exemption requirements in special circumstances.
The income of an approved deposit fund that is not exempt from tax will, if it is maintained by an approved trustee on the last day of the year of income, be subject to tax at a rate of 46 per cent. If it is not so maintained, the income of the fund would fall to be taxed under the general trust provisions of the income tax law.
Payments from approved deposit funds to depositors are to be eligible termination payments, irrespective of the tax treatment the income of the fund has received.
The PAYE tax instalment deduction provisions are to be amended by the Bill to require that PAYE deductions be made at the time an eligible termination payment is made to a person. Such deductions will be required whether or not the payment is made by the employer of the person, e.g., PAYE deductions will be required to be made by the trustee or manager of a superannuation fund or an approved deposit fund on withdrawal of a deposit. The amendments permit special rates of deduction to be prescribed by regulation and provide special rules for registration as a group employer, for dealing with group certificates and tax stamps sheets and for refunding tax instalment deductions where an eligible termination payment is "rolled-over". The PAYE measures are to apply from 1 August 1984.
In connection with the introduction of the new rules for taxing superannuation and other retirement payments, the Bill proposes 2 distinct sets of measures which will significantly alter the way in which the income tax law treats income received in the form of annuities (including superannuation pensions) and investment income referable to the annuity business of organisations that issue annuities.
The Bill will change the existing method of assessment of annuities to:
- assess annuity supplements; and
- take into account -
- residual capital values; and
- the life expectancies of a wider range of persons
- in determining the part of the annuity to be excluded from assessable income as representing the undeducted purchase price.
Life assurance companies, which at present are exempt from tax on income that is referable to their superannuation policies, are to have that exemption extended by the Bill to income from annuities that are presently payable (immediate annuities) and annuities purchased by the "roll-over" of an eligible termination payment. Other annuity investment income will remain taxable. Consistent with that measure, the Bill will provide equivalent treatment to the investment income referable to the annuity business of other organisations which, in accordance with the Life Insurance Act, may issue annuities. The rate of tax to apply to the taxable annuity business of those organisations (trade unions, other employee associations and friendly and benefit societies) is to be 20%.
The Bill will give effect to the announcement in the 1983-84 Budget that, in light of a number of technical deficiencies revealed by decisions of the courts, the law relating to the taxation of profits arising from the sale by the taxpayer of property acquired for the purpose of profit-making by sale would be strengthened.
It is proposed that the existing provision of the law - paragraph 26(a) of the Income Tax Assessment Act - under which certain speculative gains are included in assessable income will be repealed, with effect from 24 August 1983, and re-enacted in a new section - section 25A - operative from that date. The new section will include the remedial measures necessary to overcome the technical deficiencies referred to in the Budget announcement.
The first such measure relates to situations where an entity, typically a private company, acquires property with the intention of profit-making by sale but, when the property has appreciated in value, the proprietors of the company effectively dispose of the property and realise the profit by selling some or all of the shares in the company.
Proposed section 25A addresses this situation by providing that such part of the proceeds of sale of shares after 23 August 1983 as represents a profit on the effective disposal of the interest in the underlying property effectively held by the company will be included in assessable income. This provision will also apply to the disposal of an interest in a partnership or private trust estate which holds such underlying property, or where an interest in property is effectively held through a chain of companies or through any combination of interposed companies, partnerships or trusts.
The second measure proposed by the new section is to include in assessable income profits from the sale of bonus shares or rights arising from shares where any profit on disposal of the original shares would be assessable. This amendment will apply to tax profits from the sale of such bonus shares or rights acquired after 23 August 1983.
A third situation proposed to be dealt with by the Bill is one where a person acquires property for the purpose of profit-making by sale and gifts that property or transfers it for inadequate consideration to another person, so as to avoid or minimise any tax liability that would have arisen if the original owner of the property had disposed of the property. In these circumstances, where the property is transferred in a non-arm's length manner after 23 August 1983, the new provisions will treat the transferee as having also acquired the property for the purpose of profit-making by sale. As a consequence, if the property is subsequently sold by the transferee, that person will be assessed on any profit calculated as if the property had been acquired for the same price as the original owner paid for it.
By these measures, profit on the sale of property acquired by distribution in specie to a shareholder in a private company or a beneficiary of a trust estate will also be assessable if the property was acquired by the company or trustee for the purpose of profit-making by sale. These measures will not apply, however, to disposals of property acquired by a beneficiary in a distribution from a deceased estate.
The final measure proposed will correct a latent deficiency in this area of the law on a narrow view of the existing law that it is necessary for its application to find strict legal identity between the property acquired for resale at a profit and the property subsequently sold. This amendment is to meet situations where a taxpayer sells an interest in property, a greater interest in which had been acquired for the purpose of profit-making by sale, or where a taxpayer sells property or an interest in property in which is merged an interest in property that was acquired for the purpose of profit-making by sale. In both cases, new section 25A will ensure that such part of the proceeds of sale as appropriately represents profit realised on the sale after 23 August 1983, of the property, or the interest in property, which was acquired for resale at a profit will be subject to tax.
While these measures will remove technical deficiencies concerning the application of the law relating to the taxation of speculative profits, it has also been necessary to make a number of consequential and complementary technical amendments to the income tax law dealing with the circumstances in which a loss on the disposal of property may be allowed as a deduction. These amendments are contained in clause 17.
Under amendments proposed by the Bill, taxpayers who become initial subscribers for shares in companies that have been granted a licence under the Management and Investment Companies Act 1983 are to be entitled to deductions from their assessable income for the amounts they subscribe, including any share premiums.
Deductions so allowed will be withdrawn in the event of a taxpayer disposing of his shares within 2 years after the date on which the shares became fully paid-up or the last date on which moneys were paid on them. If there is a disposal in the third or fourth year, the deduction will be reduced by 50 per cent and 25 per cent respectively.
For the purposes of these rules, a shareholder will be treated as having sold his shares in a licensed MIC if any of the following events occur:
- the MIC's licence is revoked or not renewed by the Licensing Board;
- the shareholder's shares are redeemed by the MIC;
- the shares are cancelled or paid-off as part of a reduction of the capital of the MIC;
- the capital value of the shares is reduced; or
- the shares are forfeited for non-payment of calls.
Subscriptions will generally attract deductions only if made at a time when the MIC is licensed, an exception being where the MIC Licensing Board determines that a subscription was made in anticipation of, or to ensure that the company would qualify for, the grant of a licence.
Safeguarding provisions will authorise the Commissioner of Taxation to treat MIC shares owned by a private company, a partnership or the trustee of a private trust estate as having been disposed of to the extent that this is reflected in a disposal of shares in the interposed company, or of an interest in the partnership or trust estate, by persons who have indirectly gained the benefit of deductions allowed for subscriptions paid on the MIC shares by the interposed company, partnership or trustee.
The Bill also provides for exemption from tax of rent subsidy payments made direct to tenants under the scheme known as the Mortgage and Rent Relief Scheme. Under that scheme, the Commonwealth and the States and the Northern Territory share the cost of providing various forms of short-term financial assistance to tenants and mortgagors who are experiencing genuine financial difficulty in meeting their rent or mortgage commitments. Apart from those rent subsidies that are paid direct to the tenant, payments made under the scheme have no tax consequences for the tenants and mortgagors being assisted.
The proposed exemption will ensure that comparable levels of assistance are provided to all those qualifying for effective relief, and will apply to all rent subsidy payments made direct to persons being assisted after 17 August 1982 when the scheme commenced.
The Bill will clarify, in relation to property that is used only partly for the purpose of producing assessable income, the operation of section 53 of the Income Tax Assessment Act which authorises deductions for repairs.
The need for this action arises from a decision handed down by a Taxation Board of Review which allowed a deduction for the whole of the cost of repairs to a car in a year of income, although the car was used only partly for business purposes in that year. Under the amendment proposed, the previously understood operation of section 53 will be restored so that expenditure on repairs will be deductible only to the extent that it is incurred for the purpose of producing assessable income.
Three other provisions of the income tax law which might be affected by the principles emerging from the Board's decision - those which authorise deductions for expenses of borrowing (section 67), expenses relating to lease documents (section 68) and expenses relating to the grant of patents, etc. (section 68A) - are similarly being amended.
In each case the amendment will apply to expenditure incurred after 18 April 1984.
The Bill will amend the gift provisions of the income tax law under which deductions for gifts to the value of $2 or more are available for gifts made to specified funds, authorities, or institutions in Australia to extend tax deductibility to gifts, made on or after 27 June 1983 and before 1 December 1983, to the IDEC African Famine Appeal.
The Bill will give effect to the proposal announced in the 19 May 1983 Economic Statement to impose income tax on the investment income of friendly societies from their life, disability and accident insurance business for the 1983-84 and later income years. The relevant taxable income is to be taxed at a rate of 20 per cent. Full details of the taxing arrangements were announced on 17 April 1984.
Clause 36 of the Bill proposes to insert a new Division 8A in Part III of the Principal Act. This Division will specify the basis for taxing friendly societies on their insurance business. By these provisions, friendly societies are to be taxed on the income they receive, other than premiums, from their life, disability and accident insurance business. With the exception of income from some annuity business described below, friendly societies will continue to be exempt on other income, including that derived from superannuation policies and other traditional friendly society business, namely the issuing of sickness and funeral insurance policies.
Proposed new Division 8A will also operate to tax friendly societies, as well as trade unions and employee organisations registered under the Conciliation and Arbitration Act 1904, on their income from certain annuity business. In this regard, the annuity business income that is to be included in the assessable income of these bodies will be limited to the amount of investment income derived from annuity business which, if derived by a life assurance company, would be treated as assessable income of that company. Details of the extent to which life offices are to be subject to tax on income from their annuity business are explained under the heading "Taxation of Income Referable to Annuity Business" in the earlier notes on the proposed basis of taxing superannuation funds, payments on termination of employment and kindred payments.
In determining the taxable income of a friendly society or other organization to which Division 8A will apply, the assessable income determined on the basis referred to above will be reduced by any deductions allowable under the Principal Act which relate exclusively to earning that assessable income, and a proportion of any other allowable deductions, other than those that relate exclusively to earning exempt income. The resultant taxable income will be taxed at a rate of 20 per cent which will, in the normal course, be declared and imposed by the Act that fixes rates of tax payable by companies for the 1984-85 financial year.
Friendly societies and other organisations that are to be taxed in accordance with new Division 8A are, by an amendment to section 103A of the Income Tax Assessment Act proposed by clause 28, to be treated as public companies. They will thus not be subject to the provisions of Division 7 which impose additional tax on private companies in respect of certain undistributed income. These bodies will not, however, be eligible for the rebate which applies to dividends received by one company from another.
Clause 51 of the Bill will, in accordance with the announcement on 17 April 1984, extend the operation of section 160AAB of the Income Tax Assessment Act to authorise a rebate of tax, at the standard rate of tax, in respect of any amount that, by virtue of section 26AH of that Act, is included in a taxpayer's assessable income in respect of a life assurance policy issued by a friendly society. This measure will ensure that bonuses paid by friendly societies out of income on which they are to be subject to tax, will not be subject to taxation again when received by policyholders. The rebate, which is already available in respect of taxable bonuses paid by life assurance offices that are subject to income tax, will apply to bonuses paid by friendly societies that are assessable in a policyholder's hands in the 1983-84 and later income years.
The Bill will extend the deduction allowable under Division 10AAA of Part III of the Assessment Act, over 10 or 20 years at a taxpayer's option, for capital expenditure, or capital contributions to capital expenditure, incurred on a railway, road, pipeline or other facility used primarily and principally for the transport of minerals, mineral products and unrefined petroleum obtained from mining operations in Australia. At present, deductions relating to expenditure, or to contributions towards expenditure, on railway rolling-stock are not allowable under that Division.
Under the proposed amendments deductions will be allowable for capital expenditure incurred by a taxpayer after 9 March 1984 by way of contribution to capital expenditure by a government or tax-exempt government authority on railway rolling-stock.
This clause will give effect to the proposal, announced on 3 May 1984, to repeal section 221YHE of the Principal Act under which a payee is required to forward with his annual income tax return all deduction forms that relate to prescribed payments made to the payee in respect of the year of income to which the return relates.
Basically, the change is designed to further refine the administration of the prescribed payments system by reducing the paperwork burdens associated with the system in connection with the preparation and lodgment of income tax returns. The change will apply in respect of 1983-84 and subsequent returns.
The second Bill will amend the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983 which declares and imposes the rates of tax payable for the 1983-84 financial year and, until the Parliament otherwise provides, for the 1984-85 financial year, by companies, trustees or corporate unit trusts, trustees of superannuation funds and trustees of trust estates who are taxed on behalf of non-resident company beneficiaries.
The amendment proposed by this Bill will extend the operation of the Act so that it also declares and imposes the rates of tax payable on the taxable income of ineligible approved deposit funds, that is, approved deposit funds which fail to meet statutory requirements of tax exemption. That rate will be 46 per cent, the rate applicable to companies generally.
More detailed explanations of each of the provisions of the Bills are contained in the notes that follow.