House of Representatives

Income Tax Assessment Amendment Bill (No. 3) 1984

Income Tax Assessment Amendment Act (No. 3) 1984

Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984

Income Tax (Companies Corporate Unit Trusts and Superannuation Funds) Amendment Act 1984

Explanatory Memorandum

(Circulated by authority of the Minister Assisting the Treasurer, The Hon. Chris Hurford MP)

Notes on Clauses

INCOME TAX ASSESSMENT BILL (NO. 3) 1984

Clause 1: Short title, etc.

By sub-clause(1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act (No. 3) 1984.

Sub-clause(2) facilitates references to the Income Tax Assessment Act 1936, which is the Act being amended by this Bill. The Income Tax Assessment Act 1936 is referred to in the Bill as "the Principal Act".

Clause 2: Commencement

Under clause 2 the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

This clause proposes to effect two amendments of a technical kind to sub-section 6(1) of the Principal Act, which contains definitions of words and phrases used in that Act.

The proposed amendments are to the definition of "apportionable deductions" in sub-section 6(1) - consequential upon the proposed insertion, by clause 21, of new section 77F containing provisions authorising deductions for share capital subscribed to licensed Management and Investment Companies - and the repeal, by clause 23, of section 79.

The term "apportionable deductions" refers to deductions of a concessional nature which do not directly relate to the production of assessable income. The definition enables deductions of this kind to be apportioned on a pro-rata basis against various classes of income for purposes of certain provisions of the Principal Act and the Income Tax (International Agreements) Act 1953.

By paragraph 3(a), deductions under section 77F are to be treated as apportionable deductions and, by paragraph 3(b), the reference to section 79 is deleted from the relevant definition, both changes to be effective from the commencement of the 1984-85 income year.

Clause 4: Cost of certain shares

The amendment in clause 4 is also consequential upon the repeal of section 79 of the Principal Act - see clause 23. Section 6BA of the Principal Act provides that, where a taxpayer acquires shares in a company which subsequently issues bonus shares in connection with the original shares, the taxpayer is deemed to have paid no consideration for the bonus shares, but the cost of the original shares is apportioned to the original shares and the bonus shares for the purpose of determining whether any profit or loss arises on the disposal of any of those shares. This apportionment did not, however, apply to bonus shares issued to a superannuation fund to which section 79 applied because sub-section 79(23) already contained its own formula for ascertaining the cost of bonus shares. The repeal of section 79 makes the reference in sub-section 6BA(1) to sub-section 79(23) no longer relevant and this clause will delete that reference.

Clause 5: Officers to observe secrecy

This clause proposes amendments to the secrecy provisions contained in section 16 of the Principal Act to enable, where necessary for the purpose of monitoring the deduction scheme in new section 77F (clause 21) for share capital subscribed to licensed Management and Investment Companies, taxation information to be made available to a Minister, the Secretary to the Treasury or the Secretary to the Department of Science and Technology. The opportunity is also being taken for contemporaneous formal amendments to replace redundant references in sub-sections 16(5B) and (5C) to ministerial portfolios that do not accord with current administrative arrangements.

Clause 6: Exemptions

This clause will amend section 23 of the Principal Act, which exempts certain income from tax.

The amendment proposed by this clause will exempt from income tax payments made direct to tenants by way of rent subsidy under the scheme known as the Mortgage and Rent Relief Scheme. Under that scheme, the Commonwealth and the States and Northern Territory share on a 50/50 basis the cost of providing short-term financial assistance to tenants and mortgagors who are experiencing genuine financial difficulty in meeting their rent or mortgage commitments. Payments under the scheme may take the form of rent subsidies, help with bond and/or re-location expenses and assistance with mortgage repayments. In most cases, the payments have no income tax consequences for the tenants and mortgagors being assisted, either because the payments are not of an income nature or because they are not made to the tenant or mortgagor. In some cases, however, periodic rent subsidy payments are made direct to tenants and when that occurs the payments are assessable income in their hands.

Clause 6 will insert in section 23 of the Principal Act a new paragraph - paragraph (ke) - to exempt from income tax payments by way of periodic rent subsidies under the Mortgage and Rent Relief Scheme that are made direct to the person being assisted.

The amendment will apply, by the operation of sub-clause 60(1), to payments of rent subsidies made after 17 August 1982, when the scheme commenced.

Clause 7: Exemption of income of certain superannuation funds established for benefit of employees

Clause 7 proposes an amendment to section 23F of the Principal Act consequential on the exemption of the income of approved deposit funds under proposed new section 23FA (see notes on clause 8).

Sub-section 23F(2) of the Principal Act contains various conditions which must be met by a superannuation fund established by an employer for employees (a "section 23F fund") in order for the income of the fund to be exempt from tax. Paragraph 23F(2)(h) places a limit on the level of benefits that may be paid to an employee or his or her dependants from a section 23F fund. In determining the level of benefits that may be paid, regard is to be had to the employee's remuneration and the period of service with the employer. To ensure that benefits from several funds do not in aggregate exceed the permissible level of benefits, regard is also to be had to benefits, pensions and allowances provided or to be provided under any other section 23F fund.

With the introduction of approved deposit funds it is necessary, in determining the level of permissible benefits provided from a section 23F superannuation fund, to have regard to benefits accruing to the taxpayer or his or her dependants in any approved deposit fund or funds. This will be effected by the inclusion by paragraph (a) in sub-paragraph 23F(2)(h)(iii) of the Principal Act of a reference to funds to which proposed section 23FA will apply.

Where an eligible termination payment is used to purchase an annuity the amount so used will be free from tax until paid as the annuity. Where an annuity purchased is not immediately payable, but is deferred, the investment income of the annuity issuer in relation to that "roll-over annuity" (see explanation of this definition in the notes on clause 15) is to be exempt from tax. Thus, the benefits of tax exempt accretions will be provided for roll-over annuities in much the same way as those enjoyed by superannuation pensions provided by section 23F funds. For this reason, a new sub-paragraph (iiia) will be inserted into paragraph 23F(2)(h) to require any roll-over annuities purchased by the employee to be taken into account in determining the reasonableness of benefits provided by any section 23F superannuation fund.

The amendments proposed by clause 7 will have effect in relation to benefits provided under section 23F superannuation funds in relation to the 1983-84 year of income and all later years of income.

Clause 8: Exemption of the income of certain approved deposit funds and superannuation funds

Introductory Note

Section 23FA : Exemption of income of certain approved deposit funds

As part of the package of measures for the taxation of lump sum superannuation payments and other retirement related payments a new class of fund - the approved deposit fund - is to be made available to accept deposits arising from eligible termination payments which are "rolled-over" within the meaning of the proposed Subdivision AA of Division 2 of the Principal Act. A full discussion of the structure of the arrangements under that Subdivision is contained in this memorandum in the notes on clause 15.

An approved deposit fund will, broadly speaking, be a trust fund established solely for the purposes of receiving on deposit "rolled-over amounts" within the meaning of Subdivision AA; dealing with such amounts in accordance with the rules of the fund; repaying on request the deposit and accumulated income thereon and having at all times an approved trustee. An approved deposit fund must have rules of the kind prescribed in Subdivision AA.

Where at all times in a year of income an approved deposit fund is maintained by an approved trustee for the requisite purposes and in accordance with approved rules, the income of the fund will be exempt from tax under proposed section 23FA. Where a fund has an approved trustee at the end of the year of income but fails to meet the other conditions for exemption, its investment income will be taxed under proposed section 121DAA at the rate of 46%.

Notes on each of the sub-sections of proposed section 23FA follow.

Sub-section 23FA(1) sets out the conditions of tax exemption to be satisfied by an approved deposit fund. An eligible approved deposit fund is one which at all times during its existence in a year of income is an indefinitely continuing fund (paragraph (a)); maintained by approved trustees solely for approved purposes (paragraph (b)) and subject to approved rules (paragraph (c)). (The terms "approved trustees", "approved purposes" and "approved rules" are explained in the notes on section 27A).

Where an approved deposit fund fails to meet the conditions for exemption at any time during a year of income, but there are special circumstances by virtue of which it would be reasonable to treat the fund as nevertheless exempt from tax, it will be open to the Commissioner of Taxation to grant that exemption. Sub-section (2) provides that, where a fund would not otherwise be an eligible approved deposit fund, i.e. tax-free, because the requirements of sub-section (1) are not met (paragraph (a)), but the trustee satisfies the Commissioner that, by reason of special circumstances, it would be reasonable for the fund to be treated as exempt on its investment income for that year, the Commissioner may treat the income of the fund as exempt from tax. The sub-section will thus allow tax exemption to an approved deposit fund where, through inadvertence or unavoidable circumstances or for any other sufficient reason, the fund fails to observe at all times during a year of income the requirements of sub-section (1).

The power of the Commissioner of Taxation under sub-section (2) to overlook a failure of a fund to meet the requirements of sub-section (1) is, however, limited by sub-section (3) so that it does not extend to overlooking the failure to have at all times an approved trustee or approved trustees.

Sub-section (4) refers to the requirement in paragraph (1)(a) that a fund be "indefinitely continuing" and provides that a provision in a deed which is designed to avoid a breach of the rule of law relating to perpetuities does not prevent a fund from being treated as indefinitely continuing for the purposes of paragraph (1)(a).

Under sub-section (5) the income derived by a fund that has complied with the requirements of section 23FA in relation to the year of income is to be exempt from tax.

This Bill contains a series of measures which change the basis of taxing particular kinds of superannuation funds. These measures are discussed in detail in the notes on clause 42. One significant change, however, is in relation to the taxation of superannuation funds established to provide superannuation benefits for gainfully employed persons (either self-employed or employees) ("section 79 funds"). These funds, provided they met the requirements laid down in section 79 of the Principal Act, obtained a concessional taxing basis by reason of the availability of a special deduction relating to the cost of certain assets held for investment. As a complementary measure, clauses 23 and 39 will repeal two sections - section 79 and section 121BA - of the Principal Act which provides for the assessment of income of those funds.

Clause 8 will also insert a new section 23FB into the Principal Act to exempt the income of section 79 funds other than certain dividend income received from a private company and other excessive non-arm's length income. Clause 40 will introduce a new section 121CB into the Principal Act to replace the existing section 121CB. Whereas the existing section provides a liability for tax upon the aggregate of the net income from both the non-arm's length and other than non-arm's length income, the new section will provide for tax only upon the non-arm's length income. The notes on clauses 23, 39 and 40 discuss these changes in more detail.

Exemption of the income of certain superannuation funds

The second of the new sections to be inserted by clause 8 is section 23FB which will provide an exemption from tax for the investment income of a superannuation fund which meets those requirements previously specified in section 79, but now to be specified in section 23FB. In form, section 23FB picks up those requirements from the repealed section and also those provisions dealing with income in the form of private company dividends and other non-arm's length income previously contained in section 121BA.

Sub-section (1) of proposed section 23FB contains two definitions of terms used in the section. Apart from a drafting correction in the definition of "superannuation fund" to insert a reference to Division 9C, both definitions are in the same form as they appeared in section 79:

"dependant" is defined as including the spouse and any child of a member of a superannuation fund;
"superannuation fund" is defined as meaning a provident, benefit, superannuation or retirement fund but, for the purposes of this section, excludes those funds to which paragraph 23 (jaa) or (ja) or section 23F of the Principal Act refer.

Sub-section (2) of the new section 23FB establishes the conditions to be met by a superannuation fund in order that the section will apply to it in a given year of income. As previously mentioned, these conditions are in the main those presently contained in section 79 of the Principal Act.

Paragraph (2)(a) specifies that the fund must be indefinitely continuing and must have been established and maintained solely for the purposes of providing superannuation benefits for each of the fund's members in the event of their retirement from gainful employment; superannuation benefits for dependants of a member in the event of the member's death or for approved purposes which are incidental and ancillary to the provision of such benefits.

It is necessary under paragraph (2)(b) that the rights of members and dependants to receive the benefits provided by the fund be fully secured. In essence, this means that the trust deed of the fund must give each member a right to benefits which having regard to the entire arrangement are of substance notwithstanding that they may be contingent on the meeting of conditions.

By paragraph (2)(c) the superannuation fund must have defined terms and conditions establishing the right of each member to receive benefits from the fund. Furthermore, each member of the fund must receive notice in writing of that right, generally not later than the time when contributions were first made to the fund for the member or his or her dependants.

Where benefits are allocated within the fund for a member or his or her dependants and the member's or dependants' right to receive any part of those benefits ceases, paragraph (d) requires the benefits forgone to be dealt with in specified ways within two months of the end of the year of income or in accordance with an undertaking given to the Commissioner. The ways in which those forgone benefits are to be dealt with are:

(a)
to provide benefits which other members of the fund or their dependants are entitled to receive from the fund (sub-paragraph (i));
(b)
to provide additional benefits on a reasonable basis to other members of the fund or their dependants (sub-paragraph (ii)); or
(c)
for such other purposes as are approved by the Commissioner (sub-paragraph (iii)).

A similar requirement is contained in paragraph (e) in relation to benefits forgone where the fund is not specifically allocated to each particular member, e.g., where the fund is operated on an actuarial basis. In the generality of "unallocated funds", benefits forgone are not specifically reapplied by the trustees for the benefit of other employees, but remain in the fund to provide benefits, or additional benefits which are reasonable, for the remaining members and their dependants. Because of the nature of these "unallocated superannuation funds", paragraph (e) does not specify a time for the application of forgone benefits or require the trustee to give an undertaking in relation to them.

Paragraph (2)(f) restricts the circumstances in which a fund may allow members to be paid benefits from the fund.

Sub-paragraph (i) imposes the first restriction, that is, that the terms and conditions applicable to the fund are not to permit a member or his dependants to receive any benefits from the fund until the member attains 55 years of age, except in the event of death, sickness or permanent incapacity for work or such other circumstances as are approved by the Commissioner of Taxation. The comparable provision in section 79 specifies age 60 as the earliest age at which a member can generally be paid benefits from the fund. The reduction to age 55 reflects the age at which eligible termination payments will attract the lower rate of 15% of the first $50,000.

Under sub-paragraph (ii) the terms and conditions relating to the fund must require any pension or annuity to commence to be paid, and any other form of benefit to be paid, to a member not later than the member's 70th birthday. These payments are to be made even though the member may not have retired from the work-force at that time.

Sub-paragraph (iii) imposes conditions corresponding to sub-paragraph (ii) to the payment of pensions or annuities and other forms of benefits to dependants of a member. In addition, the Commissioner of Taxation is required to formally approve the terms and conditions applicable to the fund before the fund may qualify for exemption under the section.

By paragraph (2)(g) the Commissioner of Taxation, in approving a fund, is to have regard to the reasonableness of the benefits that have been, are being or may be provided for members of the fund or their dependants from that particular fund and from any of the following classes of funds:

·
a superannuation fund established by a government or a government or municipal authority that is exempt under paragraph 23(jaa) of the Principal Act (sub-paragraph (i));
·
a superannuation fund for self-employed persons which is eligible for exemption by virtue of paragraph 23(ja) of the Principal Act (sub-paragraph (ii));
·
any other fund -

-
to which the proposed section 23FB will apply;
-
the income of which is or has been exempt under section 23F of the Principal Act; or
-
that is an approved deposit fund the income of which will be exempt under the new section 23FA.

For reasons similar to those discussed in relation to clause 7, it is also necessary in determining a reasonable level of benefits to have regard to tax-exempt income accumulated by purchase of a "roll-over annuity". It is therefore proposed by paragraph (2)(h) that, in approving the terms and conditions applicable to a fund, the Commissioner of Taxation should also have regard to the benefits that have been, are being or may be provided for members of the fund or their dependants from "roll-over annuities".

Paragraph (2)(j) will require the Commissioner of Taxation, when approving the terms and conditions applicable to a superannuation fund for the purposes of new section 23FB, to also have regard to the amount of the fund in relation to the benefits that are being or may be provided for its members. The purpose of this test is to prevent the accumulation tax-free of unnecessarily large amounts in a fund which, if allowed to continue to accumulate unchecked, would result in the fund providing benefits which are excessive in terms of paragraph 23FB(2)(g).

Under paragraph (2)(k), the Commissioner of Taxation, in deciding whether to approve the terms and conditions applicable to a fund, is to be authorised to have regard to such other matters as he thinks fit. The purpose of the provision is to give the Commissioner a degree of flexibility in dealing with the wide variety of funds which might seek to qualify for exemption under proposed section 23FB.

The final requirement in sub-section 23FB(2) is that the terms and conditions approved by the Commissioner of Taxation in accordance with the various sub-paragraphs of paragraph (g) are complied with by the trustee of the fund during the year of income.

The purpose of sub-section (3) of section 23FB is to ensure that a provision in a deed which is designed to avoid a breach of the rule of law relating to perpetuities would not prevent a fund from being treated as "indefinitely continuing" for the purposes of paragraph (2)(a) of the section.

Sub-sections (4) to (10) deal with the situation where a trustee of a fund is required to give an undertaking in relation to the application of benefits forgone in accordance with the provisions of paragraph 23FB(2)(d). Sub-section (4) provides that, where a trustee has already given an undertaking which has been approved by the Commissioner of Taxation, he may nevertheless lodge a new undertaking in substitution for the earlier one. This may be done at any time, but the new undertaking is not to take effect until it is approved by the Commissioner.

The provisions of sub-section (5) set out the manner in which an undertaking must be given by the trustee of a superannuation fund for the purposes of paragraph 23FB(2)(d). Such an undertaking must be in writing and signed (paragraph (a)) and lodged with the Commissioner (paragraph (c)). The terms of an undertaking must provide that the amounts to which the undertaking relates will be applied in accordance with the undertaking within a time that is reasonable in all the circumstances (paragraph (b)).

Under sub-section 23FB(6) an undertaking approved by the Commissioner of Taxation will have effect in relation to the year of income in which it is lodged and subsequent years. It will also have effect in relation to the immediately preceding year of income if it is lodged within two months after the end of that year of income or within such further time as the Commissioner may allow.

Sub-section (7) will apply where an approved undertaking was not complied with during a year of income in which it had effect. Unless the Commissioner disregards that failure to comply (see below in notes on sub-section (9)), the effect of the non-compliance is twofold. By paragraph (a), the income of the fund in relation to the year of income will not be exempt from tax and, by paragraph (b), the undertaking will be of no effect for any subsequent year of income.

The procedure to be followed by the Commissioner when he concludes that an undertaking was not complied with is laid down in sub-section (8). That sub-section will require him to inform the trustee of the fund in writing the nature of the non-compliance.

However, under sub-section (9), the Commissioner is to have the power to disregard any non-compliance with an undertaking where the trustee has made a genuine attempt to comply with the terms of the undertaking and, in all the circumstances, the Commissioner considers that it would be reasonable to disregard the failure. This provision is designed to ensure that the tax exemption of the fund is not jeopardised by an inadvertent or unavoidable failure by the trustee to apply benefits forgone in accordance with the terms of an approved undertaking.

Sub-section (10) will permit the trustee to lodge a fresh undertaking with the Commissioner of Taxation to have effect for a year of income subsequent to one in which there has been a failure to comply with a previous undertaking. The fresh undertaking would, of course, require the Commissioner's approval in terms of sub-section (4) outlined above. The effect of sub-section (10) is to mitigate the otherwise severe consequences under paragraph 23FB(7)(b).

Where, under the terms and conditions of a superannuation fund to which the proposed section 23FB will apply, a reversionary pension or annuity is payable to a dependant of a member of the fund, sub-paragraph (2)(f)(iii) of that section requires the payment of such pension or annuity to commence not later than the member's 70th birthday. Clearly, if the pension is payable to the dependant only on the member's death and that member is alive at age 70, that condition could not be satisfied. Sub-section 23FB(11) therefore will in such cases deem the requirement in sub-paragraph (2)(f)(iii) to have been satisfied in cases where a reversionary pension or annuity commences to be paid after the 70th birthday of a fund member because the entitlement of the dependant did not commence until after the member's death.

Where a superannuation fund complies with all of the requirements discussed in relation to sub-sections (2) to (11) above, the income of the fund will, under sub-section (12), be exempt from tax. This exemption in relation to certain classes of income is, however, subject to the provisions of sub-sections (13), (14) and (15) which are intended to safeguard against abuse of the exempt status of a superannuation fund in private company or other non-arm's length situations.

Under sub-section (13), income by way of a dividend paid to a superannuation fund by a private company does not qualify for the exemption authorised by sub-section 23FB(12) unless the Commissioner is of the opinion that it is reasonable to exempt the dividend having regard to certain matters set out in paragraphs (a) to (f) of the sub-section. These are:

·
the paid-up value of shares in the company owned by the fund (paragraph (a));
·
the cost to the fund of those shares (paragraph (b));
·
the rate of dividend on those shares compared with the rate of dividend (if any) paid on other shares issued by the company (paragraphs (c) and (d));
·
whether the shares issued to the fund were in whole or in part satisfaction of a dividend paid by the company and, if so, the circumstances surrounding the issue of those shares (paragraph (e)); and
·
any other relevant matters (paragraph (f)).

The provisions of proposed sub-section 23FB(14) are designed to augment the safeguard in sub-section (13) by ensuring that sub-section applies where there is an interposition of a trust or partnership between the private company paying the dividends and the superannuation fund. By sub-section (14) a fund will be deemed to have received a dividend paid by a private company where the income derived by the fund is indirectly derived from such a dividend.

Under sub-section (15) of proposed section 23FB, income (other than private company dividends) derived by a superannuation fund from any transaction will not be exempt from tax if:

(a)
the parties to the transaction were not dealing with each other at arm's length in relation to the transaction; and
(b)
the income derived by the fund from the transaction is greater than it would have been had those parties been dealing with each other at arm's length in relation to the transaction.

The basic question asked by sub-section (15) is whether, having regard to the nature of the transaction, the income derived by the fund exceeds what would have been derived if the transaction had been entered into on a normal commercial basis between parties independent and unrelated to each other. If the income is excessive on that test it will not be exempt from income tax under the proposed sub-section 23FB(12).

Clause 9: Gross income from certain sources

The purpose of the amendment to be made by clause 9 to section 25 of the Principal Act is to remove elements of uncertainty mentioned by the High Court in Reseck v. F.C. of T.(1975) 133 CLR 45, that a severance payment made by an employer to an employee on the termination of employment might, in addition to being an amount to which specific provisions of the law relating to lump sum termination payments apply, also be income according to ordinary concepts (and therefore assessable income to which section 25 refers) as well as an allowance in relation to employment to which paragraph 26(e) of the Principal Act refers.

In a separate amendment in clause 11 it is proposed to exclude the application of the new paragraph 26(e) to all superannuation, termination of employment and kindred payments proposed to be included in assessable income under the new Subdivision AA to be inserted by clause 15 as well as amounts to which section 26AC (amounts paid in lieu of accumulated annual leave) or 26AD (payments in lieu of unused long service leave) refer. The effect of clause 9 will be that superannuation, termination of employment and kindred payments which fall within the description of "eligible termination payments" for the purposes of proposed Subdivision AA will only be assessable income in accordance with that subdivision. In addition, payments in lieu of accumulated annual leave will only be assessable in accordance with section 26AC of the Principal Act and payments in lieu of unused long service leave will only be assessable in accordance with section 26AD.

The amendments proposed by clause 9 will have effect in relation to amounts received on or after 1 July 1983.

Clause 10: Assessable income to include certain profits

Introductory Note

This clause proposes a number of remedial measures to overcome various technical deficiencies that have been revealed by court decisions in the provisions of the income tax law relating to the taxation of profits derived from speculative transactions. In this regard, paragraph 26(a) of the Principal Act now includes in assessable income of a taxpayer "profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme".

It is proposed to repeal this provision and to re-enact its terms in a new section - section 25A - of the Principal Act. The new section will also contain measures which will overcome the technical deficiencies in the present operation of paragraph 26(a). These remedial measures will apply to sales of property made after 23 August 1983.

The first of these measures will ensure that the operation of the new section is not avoided in cases where, for example, a taxpayer uses a private (unlisted) company as a vehicle to acquire property for the purpose of resale at a profit and, in order to realise any increase in the value of the property, arranges the sale of the shares in the interposed company. Under this type of arrangement, the "ownership" of the underlying property is effectively transferred but, because there has not been an actual disposal of that underlying property, the existing provisions of the law cannot operate to tax the gain reflected in the sale price of the shares.

To counter this situation, the new provisions will, in certain cases, treat the shares which are sold as property acquired for the purpose of profit-making by sale, and will include in the assessable income of the vendor shareholder that part of the proceeds of sale of the shares which represents the increase in value of the underlying property owned by the company. In calculating the amount of profit, it is proposed to make allowance for certain capital expenditure on the underlying property made by the company during the period in which the taxpayer held the shares.

This provision will also extend to cases where a private trust estate or a partnership is used as the vehicle for holding the underlying property, or where the property is held through a chain of companies or through interposed companies, partnerships or trusts.

The new provision will operate whenever a taxpayer sells, after 23 August 1983, shares in a private company or an interest in a partnership or private trust and, at the time of sale, that entity holds property which was acquired for the purpose of profit-making by sale. However, to ensure that the proposed provision does not affect a taxpayer who disposes of his or her shares or interest without the intention of effectively transferring the ownership of underlying property, the provision is not to apply where, having regard to the extent to which the assets of the entity by which it is held consists of the underlying property, the nature and extent of the taxpayer's control of that entity and the circumstances surrounding any other relevant sales of interests in that entity, it would be inappropriate to apply the proposed provision.

Another provision will ensure that a profit is taxed where it arises from the sale of bonus shares or rights issued to a taxpayer as a consequence of the holding of shares in a company which had been acquired by the taxpayer for the purpose of profit-making by sale. For this purpose, the bonus shares or rights will be treated as part of a total package of shares acquired for the purpose of profit-making by sale if the original shares were acquired for that purpose. The amendment will apply to all sales of bonus shares or rights acquired after 23 August 1983.

The proposed measures also address a situation where a person (the transferor) acquires property for the purpose of resale at a profit and subsequently gifts the property or transfers it for inadequate consideration to another person (the transferee), thus avoiding or minimising any tax liability that would otherwise arise if the transferor had disposed of the property at full value. In those circumstances, it has been put that - because the transferee did not in fact acquire the property for the purpose of profit-making by sale - the transferee is able to subsequently realise the full value of the property without any liability to tax. Similar situations may also arise in cases where speculatively acquired property is distributed in specie by a private company or private trust estate to a shareholder or beneficiary.

In such cases, the transferee of property previously acquired for resale at a profit will be deemed to have acquired it for that same purpose where the property is transferred in a non-arm's length transaction after 23 August 1983. The practical effect will be that when the property is subsequently sold by the transferee, the profit that would have been assessed to the transferor of that property will be assessed to the transferee. However, where the transferee has incurred expenditure in making improvements to the property (other than such expenditure itself incurred for profit-making purposes or as part of a profit-making scheme), that part of the proceeds on sale which is attributable to the value of those improvements will not be included in the profit calculation. The assessable profit of the transferee will also be reduced by any profit that is included in the assessable income of the transferor in a case where the transfer is made for inadequate consideration.

The new section 25A will also include a provision to overcome the interpretation of the operation of present paragraph 26(a) that, before any profit on sale can be included in assessable income, there must be strict legal identity between the property, or interest in property, purchased and that which is sold.

A taxpayer who sells property will thus be deemed to have acquired that property for the purpose of profit-making by sale where the property sold is an interest in property which was acquired for such a purpose, or where the property is property, or an interest in property, in which was merged an interest in property which was acquired for the purpose of profit-making by sale. In these circumstances, the profit to be included in the assessable income will be ascertained by having regard to the cost of the property, or interest in property, which was actually acquired for profit-making by sale.

As a consequence of these measures, the Bill also proposes - in clause 17 - complementary amendments to section 52 of the Principal Act which provides a basis for the allowance of deductions for losses incurred on speculative transactions. These amendments will specify the circumstances in which, and the extent to which, a taxpayer may be entitled to a deduction for a loss on the sale of property which he or she is treated as having acquired for the purpose of profit-making by sale by the application of new section 25A.

The repeal of paragraph 26(a) and its re-enactment in new section 25A, as well as the amendments to section 52 will operate from 24 August 1983. As indicated in the foregoing notes, the remedial measures contained in new section 25A will apply to sales of property on and after that date.

More detailed notes on clause 10 follow.

Sub-section (1) of the new section 25A is a re-enactment of the present paragraph 26(a) of the Principal Act. It provides that profit arising from the sale by a taxpayer of any property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme, shall be included in the assessable income of the taxpayer. The existing paragraph 26(a) will be repealed by paragraph (a) of clause 11 of this Bill.

Sub-section 25A(2), which is subject to proposed sub-section 25A(3), will operate to deem shares in a private company, or an interest in a partnership or private trust estate sold after 23 August 1983, to have been acquired for the purpose of profit-making by sale in circumstances where, at the time of sale, the company, partnership or trustee, as the case may be, held property (underlying properly) which had been acquired for the purpose of profit-making by sale. The sub-section also applies where the sale of the shares or interest carries with it the effective disposal of an indirect interest in underlying property acquired by another company, partnership or trust. It will not apply, however, where the property held by the company, partnership or trust is "excepted property", namely, trading stock or depreciable plant.

Paragraph (a) of proposed sub-section 25A(2) specifies three kinds of property (referred to in the sub-section as "relevant property"), the sale of which after 23 August 1983 will trigger the operation of new sub-section (2). The property concerned is:

·
shares in a private company;
·
an interest in a partnership; or
·
an interest in a private trust estate.

For these purposes, the terms "private company" and "private trust estate" are defined in proposed sub-section 25A(12) to mean a company whose shares are not listed on a stock exchange or a unit trust whose units are not so listed.

Proposed sub-paragraph (i) of sub-section (2) deals with the sale of relevant property specified in paragraph (a) where, at the time of the sale of the shares or interest, the company, partnership or trustee held property that:

·
was acquired by the company, partnership or trustee for the purpose of profit-making by sale; and
·
was not "excepted property" of the company, partnership or trust (i.e., trading stock or depreciable plant or articles as explained later in these notes in relation to paragraph (a) of proposed new sub-section (12)).

Sub-paragraph (b)(ii) deals with the sale of relevant property specified in paragraph (a) where, at the time of the sale of the shares or interest, the company, partnership or trustee, indirectly held an interest, through one or more interposed companies, partnerships or trusts, in property that:

·
had been acquired by another private company, partnership or trustee of a private trust for the purpose of profit-making by sale; and
·
was not "excepted property" (as defined) of that other company, partnership or trust.

If the conditions specified in paragraph (a) and in either sub-paragraph (b)(i) or (b)(ii) are satisfied, the taxpayer will, subject to sub-section (3), be deemed, for the purpose of the application of the Principal Act, including proposed section 25A, to have acquired the relevant property for the purpose of profit-making by sales.

Where this sub-section operates to treat property sold by a taxpayer as having been acquired for the purpose of profit-making by sale, proposed sub-section (9) empowers the Commissioner to determine how much of the proceeds on sale is to be treated as profit of the taxpayer arising from the sale.

Under proposed sub-section 25A(3), it will be open to the Commissioner to conclude that, even though the conditions for application of sub-section (2) are satisfied, it would be inappropriate in the circumstances to do so. In forming such a conclusion, the Commissioner will have regard to:

·
the extent to which the assets of the company, partnership or trust, immediately before the time of sale of the shares or interest, consisted of property acquired by the entity concerned for the purpose of profit-making by sale (paragraph (a));
·
the nature and extent at that time of the taxpayer's control of the company, partnership or trust and, in the case of a company, the nature and extent of the taxpayer's shareholding in that company (paragraph (b));
·
the circumstances surrounding any other sale, whether or not by the taxpayer, of shares in the company, or an interest in the partnership or trust, being a sale at a time when the property of that company, partnership or trust included the property or interest referred to in sub-paragraph (b)(i) or (b)(ii) of sub-section 25A(2) (paragraph (c)); and
·
such other matters as the Commissioner considers relevant (paragraph (d)).

It might be expected that the authority contained in this sub-section would be exercised in a case where the Commissioner, having regard to the above factors, concludes that the increase in the value of the underlying property held by the company, partnership or trust did not influence in a significant way the taxpayer's decision to sell the shares or interest, or the amount of consideration received on sale. This could be the situation, for example, in a case where a minority shareholder in a private company in which the underlying property is not a major part of its total assets, disposes of his or her shares in that company. The discretion might also be exercised where a listed public company disposes of shares in a wholly-owned subsidiary for genuine commercial reasons, other than reasons principally aimed at the effective realisation of underlying speculative property held by the subsidiary.

Proposed sub-section 25A(4) will to include in the assessable income of a taxpayer profits from the sale of bonus shares or rights, where those bonus shares or rights are issued by a company after 23 August 1983, as a result of the taxpayer holding shares in a company which were acquired for the purpose of profit-making by sale.

Paragraphs (a) and (b) of sub-section (4) set out the conditions for the application of this sub-section. Those conditions are that :

·
the taxpayer acquired shares in a company (or an "interest in shares" - as explained later in these notes in relation to paragraph (d) of new sub-section (12)) for the purpose of profit-making by sale (paragraph (a)); and
·
after 23 August 1983, the company -

-
issued other shares (referred to in the sub-section as "bonus shares") to the taxpayer in satisfaction of a dividend - including an amount effectively paid out of a share premium account - payable to the taxpayer in respect of the shares acquired for the purpose of profit-making by sale (sub-paragraph (b)(i)); or
-
issued rights to the taxpayer to acquire other shares in the company, by reason that the taxpayer was the owner of the shares acquired for the purpose of profit-making by sale (sub-paragraph (b)(ii)).

Where these conditions apply, the taxpayer will be deemed for the purposes of the application of the Principal Act to have acquired the bonus shares or the rights for the purpose of profit-making by sale. In that situation, proposed sub-section (9) will authorise the Commissioner to determine the appropriate amount of relevant profit to be included in the taxpayer's assessable income. (Also see the notes on sub-section (10)).

Proposed sub-section 25A(5) will, in certain circumstances, treat a transferee of property under a transfer after 23 August 1983 to have acquired the property for the purpose of profit-making by sale where the transferor of the property had acquired the property for that purpose.

The circumstances in which property is to be taken to have been transferred in a manner attracting the operation of sub-section(5) are set out in proposed sub-section (11) (see notes on that sub-section). Briefly, such transfers are those made by way of gift or by way of sale for inadequate consideration between people who are not dealing at arm's length, or by an in specie distribution by a private company or private trust to a shareholder or beneficiary, but not including a transfer made by way of a distribution from a deceased estate.

When property to which sub-section (5) applies is subsequently sold by the transferee, that person will be assessed on the profit arising on the sale calculated in accordance with provisions of proposed sub-section (9) and (10), the operation of which are also explained later in these notes.

It is to be noted that sub-section (5) is capable of successive applications. If, for example, a taxpayer acquires property for the purpose of profit-making by sale, and subsequently transfers that property by way of gift to another person, sub-section (5) will operate to deem that other person to have acquired the property for the same purpose as the taxpayer. If that other person were also to subsequently transfer that property by way of gift to a third person, that third person would also be deemed by sub-section (5) to have acquired the property for the purpose of profit-making by sale.

Sub-section 25A (6) is designed to make it clear that there need not be strict legal identity between property acquired by a taxpayer for resale at a profit and the property actually sold by the taxpayer for the section to apply. The proposed new provision will cover two kinds of situations. The first is where a taxpayer acquires property (including an interest in property) and subsequently sells a lesser interest in that property. The other situation is where a taxpayer acquires an interest in property for the purpose of profit-making by sale, and the legal identity of that interest subsequently becomes merged in other property the whole of which, or an interest in which, is sold.

The conditions necessary for sub-section (6) to apply are set out in paragraphs (a) and (b). These conditions are:

·
that the taxpayer sold property after 23 August 1983 (paragraph (a)); and
·
that the property sold was an interest only in property that was acquired by the taxpayer for the purpose of profit-making by sale (sub-paragraph (b)(i)); or
·
that the property sold was property, or an interest in property, in which was merged an interest in property that was acquired by the taxpayer for the purpose of profit-making by sale (sub-paragraph (b)(ii)).

Where these conditions are met, the taxpayer will be deemed for the purposes of the application of the Principal Act to have acquired the property sold for the purpose of profit-making by sale. Proposed sub-section (9) will then operate to include in the assessable income of the taxpayer as profit so much of the proceeds of sale as is appropriate.

At this point, it is appropriate to note that particular property dealt with in the new measures contained in proposed section 25A can be subject to the operation of more than one of its proposed new provisions. As indicated in the earlier notes sub-section (5), that sub-section is capable of successive applications to the one item of property. In a case where sub-section (5) has operated to deem a taxpayer to have acquired a particular item of property for the purpose of profit-making by sale, and the taxpayer sells, for example, only an interest in that property, sub-section (6) would then apply to deem the taxpayer to have acquired the interest sold for a profit-making purpose.

Sub-section (7) is relevant to the operation of sub-section (2) described earlier in these notes. It will overcome the possibility of sub-section (2) not applying where there is not, in a strict legal sense, identity between property acquired for the purpose of profit-making by sale and the property as still held by a company, partnership or trustee of a trust estate at the time a taxpayer sells his or her shares on interest in the interposed entity.

Where a company, partnership or trustee referred to in paragraph 25A(2)(b) continues to hold property which may not have the same strict legal character as the property that was acquired for the purpose of profit-making by sale, sub-section (7) will operate to deem the property presently held (referred to in the sub-section as "underlying property") to have been acquired for that purpose.

For sub-section (7) to apply in this way, the company, partnership or trustee must hold underlying property consisting of:

·
an interest in property, being property that was acquired by the company, partnership or trustee for the purpose of profit-making by sale (paragraph (a)); or
·
property, or an interest in property, in which was merged an interest in property that was acquired by the company, partnership or trustee for the purpose of profit-making by sale (paragraph (b)).

Sub-section (8) of proposed section 25A is complementary to sub-section 25A(5). It will also, like sub-sections (6) and (7), dispose of any requirement of strict legal identity between the property acquired for the purpose of profit-making by sale, and the property transferred in a "prescribed manner" as defined in sub-section (11) (see notes on that sub-section).

The conditions necessary for the application of sub-section (8) are specified in paragraphs (a) and (b) of that sub-section. It applies where property ("acquired property") is acquired for the purpose of profit-making by sale (paragraph (a)) and, after 23 August 1983, property ("transferred property") being:

·
an interest in the acquired property (sub-paragraph (b)(i)); or
·
property, or an interest in property, in which was merged an interest in the acquired property" (sub-paragraph (b)(ii)),

was transferred to a taxpayer, for example, by gift or for inadequate consideration in terms of sub-section (11).

Where these conditions are met, the taxpayer will for the purposes of the Principal Act be deemed to have acquired the "transferred property" for the purpose of profit-making by sale.

The provisions of sub-section (8), like those of sub-section (5), are also capable of successive application. Moreover, as indicated in the earlier notes on sub-section (6), property to which the new provision of proposed section 25A apply can be subject to the operation of more than one of those provisions. Thus, property to which sub-section (8) applies could, in fact, have been deemed to have been acquired by the taxpayer by virtue of the operation of sub-section (5), for example, by having obtained that property by gift from another person who acquired the particular property for the purpose of profit-making by sale.

Proposed sub-section (9) is the operative provision which will bring to account as assessable income any profit arising from the sale by a taxpayer of property that is deemed by any of the preceding provisions of section 25A to have been acquired for the purpose of profit-making by sale. For this purpose, the sub-section specifies that so much of the amount (if any) of the proceeds of the sale as the Commissioner considers appropriate is to be deemed to be profit arising from the sale of the property concerned.

Proposed sub-section (10) specifies factors to which the Commissioner is to have regard in determining the profit which is to be assessed where sub-section (9) applies as a consequence of property being deemed by preceding sub-sections of section 25A to have been acquired for the purpose of profit-making by sale.

Because of the very complex and varied range of situations which may emerge where a taxpayer sells property which, in a strict legal sense, is not identical with the property as acquired for profit-making by sale, sub-section (10) does not attempt to prescribe rules to cover all situations. Rather, the first two paragraphs of the sub-section provide substantive guidelines to which the Commissioner is to have regard in some cases where either sub-section (2) or (5) applies and considerations of the strict legal identity of property is not involved in the profit calculation. In other cases, e.g., those where legal identity issues are involved, the Commissioner is to have regard to the guidelines contained in paragraph(10)(a) but, in appropriate cases, would also have regard to the principles established in paragraphs (a) and (b) of this sub-section.

Paragraph (a) of proposed sub-section (10) deals with the calculation of profit in cases where sub-section (2) applies to deem the taxpayer to have acquired shares, or an interest in a partnership or trust estate, for the purpose of resale at a profit in circumstances where "underlying property" of the company, partnership or trust has increased in value. The paragraph will apply in cases where:

·
sub-section (2) has operated to deem property (referred to as the "relevant property") to have been acquired for resale at a profit (sub-paragraph (a)(i));
·
at the time of the sale of the "relevant property", the company, partnership or trustee held property which had been actually acquired (and not merely deemed to have been acquired by operation any of the provisions of section 25A) for resale at a profit (sub-paragraph (a)(ii)); and
·
the "relevant property" was not obtained by the taxpayer as a result of a transfer in the "prescribed manner" - see notes on sub-section (11). (sub-paragraph (a)(iii)).

Where those conditions apply the Commissioner, in determining the amount of profit to be included in the assessable income of the taxpayer in respect of the sale of the "relevant property" under sub-section (9) by virtue of the application of sub-section (2), is to have regard to the extent to which the proceeds of sale of the "relevant property" is attributable to any increase in value of the underlying property during the period in which the taxpayer held the "relevant property". However, where the company, partnership or trustee has incurred non-deductible capital expenditure on the underlying property, the amount of any increase in value so determined is to be reduced by the amount of that expenditure.

As indicated above, this paragraph will not apply - by virtue of the operation of sub-paragraph (a)(iii) - in cases where the relevant property to which sub-section 25A(2) applies was obtained by the taxpayer as the result of a transfer, for example, by gift or for inadequate consideration in terms of sub-section (11).

This exclusion is necessary to ensure that where property has been so obtained the Commissioner is not restricted to looking at the amount by which the underlying property has increased in value only during the period in which the transferee held the relevant property. It would be open to the Commissioner to have regard to the increase in value of the underlying property during the period in which the relevant property was owned by both the transferor and the transferee.

Paragraph (b) of sub-section (10) deals with the calculation of profit where sub-section (5) applies to deem property that has been transferred to a taxpayer in the "prescribed manner" (as defined) to have been acquired by that taxpayer for the purpose of profit-making by sale. It will only operate, however, where the property transferred in this way was actually acquired by the transferor for the purpose of profit-making by sale.

Where the conditions for the application of this paragraph are met, the Commissioner is required to have regard to the amount which would have been included in the assessable income of the transferor if that person had sold the "relevant property" for the same consideration and at the same time as it was sold by the transferee. The amount so determined is to be reduced by the sum of -

·
any expenditure incurred by the taxpayer in relation to the property, other than the amount of any consideration given by the taxpayer in relation to the transfer or any expenditure not incurred for a profit-making purpose (sub-paragraph (b)(i));
·
the amount of the sale proceeds which, in the opinion of the Commissioner, is attributable to expenditure of a capital nature on the property (being expenditure to
(Editorial note: Pages 43-47 are incorrect. Please refer to Explanatory Memorandum Erratum.)
which sub-paragraph (b)(1) applies) i.e., expenditure which is not incurred for a profit-making purpose (sub-paragraph (b)(ii)); and
·
the amount of profit, if any, which was or is to be included in the assessable income of the transferor as a consequence of the transfer to the transferee (sub-paragraph (b)(iii)).

This provision will ensure that, for example, where a taxpayer who has obtained a gift of land acquired by the transferor for the purpose of profit-making by sale, subsequently builds a house in which to live on the land, sub-sections 25A(5) and (9) will apply to include in the assessable income of the taxpayer only that part of any profit on sale which is attributable to the increase in value of the land itself.

Sub-section (11) sets out the circumstances in which property is to have been transferred to a person (referred to as the "transferee") in the "prescribed manner". This term is relevant for the application of proposed sub-sections (5) and (8) and paragraph 10(d). Property is transferred in the "prescribed manner" if the conditions in either paragraphs (a) or (b) of sub-sections (11) are met. Those conditions are :

·
that the property is transferred - by way of gift, or for inadequate consideration (sub-paragraph (a)(i)) - otherwise than as a result of a distribution made from a deceased estate (sub-paragraph (a)(ii));
·
the transferee and the person who transferred the property were not dealing at arm's length in relation to the transfer of the property (sub-paragraph (a)(iii)); or
·
the property is transferred by way of a distribution to a shareholder of a private company or a beneficiary of an estate and the property is no "excepted property" (as defined in proposed paragraphs (12)(a)).

Sub-section (12) is an interpretative provision which explains the meaning of a number of terms used in section 25(A).

Paragraph (c) of sub-section (10) is relevant to the determination - in accordance with sub-section (9) - of the amount of profit to be included in a taxpayer's assessable income where there has been a change in strict legal identity between the property actually acquired for the purpose of profit-making by sale and the property sold.

The provision is designed to express a general rule for application in the many and varied situations in which a taxpayer may sell property which, in a strict legal sense, is not identical with the property acquired for the purpose of profit-making by sale. It would, for example, be relevant for the purpose of determining the assessable profit in a relatively simple case to which sub-section (6) applies where a taxpayer sells only an interest in a property actually acquired for resale at a profit. It would also be relevant where a taxpayer sells property that he or she is deemed to have acquired for the purpose of resale at a profit by a combination of applications of different provisions of section 25A - for example, where a taxpayer sells property, being an interest that was actually acquired by another person for the purpose of profit-making by sale and was transferred to the taxpayer in a manner in which sub-section (5) operates to deem the taxpayer to have acquired that interest for that purpose.

The general rule expressed in paragraph (c) is that, in circumstances where property sold is deemed to have been acquired by the taxpayer by virtue of the application of any provision of section 25A to property which was actually acquired, whether by the taxpayer or by any other person, for the purpose of profit-making by sale, the Commissioner is required to have regard to the extent to which the property sold consists of, or is attributable to, the property that was actually acquired for that purpose. In so doing, the Commissioner would also have regard to the cost of the last-mentioned property and, if appropriate, the circumstances in which the property sold was obtained and subsequently dealt with by the taxpayer.

As mentioned in the earlier notes on sub-section (4), the provisions of paragraphs (d) and (e) of sub-section (10) are relevant where bonus shares or rights are deemed to have been acquired by a taxpayer for resale at a profit. Paragraph (d) will ensure that the whole of the proceeds of any sale of such rights is included in the assessable income of the taxpayer by virtue of sub-section (9) by deeming those rights to have been acquired at no cost.

In the case of a sale of bonus shares which a taxpayer is deemed by sub-section (4) to have acquired for the purpose of profit-making by sale, paragraph (e) specifies that, for the purpose of calculating the relevant profit in pursuance of sub-section (9), the cost of such shares is to be determined in accordance with section 6BA of the Principal Act. Briefly, that section deems bonus shares to have been purchased as part of the transaction by which the original shares were purchased, and attributes no cost to bonus shares other than such part of the cost of the original shares as the Commissioner determines to be appropriate.

Paragraph (a) of sub-section (12) defines the term "excepted property" which is excluded from the scope of the property to which paragraph (b) of sub-section (2) and paragraph (b) of sub-section (11) apply. For those purposes the term is to mean:

·
trading stock; or
·
depreciable plant or articles purchased for use in producing assessable income.

These items of property

(Editorial note: Spelt as "proerty" in text)
are so excluded because provisions of the Principal Act other than proposed section 25A are applicable to determine the income tax treatment of amounts received on their disposal.

Paragraphs (12)(b) and (c) contain definitions of the terms "private company" and "private trust estate" which are used in proposed section 25A. By paragraph (b), a private company is to mean a company other than one the shares in which are listed for quotation on the official list of a stock exchange in Australia or elsewhere.

Paragraph (c) defines a private trust estate as a trust estate other than, in effect, a public unit trust. This will ensure that the provisions of sub-section 25A(2) will not apply to the sale of shares or units in public companies and public unit trusts. Profit from the sale of these or any other shares or units actually acquired for the purpose of profit-making by sale will, of course, be subject to tax by virtue of sub section 25A(1).

Paragraph (d) of sub-section (12) will ensure that any reference to property, or to a particular kind of property in proposed section 25A will include property in which a taxpayer has only an estate or interest. This will mean, for example, that the provisions of sub-section (4) would apply to the sale of a taxpayer's interest in bonus shares, where the shares were issued as a consequence of the taxpayer holding an interest in other shares that was acquired by the taxpayer for the purpose of profit-making by sale.

The measures proposed by clause 10 will, by virtue of sub-clause 62(8) of the Bill, apply to sales of property after 23 August 1983 whether the property was acquired before or after that date. Where the measures do not relate to the sale of property, but to the carrying on or carrying our of any profit-making undertaking or scheme, they will apply from the date of Royal Assent.

The conditions contained in paragraph (a) are :

·
the property is transferred by way of gift, or, in the opinion of the Commissioner, for inadequate consideration (sub-paragraph (a)(i));
·
the property is transferred otherwise than as a result of a distribution made from a deceased estate (sub-paragraph (a)(ii); and
·
The Commissioner is satisfied that the transferee and the person who transferred the property were dealing in a non arm's length manner in relation to the transfer of the property (sub-paragraph (a)(iii)).

Paragraph (b) provides that property is transferred in the prescribed manner where the property is transferred by way of a distribution of property of a private company or private trust estate and the property is not "excepted property" - as defined in new paragraph 12(a).

Sub-section (12) of section 25A is an interpretative provision designed to facilitate drafting. It explains the meaning of a number of terms used in the proposed new section 25(A).

By paragraph (a) of sub-section (12) the term "excepted property" is defined for the purposes of the operation of proposed new sub-section (2) and paragraph (b) of proposed new sub-section (11). These provisions will not have application where property of the company, partnership or trust is excepted property. For those purposes, excepted property will be:

·
trading stock;
·
depreciable plant or articles purchased for use in producing assessable income.

These exceptions are on the basis that other provisions of the Income Tax Assessment Act other than new section 25A are applicable to determine the income tax treatment of amounts received on the disposal of trading stock or depreciable plant or articles.

Paragraph (b) defines a reference to a private company in the section as being to a company other than one the shares of which are listed for quotation on a stock exchange. This means that sub-section (2) will not apply to shares in, or property owned by, public listed companies.

Similarly paragraph (c) will exclude from the operation of sub-section (2) an interest in, or property of, public unit trusts. A public unit trust is one where the units in which are listed for quotation on a stock exchange or are ordinarily available for public subscription or purchase.

Paragraph (d) of sub-section (12) provides that for the purposes of section 25A a reference to property or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property.

Clause 11: Certain items of assessable income

Consistent with the proposed insertion by clause 10 of new section 25A, sub-section (1) of which will re-enact the term of existing paragraph 26(a), paragraph (a) of this clause will omit paragraph 26(a) from the Principal Act. As indicated in the above note on clause 10, new Section 25A will apply to sales of property after 23 August 1983 (by virtue of sub-clause 62(8)), whether the property was acquired before or after that date but, in its application other than in respect of sales of property after that date, paragraph 26(a) will continue in effect until the commencement of new section 25A on the date of Royal Assent of the Bill.

By paragraph (b) of clause 11 it is proposed to repeal paragraphs 26(d) and 26(e) of the Principal Act and to substitute a new paragraph 26(e) which will have, with one exception, substantially the same effect as the paragraph 26(e) it replaces.

With some specified exceptions, existing paragraph 26(d) includes in a taxpayer's assessable income 5% of a lump sum amount paid to the taxpayer in consequence of his or her retirement from, or the termination of, any office or employment. The taxation treatment of such amounts will, where paid on or after 1 July 1983, in future be determined under proposed Subdivision AA to be inserted by clause 15.

The proposed new paragraph 26(e), although substantially in the same form as the paragraph it replaces, reflects more contemporary drafting style and also specifically excludes from its ambit eligible termination payments, (see notes on proposed section 27A) which are not to be assessable under paragraph 26(e) but under new Subdivision AA.

Clauses 12, 15 and 61: Assessable income to include annuities and superannuation pensions

Introductory Note

Section 26AA of the Principal Act presently provides for the inclusion in a taxpayer's assessable income of the amount of any annuity received, excluding in the case of a purchased annuity the part of the annuity which represents the undeducted purchase price.

The exemption of tax of an eligible payment rolled-over into an annuity (see the notes to clause 15 for a detailed summary of the Government's lump sum package) has brought a requirement for a more extensive range and variety of annuities than are available under the existing market conditions. Section 26AA is not adequate to deal with the kinds of annuities which may be marketed by the life assurance industry and other approved issuers (refer to the notes on amendments to Division 8 in clauses 29 to 35 and clause 36 which introduces a new Division 8A).

A further perceived deficiency in section 26AA of the Principal Act and one likely to inhibit the future development of the annuity market is that the amount excluded representing the undeducted purchase price is only available to the person paying the purchase price. Thus a widow receiving a reversionary pension or annuity on the death of her husband who contributed the purchase price would be unable to have the taxable income from her annuity reduced by any part of that purchase price no matter how little of that purchase price had been excluded from her husband's assessable income. The apportionment of the undeducted purchase price will, under the proposed new section 27H, take effect in relation to the period during which it is reasonably expected that the annuity or pension will be payable.

So as not to interfere with the arrangements for the pensions and annuities which commenced to be payable before the date when the new superannuation proposals come into effect it is proposed that the new arrangements only apply to pensions and annuities which commenced to be payable on or after 1 July 1983.

Clause 12: Repeal of section 26AA

This clause proposes the repeal of section 26AA of the Principal Act which provides for the inclusion in a taxpayer's assessable income of the amount of any annuity received, excluding in the case of a purchased annuity the part of the annuity which represents that part of the purchase price which has not attracted a tax deduction or a tax rebate. In effect, this ensures that the capital component of a purchased annuity is not subject to tax.

By virtue of clause 63, section 26AA, although repealed, will continue to have application in respect of annuities which commenced to be payable before 1 July 1983 (see notes on that clause).

In respect of annuities which commenced to be payable on or after 1 July 1983, section 27H, which it is proposed to insert by clause 15 of this Bill, will apply.

Clause 13: Repeal of section 26AE

This clause will repeal section 26AE of the Principal Act. Under that section, benefits generated by tax deductible contributions received by a taxpayer as a member of a superannuation fund to which paragraph 23(ja) or section 79 of the Principal Act applies, which are paid in accordance with terms and conditions approved by the Commissioner of Taxation are included in assessable income to the extent of 5% of so much of those benefits as are attributable to the contributions made by the taxpayer after 19 August 1980. Because such benefits received on or after 1 July 1983 will be eligible termination payments" for the purposes of proposed new Subdivision AA and assessment of them determined in accordance with paragraph 27C(1)(c) or (d) - see notes on section 27C - section 26AE is no longer required.

Clause 14: Assessable income to include value of benefits received from or in connection with certain superannuation funds

Clause 14 will make a series of minor amendments to section 26AF of the Principal Act in the main as a consequence of the repeal of other provisions of the Principal Act by the Bill.

Section 26AF of the Principal Act includes in the assessable income of a taxpayer the value of benefits received from a superannuation fund to which paragraph 23(ja) or section 79 of the Principal Act applies, where those benefits are received otherwise than in accordance with the terms and conditions approved by the Commissioner of Taxation.

The amendment to be made by paragraph (a) is in consequence of the repeal of section 79 and its replacement in a modified form by new section 23FB (see notes on clause 8). Paragraph (a) will delete a reference to section 79 in existing paragraph 23AF(1)(a) and substitute a reference to new section 23FB.

By paragraph (b) it is proposed to delete a reference in sub-section 26AF(1) to paragraph 26(d) of the Principal Act which is to be repealed by clause 11.

Paragraphs (c) and (d) propose similar formal amendments to that in paragraph (a) by deleting references to section 79 in sub-sections 26AF(2) and (3) and substituting references to section 23FB.

Another formal amendment is made by paragraph (e) to insert, in the definition of "paragraph 23(ja) fund" in sub-section 26AF(3), a reference to Division 9C which was overlooked when that Division was inserted in the Principal Act by the Income Tax Laws Amendment Act 1981.

With the repeal of section 79 of the Principal Act and its replacement by new section 23FB, it is necessary for the purposes of the application of section 26AF of the Principal Act to include a definition of a "section 23FB fund" designed so that any reference to a section 23FB fund will automatically include reference to any fund to which section 79 previously applied in relation to any year of income prior to 1984-85 from which the new section 23FB operates. Paragraph (f) therefore proposes to insert in section 26AF a definition of "section 23FB fund" which meets that specification. Under paragraph (a) of that definition, a section 23FB fund will mean a fund the income of which of any year of income has been exempt from tax under proposed section 23FB or would, but for Division 9C of the Principal Act, have been so exempt.

Under proposed paragraph (b) of the definition, the expression "section 23FB fund" is to be given an extended meaning so that any fund to which the repealed section 79 would have applied will also be treated as a fund to which section 26AF of the Principal Act applies.

Clause 15: Superannuation, termination of employment and kindred payments

Introductory Note

Clause 15 will insert new Subdivision AA in Division 2 of Part III of the Principal Act. Together with provisions proposed to be inserted by several other clauses, Subdivision AA introduces a new system for the taxation of retirement and kindred payments made on or after 1 July 1983, including measures which require PAYE deductions to be made from affected payments, which exempt from tax certain annuity business income, and set down rules and taxing arrangements to apply to trustees of funds to be known as approved deposit funds. The principal aspects of the new system are described in the "Main Features" section of this memorandum. A general explanation follows of the legislative scheme adopted for implementing the system.

General plan of amendments

Proposed new Subdivision AA, which contains proposed sections 27A to 27J, essentially defines the payments to which the new tax arrangements will apply and provides the rules which will determine the extent to which an affected payment is to be included in assessable income. The Subdivision will also replace the existing provisions of the income tax law which govern the assessment of annuities and superannuation pensions.

Eligible Termination Payments:

The payments to which the new rules apply are listed in the definition of "eligible termination payment" in sub-section 27A(1). In brief outline, a payment is an eligible termination payment if it is:

(a)
in consequence of the termination of employment;
(b)
from a superannuation fund;
(c)
from an approved deposit fund (defined in sub-section 27A(1));
(d)
in respect of the commutation of an eligible annuity (defined in sub-section 27A(1)) or superannuation pension; or
(e)
a payment of the residual capital value (defined in sub-section 27A(1) of an eligible annuity or superannuation pension.

If a payment that is made upon the death of a person is in category (a), (b) or (c) above, there will be an appropriate reduction in the amount that is to be treated as an eligible termination payment, having regard to the extent to which the deceased's spouse (or former spouse) and children benefit from the deceased's estate (sub-section 27A(4)).

Assessable Components of Eligible Termination Payments :

When an eligible termination payment is made, the key taxing sections - sections 27B and 27C - will apply to determine whether, and to what extent, the payment is to be included in assessable income. Section 27B will operate to include in assessable income that component of an eligible termination payment which is referable to the part of the taxpayer's period of employment or membership of a superannuation fund (see the definition of "eligible service period" in sub-section 27A(1)) between 1 July 1983 and the date of the payment (referred to in this memorandum as the "after 30 June 1983 component"). The component of the payment that is referable to that part of the eligible service period or superannuation fund membership that occurred before 1 July 1983 (referred to in this memorandum as the "before 1 July 1983 component") to be dealt with in accordance with section 27C. This differing treatment of the "before" and "after" components will cease at the end of a lengthy transitional period after which no payments having eligible service periods that commenced before 1 July 1983 are made.

Section 27B will also not apply to:

(a)
any "concessional component" of the eligible termination payment - defined in sub-section 27A(1) as a bona fide redundancy payment (section 27F), an approved early retirement scheme payment (section 27E) or an invalidity payment (section 27G); or
(b)
any part of the "after 30 June 1983 component" that -

(i)
represents "undeducted contributions" - defined in sub-section 27A(1) as contributions to a superannuation fund after 30 June 1983 that have not attracted a tax deduction; or
(ii)
is paid during a 90 day "roll-over period" to a superannuation fund or an approved deposit fund (see later in this note) or is applied in purchasing an annuity.

The other key taxing section is section 27C. That section has two sub-sections which are independent and operate on different components of an eligible termination payment. Sub-section 27C(1), as a general rule, will include in assessable income 5% of the "before 1 July 1983 component". If, however, the law existing at 30 June 1983 would have included less than 5% of that component in assessable income that lesser amount will be included. Sub-section 27C(2) will include in assessable income 5% of the concessional component (see earlier note on section 27B) of an eligible termination payment. As with section 27B, the sub-sections of section 27C do not apply to that part of the eligible termination payment to which that section relates that is paid, during the 90 day roll-over period, to a superannuation fund or an approved deposit fund or in purchasing an annuity.

The overall effect of sections 27B and 27C is that no amount will be included in assessable income in respect of the following components of an eligible termination payment:

(a)
undeducted contributions (referred to earlier in this note); and
(b)
amounts paid during the 90 day roll-over period to a superannuation fund or an approved deposit fund or applied in purchasing an annuity ("rolled-over component").

Roll-over of an Eligible Termination Payment within 90 days:

Before a rolled-over component can be treated as being tax-free the taxpayer in relation to whom the eligible termination payment is made is required to make an election, in a form approved by the Commissioner for the purposes of section 27D, which will list all payments (referred to in section 27D as "qualifying roll-over payments") made in the 90 day roll-over period to a superannuation fund or an approved deposit fund or in purchasing an annuity. This election will specify which of the qualifying roll-over payments apply in whole or in part to the eligible termination payment that is the subject of the election and sub-allocate those payments to whichever of the following components of the eligible termination payment the taxpayer wishes to have treated as having been rolled-over:

(a)
the "after 30 June 1983 component";
(b)
the "before 1 July 1983 component";
(c)
undeducted contributions; and
(d)
the concessional component.

A particular qualifying roll-over payment may appear on more than one election but, in order to avoid abuse of the roll-over concession, if the taxpayer purports to apply that payment in such a way that the total of the applications exceeds the amount of the qualifying roll-over payment, no election by the taxpayer for that year of income will be valid.

Once a valid election is made, the eligible termination payment is "deemed to have been applied in accordance with section 27D" (see notes on sections 27B and 27C for further explanation of this expression and sub-section 27A(13) for its meaning) in the manner set out in the election. Where a component of an eligible termination payment is deemed to have been applied in accordance with section 27D the following taxation treatment applies:

Component Applied in Accordance with section 27D   Consequence
(a) "after 30 June 1983" (i) excluded from assessable income under section 27B; and
(ii) if applied in purchasing an annuity, the component will not form part of the undeducted purchase price of the annuity (sub-section 27A(1));
(b) "before 1 July 1983" (i) amount (5% or smaller) otherwise assessable under sub-section 27C(1) is not assessable;
(c) concessional component (i) 5% portion otherwise assessable under sub-section 27C(2) is not assessable; and
(ii) the component retains its identity for the purposes of any future application of the new rules to any payment from the superannuation fund or approved deposit fund into which it is paid;
(d) undeducted contributions (i) remain exempt from tax; and
(ii) the component retains its identity for the purposes of any future application of the new rules.

Rates of tax : Although section 27B applies to include in assessable income the whole or a part of the "after 30 June 1983 component" of an eligible termination payment, the amount so included is not to be subject to tax at ordinary rates. A new section 160AA (proposed to be substituted by clause 52) will allow a rebate of tax to ensure that the amount so included in assessable income is taxed :

(a)
if received before the taxpayer reaches 55 years of age - at no more than 30%; and
(b)
if received after that age - at no more than 15% on the first $50,000 and no more than 30% on the balance.

Taxation of Annuities and Pensions :

The other principal function of Subdivision AA will be performed by section 27H. Whereas sections 27B to 27G are concerned with including some part of an eligible termination payment in assessable income, section 27H deals with the assessment of annuities and superannuation pensions, a function carried out under the existing law by section 26AA, which it is proposed will be repealed by clause 12. The more significant differences between existing section 26AA and proposed section 27H are that the new section will :

(a)
include in assessable income any supplement to an annuity or pension;
(b)
take into account any residual capital value of an annuity or pension in determining the part to be excluded from assessable income as representing undeducted purchase price; and
(c)
take into account the life expectancy of persons other than the annuitant or pensioner, to whom the annuity or pension can be expected in the future to become payable, in determining the amount to be excluded from assessable income.

Approved Deposit Funds :

Earlier in this general plan of the legislation it was explained that :

(a)
a payment from an approved deposit fund will be an eligible termination payment to which the provisions of Subdivision AA will apply; and
(b)
where any part of a component of an eligible termination payment is paid during the 90 day roll-over period to an approved deposit fund in accordance with section 27D, that part of any component that would otherwise be assessable under section 27B or 27C will not be assessable.

An approved deposit fund (an "ADF") will be a fund that satisfies the definition of "approved deposit fund" in sub-section 27A(1). That is, it will be a trust fund :

·
established as an indefinitely continuing fund;
·
established solely for approved purposes (defined in sub-section 27A(1)); and
·
having rules that include approved rules.

For rules of an ADF to be "approved rules" they will have to satisfy the requirements set out in the definition of that expression in sub-section 27A(1). The more significant of those requirements are that the trustees of an ADF will be prohibited from borrowing (that is, the only funds available to an ADF will be amounts rolled-over out of eligible termination payments) and will require repayment to a depositor or his or her legal personal representative of the whole of the amount deposited, with accrued earnings, not later than the sixty-fifth birthday of the depositor.

The taxation treatment of income derived by an ADF will be on one of the following 3 bases:

(a)
tax exemption if the ADF is an "eligible approved deposit fund", within the meaning of proposed section 23FA (to be inserted by clause 8), in relation to the year of income. This basis will apply if, at all times during the year of income :

(i)
the ADF is indefinitely continuing;
(ii)
the ADF is maintained by an "approved trustee" (within the definition in sub-section 27A(1)); and
(iii)
the rules of the ADF are approved rules;

(b)
taxed on its taxable income at a rate of 46% (proposed by clause 6 of the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984) if the ADF is an "ineligible approved deposit fund" as defined in section 121B as proposed to be amended by clause 38. This basis will apply where the ADF has not satisfied the requirements for tax exemption set out in section 23FA (for example, if its rules did not satisfy the requirement of including approved rules at all times during the year of income), but the trustee was an approved trustee on the last day of the year of income; or
(c)
taxed on its taxable income under the existing trust provisions of the income tax law (generally at a rate of 60%). This basis will apply where the ADF is not exempt from tax and where it is not maintained by an approved trustee on the last day of the year of income.

As just mentioned, in order to secure tax exemption on its investment income an ADF must be maintained at all times during the year of income by an approved trustee. The term "approved trustee" is defined widely in sub-section 27A(1) to include a trustee that is any of the following :

·
a life assurance company, including a State Government insurance office;
·
a bank, building society, finance company, credit union or money market corporation;
·
a trade union or employee association;
·
a friendly or benefit society;
·
a trustee corporation; or
·
any other body, or class of bodies, prescribed by regulation.

Exemption of Income from Certain Annuity Business :

Associated with the amendments proposed by clause 15, (which introduce the new system for taxing superannuation and kindred payments) clauses 28 to 36 propose new rules by which certain income from annuity business will be exempt from tax.

The present income tax law includes investment income from the annuity business of life assurance companies in assessable income. On the other hand, existing section 112A exempts from tax income that is referable to the superannuation business of a life assurance company. Income derived from the annuity business of other organisations that, in accordance with the Life Insurance Act 1945, may issue annuities would generally be exempt from tax because those organisations - trade unions and other employee associations and friendly societies - are generally exempt from tax under the existing law on the whole of their income.

By clauses 29 to 35 of the Bill, it is proposed to amend Division 8 of Part III of the Principal Act so that life assurance companies will be exempt from tax on income that is referable to "eligible policies" - a term that is defined (in amendments to section 112A proposed by clause 32) to mean :

(a)
a superannuation policy;
(b)
a policy in relation to an immediate annuity; or
(c)
a policy in relation to a roll-over annuity.

That is, not only the superannuation business, but also the immediate and roll-over annuity business, of life assurance companies will be tax-free under the proposed amendments. An immediate annuity is defined in the amendments of section 112A to mean an annuity that is presently payable to a natural person. A roll-over annuity is defined (also by amended section 112A) to mean a deferred annuity that has been purchased wholly by the roll-over of all or part of an eligible termination payment. (See earlier in this note.) Investment income referable to other annuity business of a life assurance company is to continue to be subject to tax.

Consistent with the proposed amendments of Division 8, clause 36 proposes to insert a new Division in Part III of the Principal Act - Division 8A - which, among other things, will include in the assessable income of other organisations which may issue annuities (trade unions, other employee associations and friendly societies - called "registered organizations" in the Division) income referable to annuity business other than eligible annuity business. An "eligible annuity" is defined in Division 8A as an annuity payable under a superannuation policy, an immediate annuity or a roll-over annuity. Income from eligible annuity business of registered organisations is to be exempt from tax. The rate of tax on the taxable income of a registered organisation from its taxable annuity business is proposed to be 20% - clause 5 of the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984.

The proposed amendment of Division 8 and insertion of Division 8A ensure that income of life assurance companies and registered organisations that is referable to eligible annuity business is exempt from tax and complements that aspect of the operation of the proposed new Subdivision AA which taxes as an eligible termination payment any payment made in relation to the commutation of an eligible annuity, but not any other annuity. This follows from the fact that the investment income referable to such other annuity business would be assessable income of the organisation that derived it.

Tax Instalment Deductions :

The other group of amendments that is associated with the amendments proposed by clause 15 is that to be inserted in the PAYE provisions of the Principal Act by clauses 54 to 58 to require tax instalments to be deducted from the payment of an eligible termination payment which a taxpayer receives or is entitled to receive on or after 1 August 1984 (clause 54). These amendments will provide for special rates of deduction to be prescribed by regulation to apply to eligible termination payments and for different rates to apply to specified classes of eligible termination payments (clause 55). Persons, including trustees of superannuation funds and approved deposit funds, who make 10 or more eligible termination payments during any period of 12 months will be required within 14 days of the end of that period to register as group employers, if they are not already so registered. A group employer will be required to issue a group certificate to a payee of an eligible termination payment within 7 days of making a deduction from that payment (clause 56).

Payers of eligible termination payments who are not required to register or who fail to register as group employers will need to purchase tax stamps equal to the amount of the tax deduction and generally comply with special rules in relation to such stamps that are proposed to be inserted in section 221G by clause 59.

Provision is to be made by clause 58 for a refund to be paid in circumstances where a tax instalment deduction has been made from an eligible termination payment that is not directly paid by the payer to a superannuation fund, approved deposit fund or applied in purchasing an annuity. The Commissioner is to be given a discretion in such cases to pay the excess deduction to either the taxpayer or the eligible payee or in part to each depending on the manner in which, and extent to which, the payment was rolled-over. Where the whole or a part of an eligible termination payment is directly rolled-over no PAYE deductions will be required to be made.

Section 27A : Interpretation

Section 27A contains a number of definitions and interpretational provisions necessary for the operation of proposed new Subdivision AA.

Sub-section (1) of section 27A defines those terms which have a general use in the Subdivision. Other terms which have a use only for the purposes of a particular section, sub-section etc. are generally defined in that particular provision. Each term is to have the given meaning unless the contrary intention appears :

·
"Agreement" is defined in a manner commonly found in the Principal Act and covers the various forms of agreement, whether formal or informal, express or implied and whether legally enforceable or not.
·
"approved deposit fund" means a trust fund established as an indefinitely continuing fund, solely for approved purposes and with approved rules. The terms "approved purposes" and "approved rules" are also defined in this sub-section.
·
"approved early retirement scheme payment", in relation to a taxpayer, is defined to mean the part of an eligible termination payment made under an approved early retirement scheme for the benefit of a category of employees that, in accordance with section 27E, is an approved early retirement scheme payment (see notes on proposed section 27E).
·
"approved purposes", in relation to an approved deposit fund, means the purposes of receiving on deposit amounts of eligible termination payments rolled-over within 90 days, dealing profitably with those deposits in accordance with fund rules and repaying the deposits, with accrued income, on request. An approved deposit fund must be established solely for approved purposes and, if it is to be exempt from tax on its income, maintained at all times during the year of income for such purposes.
·
"approved rules", in relation to an approved deposit fund, is defined to mean rules that meet the requirements set out in paragraphs (a) to (j) of the definition. Each of the requirements has a particular role to play in ensuring that an approved deposit fund fulfils its role as a "holding place" only for eligible termination payments that depositors wish to preserve; that it repays those deposits, with accrued income, as eligible termination payments to depositors no later than a depositor's sixty-fifth birthday; that the accounts are kept in such a way as to facilitate certification by an auditor of the accounts and that the rules themselves are complied with.
·
"approved trustee" is defined to cover a wide range of commercial and financial organisations that may act as trustees of approved deposit funds. The bodies listed in paragraphs (a) to (d) of the definition are themselves defined terms in the sub-section which are explained later in the notes on this sub-section. By paragraph (f) of the definition, further bodies or classes of bodies may be included in the definition if prescribed by regulation under the Principal Act.
·
"bona fide redundancy payment" has the meaning given to the term in section 27F, where it refers to a defined part of an eligible termination payment made to a taxpayer by reason of the taxpayer's redundancy (see notes on new section 27F).
·
"concessional component" is a composite term that refers to a part of an eligible termination payment that is given concessional treatment under the new rules, in that only 5% of the component is included in assessable income. The component retains its identity when rolled-over and received later as part of a further eligible termination payment and is therefore expressed as the part of an eligible termination payment that consists of or is attributable to a bona fide redundancy payment, an approved early retirement scheme payment or an invalidity payment (a term also defined in this sub-section).
·
"deferred annuity" is defined as an annuity other than an immediate annuity (also a defined term) and in essence means an annuity that commences to be payable only after the expiration of a particular period following the purchase of the annuity.
·
"dependant" is given an extended meaning to include a person who was a spouse and includes a person who is a spouse or a child (which is defined in the Principal Act to include an adopted child, a step-child or an illegitimate child) of the taxpayer. There is no requirement for these named classes to be financially maintained by the taxpayer.
·
"depositor" means a person who has paid all or part of an eligible termination payment into an approved deposit fund during the 90 day roll-over period in relation to the payment.
·
"eligible annuity" is to be defined to mean an annuity that is either presently payable, is purchased by the roll-over of an eligible annuity or is payable under a life assurance policy that either is a policy vested in the trustee of a superannuation fund that is exempt from tax or is a policy effected or accepted for the purposes of an exempt superannuation scheme. The significance of the term for Subdivision AA is that an amount received in commutation of an eligible annuity is an eligible termination payment, but the commutation of any other annuity is not.
·
"eligible bank", for the purposes of the definition of an approved trustee in relation to an approved deposit fund, is a savings or trading bank or a bank that is a public authority constituted by a statute of a State or Territory. This includes all the major savings and trading banks, the Commonwealth Bank and the State Government owned banks.
·
"eligible financial corporation", for the purposes of the definition of approved trustee in relation to an approved deposit fund, is a financial corporation within the meaning of the Constitution, being a corporation that is required to register under the Financial Corporations Act because -

(a)
its sole or principal business activities in Australia are the borrowing of money and the provision of finance; or
(b)
the assets relating to the provision of finance by the corporation exceed 50%, or a percentage prescribed by regulations under that Act, of the corporation's Australian assets.

The term includes building societies, credit unions, finance companies and merchant banks whose total assets exceed $1 million.
·
"eligible service period" is defined in four different ways and the meaning in any particular application of the Subdivision in relation to an eligible termination payment depends upon the nature of the payment.
Paragraph (a) of the definition applies where the payment is in consequence of the termination of a taxpayer's employment. The eligible service period is to be the period or periods of employment to which the payment relates. Where, for example, a taxpayer has been employed by several companies in a group and the termination payment is made in recognition of the total period of service of the taxpayer with the group, the eligible service period would be that total period. Paragraph (b) provides that where the eligible termination payment is made from a superannuation fund or approved deposit fund, the eligible service period is the aggregate of the relevant service periods in relation to the payment. The use of the concept "relevant service period" - a term also defined in this sub-section - is a drafting device which facilitates reference to the various kinds of periods that are to be taken into account. In particular, it covers the possibilities that a superannuation fund member may be an employee with or without employer superannuation support or a self-employed person and that, over the course of the person's working life, more than one of those situations may have applied. This part of the definition also provides - again through the defined term, "relevant service period" - for the case where a payment from a superannuation fund or approved deposit fund is, in whole or in part, attributable to an earlier eligible termination payment that has been rolled-over into the superannuation fund or approved deposit fund.
By paragraph (c), where the eligible termination payment represents the commutation, or residual capital value of, a superannuation pension the eligible service period is, broadly, the total period from the commencement of the taxpayer's membership of the superannuation fund from which the pension has been paid to the date of commutation or payment of the residual capital value. Where appropriate (refer to the notes on paragraph (b) of this definition and on the definition of "relevant service period") the taxpayer's period of service may be substituted for the period of fund membership in the total eligible service period.
Paragraph (d) applies where the eligible termination payment represents the commutation or residual capital value of an eligible annuity (a term also defined in this sub-section). The eligible service period is to be the total period from the commencement of any eligible service period that is referable to any eligible termination payment that, itself, has been used to purchase the annuity (that is, in the case of all roll-over annuities and certain immediate annuities) to the date of commutation or payment of the residual capital value. Where the purchase price of the annuity has not consisted of an eligible termination payment rolled-over, the eligible service period will commence on the date on which the annuity was purchased.
·
"eligible termination payment" is to be defined exhaustively in relation to a taxpayer by reference to all of the possible circumstances in which may be made a payment to which the new Subdivision AA is to apply. Whereas paragraph 26(d) of the Principal Act, which is being repealed by this Bill, applies only to amounts paid "in a lump sum", the term "eligible termination payment" is not so limited. As a result, the provisions of proposed Subdivision AA will apply where, for example, a taxpayer's entitlement to a benefit from a superannuation fund is paid by way of 2 or more instalments. The definition will accordingly overcome the decision of the Federal Court of Australia in the case Federal Commissioner of Taxation v Knight.
Paragraph (a) of the definition refers to payments in consequence of the termination of a taxpayer's employment, but does not include a payment from a superannuation fund or scheme (which is covered by paragraph (b)); payment of an annuity or dividend; or a payment in lieu of annual leave and long service leave (which are covered by existing sections 26AC and 26AD of the Principal Act). In particular, this paragraph of the definition does not apply to a payment from a superannuation fund that is to be subject to tax from 1 July 1984 at a rate of 60% and in respect of contributions to which by an employer will not be tax deductible from that date (as such a fund is not a superannuation fund for the purposes of the Subdivision, payments from it will not be brought within paragraph (b) of this definition either).
A payment from a superannuation fund that is subject to tax at a rate of 60% in the 1983-84 income year will, however, be within paragraph (a) of the definition if the other conditions of the paragraph are met. Paragraph (b) will define as an eligible termination payment a payment in respect of the taxpayer from a superannuation fund - as specially defined for the purposes of Subdivision AA - by reason of the taxpayer's membership of the fund, but will not include a payment that is :

(i)
income of the taxpayer;
(ii)
a payment from a superannuation fund for self-employed persons or employees without superannuation support, being a payment that is not in accordance with the fund's approved terms and conditions; or
(iii)
a payment made to another person by reason of the taxpayer having assigned his or her right in such a fund to the payment for consideration, where the taxpayer has already been, or is to be, assessed on the amount of that consideration.

Amounts referred to in (ii) and (iii) above are already taxed in full under the existing law.
Paragraph (c) makes payments to depositors from approved deposit funds eligible termination payments. By applying the taxing provisions of Subdivision AA to payments of this kind there is a counter balance to the proposal contained elsewhere in the Subdivision to exempt from tax the part of an eligible termination payment that is deposited in an approved deposit fund.
By paragraphs (d) and (g) payments in commutation of eligible annuities and pensions payable from superannuation fund or schemes are brought within the definition of eligible termination payment. The part of such a payment that represents the "unused undeducted purchase price" of the annuity or pension - that is, the part of the purchase price that, broadly, has not attracted a tax deduction, has not had its source in an otherwise fully taxable component of an eligible termination payment, and has not been excluded from assessment when the annuity or pension was being assessed - will not be within the definition.
Paragraphs (e), (f) (h) and (j) encompass payments of the residual capital value of an eligible annuity or superannuation pension but again exclude the unused undeducted purchase price. Paragraphs (e) and (h) deal with the cases where the payment of the residual capital value is made either to the taxpayer during the taxpayer's lifetime or, after death, to the trustee of the taxpayer's estate. Where, however, the payment is made after the death of the person to whom the pension or annuity was payable, direct to another person (not being the trustee of the deceased's estate), paragraphs (f) and (j) apply to treat that other person as the recipient of an eligible termination payment and liable to be assessed in respect of the amount of the residual capital value.
Payments being excluded from the definition by paragraphs (k), (m) and (n) are sums paid as loans or under covenants in restraint of trade or by way of compensation for loss of income through personal injury.
The inclusive paragraphs of the definition generally refer to payments made "in respect of the taxpayer". This term is given an extended meaning by sub-section 27A(3) (refer to the note on that provision for further detail). That expression is not used, however, in paragraphs (f) and (j). Subdivision AA only applies to payments described in those paragraphs if they are made direct to the taxpayer who is liable to be assessed.
·
"employment" is being defined, as a drafting measure, to include the holding of an office. This extended meaning ensures that payments of a kind that have in the past been assessable as to 5% under paragraph 26(d) of the existing law will be brought within this Subdivision.
·
"immediate annuity" is to mean -

-
an annuity that commences to be payable immediately after the purchase price is paid; and
-
a deferred annuity which has commenced to be paid.

·
"invalidity payment" means the component of an eligible termination payment made by reason of the taxpayer's incapacity to continue in his or her current employment. Only 5% of the amount of the component is included in assessable income.
·
"last retirement date" is the date used in ascertaining under section 27G the amount of an invalidity payment. It is the date by which the taxpayer's employment would necessarily end, but for the invalidity. If there is no such date ascertainable from the terms of the taxpayer's contract of employment, the date to be used is the taxpayer's sixty-fifth birthday.
·
"legal personal representative" is being defined, in relation to a person who is or was a depositor in an approved deposit fund, as the executor or administrator of a deceased depositor's estate, the trustee of the estate of a depositor who is under a legal disability or a person who holds a general power of attorney granted by a depositor. A trustee of an approved deposit fund may repay a depositor's funds only to the depositor or to the legal personal representative of the depositor.
·
"life assurance company" is to mean a company that, because it is registered under the Life Insurance Act 1945, is authorised to carry on life insurance business in Australia. Life insurance business is defined in that Act to mean the issuing of life policies, continuous disability insurance contracts and policies ensuring payment of a sum or series of sums of money on a future date or dates, not being a life policy (e.g., an annuity contract), but excludes business in relation to the benefits provided by organisations that are within the meaning of the term "registered organization" defined later in this sub-section. The term "life assurance company" will include a public authority that carries on life insurance business through a State Government Insurance Office.
·
"property" includes a chose in action and any estate, interest, right or power, whether at law or in equity, in or over property.
·
"purchase price", which is defined for the purposes of another term that is defined in this sub-section - "undeducted purchase price" - is the amount of the contributions made or purchase price paid to obtain a superannuation pension or an annuity. Where the amount paid to purchase the pension or annuity is paid also to obtain other benefits, the Commissioner is to have a discretion as to how much of the amount is to be treated as the purchase price.
·
"registered auditor", for the purposes of the operation of the provisions relating to approved deposit funds, means a person registered or deemed to be registered as an auditor under the Companies Act 1981. Under that Act a natural person may apply for registration on the basis of membership of certain specified professional accounting organisations or on the basis of specified academic qualifications or other qualifications and experience. The Auditor-General is deemed to be registered as an auditor under that Act.
·
"registered organization" means a trade union, a friendly or benefit society or an association of employees that, in respect of life insurance business in relation to benefits provided for members or their dependants, is specifically excluded from the scope of the Life Insurance Act 1945. Such life insurance business as it carries on may include the issuing of annuities. A taxpayer will be permitted to roll-over an otherwise assessable component of an eligible termination payment tax-free by purchasing an annuity from a registered organization (further explanation of this is contained in the note on sub-section 27A(12)).
·
"related entity", in relation to an approved deposit fund, is to mean any corporation that is related to the trustee of the fund in that the corporation is -

(a)
the holding company of the trustee;
(b)
a subsidiary company of the trustee; or
(c)
a subsidiary of the holding company of the trustee.

·
"relevant service period" is defined as a subsidiary term for the purposes of the earlier definition of "eligible service period". The term applies only where the eligible termination payment under consideration has been made from a superannuation fund or approved deposit fund, including where the payment is attributable to an earlier eligible termination payment that had been rolled-over into the fund. Where such a payment is made, the eligible service period consists of the aggregate of the periods that are relevant service periods.
Paragraph (a) of the definition refers to the case of a payment from a superannuation fund to which an employer has made tax deductible contributions. A relevant service period is the period of the taxpayer's employment to which the contributions relate. That would include, where the taxpayer has changed employers but preserved his superannuation benefits, the periods of employment with both employers. In a case where the total employment with an employer exceeded the period during which contributions were made by the employer, the total period of employment would be a relevant service period.
Paragraph (b) covers two cases. One is where the payment in question is made from a superannuation fund of which the taxpayer was a member but to which no deductible contributions were made by an employer (sub-paragraph (i)). A relevant service period in that situation is to be the period of fund membership. Sub-paragraph (ii) deals with the situation where, although the payment is made from a fund to which employer contributions were made - so that paragraph (a) of this definition also applies - there may have been a period of accrual of fund benefits during which the taxpayer was a fund member but which was not a period of employment to which the contributions relate (where, for example, a taxpayer left employment but preserved his superannuation benefits in a fund for self-employed persons). The part of the period during which the eligible termination payment accrued that is not already a relevant service period under paragraph (a) is a relevant service period under this sub-paragraph. Both periods count as part of the eligible service period.
Paragraph (c) deals with an eligible termination payment from an approved deposit fund and defines a relevant service period as the period during which the taxpayer was a depositor with the fund.
Paragraph (d) ensures that, in any of the situations in which paragraph (a), (b) or (c) of this definition applies, if the payment in question is attributable to the roll-over of all or part of an earlier eligible termination payment, the eligible service period in relation to that earlier payment (modified in accordance with sub-section 27A(10) if necessary - refer to the note on that sub-section) is also a relevant service period in relation to the later payment.
·
"residual capital value" is being defined for the purpose of the definition of eligible termination payment, as it relates to annuities and superannuation pensions, to mean the capital amount payable on termination (for example, by death or the expiration of a given period) of the annuity or pension.
·
"rolled-over amount" is to mean so much of an eligible termination payment as is applied within a 90 day roll-over period (a defined term) in purchasing an annuity or superannuation pension.
·
"roll-over annuity" is being defined to mean a deferred annuity (that is, an annuity that is not presently payable) purchased by the roll-over within 90 days of all or part of an eligible termination payment. It is a member of a class of annuities - defined in this sub-section as "eligible annuities" - that attract tax exemption for the annuity issuer on its investment income. Further, if commuted or otherwise terminated with a residual value the amount payable is to be an eligible termination payment.
·
"roll-over period" means the 90 day period following the making of an eligible termination payment during which any part of the payment may be "rolled-over" in one of the three ways set out in sub-section 27A(12), with the result that the ordinary operation of the assessment provisions of the proposed new Subdivision AA on the amount is deferred.
The period is extended by sub-section 27A(6) for payments made before the commencement of this Bill and may be extended in other special circumstances to such extent as the Commissioner allows.
·
"scheme" is defined, as a drafting measure, to include arrangements.
·
"superannuation fund" means, for the purposes of this Subdivision,

(a)
a provident, benefit, superannuation or retirement fund that

(i)
is a fund to which paragraph 23(ja), (jaa) or (jb) or section 23F or 23FB (to be inserted in the Principal Act by this Bill) applies to generally exempt the income of the fund or has so applied at any time;
(ii)
is, or at any time has been, subject to tax (at a rate of 46%) under proposed section 121DAB, which will apply to funds other than those mentioned in (i) above that are superannuation funds within the wider definition of that term in Division 9B of the Principal Act and that meet the requirements to be imposed by section 121DAB (refer to the note on clause 42; or
(iii)
a fund that has been, at any time up to and including the 1983-84 year of income, subject to tax under section 79 as a fund for self-employed persons and employees (often without support) that was not required to comply with the "30/20" investment rule (section 79 is being repealed by clause 23 of this Bill with effect from the 1984-85 year of income); and

(b)
a statutory superannuation scheme.

A fund which, at any time, has been taxed under section 121DA of the Principal Act (at a penalty rate of 60%) is not a superannuation fund within the definition. A payment by reason of a person's membership of a superannuation fund as defined in this sub-section from the fund is an eligible termination payment. A payment from any other fund (not being an approved deposit fund) does not constitute an eligible termination payment, but nor do contributions
(Editorial note: original spelling was ' "ontributions' which is assumed to be a typographical error.)
by an employer to such a fund attract tax deductions (see notes on new sub-section 82AAC(2)).
·
"superannuation pension", for the purposes of the roll-over provisions and the eligible termination payment assessment provisions of the Subdivision, is to mean a pension payable from a superannuation fund as defined in this sub-section.
·
"undeducted contributions" is to mean that part of an eligible termination payment made from a superannuation fund or approved deposit fund that is attributable to contributions to a superannuation fund to obtain superannuation benefits. By defining the term not only to include contributions to the superannuation fund from which the payment in question is being made, but also to allow attribution of the payment to contributions to a superannuation fund in circumstances where an earlier payment to which the contributions directly related has been rolled-over into an approved deposit fund or another superannuation fund from which the payment in question is being made, the definition permits such contributions to retain their identity and, therefore, freedom from tax, as they pass through a series of such funds. Such attribution will not permit fund earnings on contributions to be treated as part of the tax-free component. Where an eligible termination payment is rolled-over in purchasing an annuity or pension, any undeducted contributions component will, in addition, form part of the undeducted purchase price of the annuity or pension (see the following note).
·
"undeducted purchase price" of an annuity or superannuation pension is to mean the sum of

(a)
so much of any purchase price of an annuity or pension paid before 1 July 1983 as has not attracted a tax deduction or rebate and has not been treated as a rebatable amount for the purposes of the concessional rebate provisions; and
(b)
so much of any purchase price paid on or after 1 July 1983 as has not been and will not be an allowable deduction, excluding, in the case of an annuity or pension that is purchased by the roll-over of an eligible termination payment, any part of the purchase price that consists of the roll-over, of any part of a component of the payment that would, but for the roll-over have been assessable in full under sub-section 27B(1).

The term is used in proposed section 27H in ascertaining the part of an annuity or pension that is excluded from assessable income. It is also used for the purposes of the definition of "unused undeducted purchase price" (refer to the following note).
·
"unused undeducted purchase price" means so much of the undeducted purchase price of an annuity or pension as has not been excluded from assessment when the annuity or pension has been assessed under either section 26AA of the Principal Act (which is being repealed in relation to annuities derived on or after 1 July 1983) or the proposed new section 27H (which is to apply from that date).

Sub-section 27A(2) is a measure to ensure that the presence in the rules of an approved deposit fund of a rule to overcome the "rule against perpetuities" will not prevent the fund being treated as an indefinitely continuing fund and therefore complying with the requirements of the definition of "approved deposit fund" in sub-section (1). A similar concession is made in proposed section 23FA which exempts from tax the income of certain approved deposit funds.

Sub-section 27A(3) clarifies and extends the meaning of the expression "payment made in respect of the taxpayer" for the purposes of the definition of "eligible termination payment". The effect of the extended meaning of the expression is that a taxpayer will be assessed under Subdivision AA on an eligible termination payment - other than one to which paragraph (f) or (j) of the definition applies - even though the payment is not made to the taxpayer but is, whether voluntarily, by agreement or by compulsion of law paid:

(a)
during the taxpayer's life to or for the benefit of the taxpayer or a dependant or to another person at the taxpayer's request or direction; or
(b)
after the taxpayer's death to the trustee of the deceased's estate.

The purpose of the paragraph (a) extension is essentially an anti-avoidance one. Paragraph (b), however, is a drafting measure which, together with the proposed amendment by clause 27 to section 101A of the Principal Act, will ensure that the trustee of the taxpayer's estate will be assessed to the extent that the taxpayer would have been had the payment been made to the taxpayer immediately before death.

Sub-section (4) will ensure that eligible termination payments, in consequence of the termination of employment or from a superannuation fund or approved deposit fund, made after the taxpayer's death to the estate of the taxpayer will not be included in the assessable income of the estate by virtue of Subdivision AA and proposed sub-section 101A(3) to the extent that the Commissioner considers appropriate having regard to the extent to which the taxpayer's dependants (see the notes on the extended definition of "dependant" in sub-section 27A(1)) are expected to benefit from the estate.

Where a payment of these kinds is made direct by the employer or fund to a dependant, the terms of paragraphs (a), (b) and (c) and sub-section 27A(3) prevent the payment from being an eligible termination payment of either the dependant or the deceased.

This "death benefits" exclusion does not apply to eligible termination payments of amounts in commutation, or as residual capital values, of annuities and pensions.

Sub-section 27A(5), which is consequential upon sub-section (3), has the effect that, where an eligible termination payment made to or for the benefit of a dependant of a taxpayer is taken by the operation of sub-section 27A(3) to be a payment in respect of the taxpayer, the exclusions from the definition of eligible termination payment contained in sub-paragraphs (a)(v) and (b)(i) of that definition will apply where the payment is deemed to be a dividend paid to the dependant or is income of the dependant.

By sub-section 27A(6) taxpayers will be given until 90 days after the date on which this Bill receives the Royal Assent to roll-over components of eligible termination payments made before that date so as to defer the operation of the assessment provisions of the new Subdivision AA.

Sub-section 27A(7) is a measure which limits the size of the "undeducted contributions" component of an eligible termination payment (that is, the tax-free return of contributions to a superannuation fund made after 30 June 1983 that have not attracted a tax deduction) where there has been a roll-over of an eligible termination payment from one superannuation fund to another. The provision ensures that the prima facie effect of the definition of "undeducted contributions" in sub-section (1), which would be to count both the contributions to the first superannuation fund and also the amount of the rolled-over payment to the second fund, is denied by excluding the latter amount. In that way, the actual contributions (is those to the first hand) are counted only once and the part of the rolled-over payment that does not represent contributions to the first fund is not counted at all.

Sub-section 27A(8) will perform a similar function to that performed by section 21 of the Principal Act, which applies where consideration is paid under a transaction otherwise than in cash. By this sub-section, an eligible termination payment that is not in cash is to be deemed to be a payment of the value of the property transferred. The need for the measure arises from the fact that the payment might not be said to have been consideration paid or given upon a transaction in terms of section 21.

The method to be used for aggregating periods for the purpose of ascertaining an eligible service period or relevant service period in relation to an eligible termination payment is set out in sub-section 27A(9). Where a number of periods overlap, the period of overlap is counted only once. Where there are gaps between the end of one period to be aggregated and the start of another, the eligible service period or the relevant service period, as the case may be, will exclude the periods of such gaps.

Sub-section 27A(10) has the effect that there will be only partial preservation of an eligible service period commencing before 1 July 1983 in relation to an eligible termination payment where only part of the component of that payment that is referable to the period of service that occurred before 1 July 1983 (the "before 1 July 1983" component) is preserved by way of roll-over into a superannuation fund or approved deposit fund or applied in purchasing an annuity from a life assurance company or a registered organization. Under the formula in the sub-section, an eligible service period is to be truncated in the circumstances just outlined by removing from the beginning of the period so much of the part of the period that occurred before 1 July 1983 as is obtained by applying the formula

(A*B)/(C)

, where

A is the pre - 1 July 1983 part of the eligible service period;
B is the part of the "before 1 July 1983" component of the payment that is not rolled-over (that is, not preserved); and
C is the "before 1 July 1983" component.

The operation of the sub-section can be illustrated as follows. Assume that a taxpayer receives an eligible termination payment of $10,000 on 1 July 1984 in relation to which the eligible service period of 10 years commenced on 1 July 1974, so that the "before 1 July 1983" component is $9,000 (i.e. nine-tenths of $10,000) and the "after 30 June 1983" component is $1,000, and assume also that there are no "undeducted contributions" or "concessional component". If the taxpayer elects under section 27D (see the note on that section) to roll-over $7,000 into an approved deposit fund and, furthermore, that the $7,000 rolled-over is to consist of the $1,000 that would otherwise have been assessable in full and $6,000 of the $9,000 "before 1 July 1983" component, the eligible service period to be carried forward and used as a relevant service period in relation to a future payment from the approved deposit fund to the taxpayer will be reduced by :

9*(3000/(9000)) years = 3 years

and therefore be deemed to commence on 1 July 1977.

Sub-section 27A(12) is, as explained in the note on section 27D, part of a group of provisions that, basically, govern a taxpayer's capacity to defer tax on components of an eligible termination payment. The sub-section sets out the kinds of applications of a payment that, if made within a 90 day roll-over period, will make the payment a qualifying eligible termination payment and therefore one in respect of which an election must be made under section 27D as to the manner in which the taxpayer wishes to have the components of the payment treated as having been rolled-over. The relevant applications are

(a)
to a superannuation fund for standard superannuation purposes similar to those stipulated in other provisions in the Principal Act (for example, sub-section 23F(2));
(b)
to an approved deposit fund having an approved trustee; or
(c)
to a life assurance company or registered organization (refer to the notes on sub-section 27A(1) on both of these expressions) to purchase an annuity for the benefit of the taxpayer or, on death, the taxpayer's dependants.

Sub-section (11) is a drafting device to make it clear, that in Subdivision AA references to the termination of the employment of a taxpayer (for example, in paragraph (a) of the definition of "eligible termination payment"), also extend to the retirement of a taxpayer from employment and, where the context of the usage of such an expression allows, the death of the taxpayer.

Sub-section 27A(13) contains two drafting measures. Paragraph (a) provides that where an amount is paid in one of the ways described in sub-section (12) during a roll-over period and, by virtue of the taxpayer's completing a valid election under section 27D in respect of the qualifying eligible termination payment, the amount is taken to have been expended in making the sub-section (12) payment, the amount is to be "deemed to have been applied in accordance with section 27D". As a result, the relevant component of the eligible termination payment that is, by the election in section 27D, applied against the roll-over payment is exempted from the operation of the assessment provisions of the Subdivision.

The need for the relatively complex provisions of this paragraph, sub-section (12) and section 27D arises from the fact that a taxpayer will not be required to show, for the purposes of the roll-over provisions, that the actual cash received as an eligible termination payment was the cash rolled-over. It will be sufficient if an amount equal to the whole or a part of the payment is paid to one or more of the sub-section (12) destinations within the 90 day roll-over period.

Paragraph (b) of sub-section (13) clarifies the meaning of the expression "attributable to" when used in the Subdivision to, for example, allow aggregation of service periods (paragraph (d) of the definition of "relevant service period") or preservation of the identity of the "concessional component" or "undeducted contributions component" of a payment (refer to the notes on those definitions in sub-section 27A(1) when the payment is rolled-over in the ways mentioned in sub-section 27A(12). Paragraph (b) limits the circumstances in which the later eligible termination payment or one of its component can be attributed to an earlier payment or component to where the earlier payment or component has been applied in accordance with section 27D.

Section 27B : Assessable income to include certain superannuation and kindred payments

Proposed section 27B will include in a taxpayer's assessable income that component of an eligible termination payment that is referable to the part of the taxpayer's period of service or superannuation fund membership that occurs between 1 July 1983 and the date of payment, excluding the amount of any undeducted contributions made to a superannuation fund during that period and any part of that component paid within a 90 day roll-over period to a superannuation fund or approved deposit fund or applied in purchasing an annuity. The amount included in assessable income is to be subject to a rebate to ensure the appropriate rate of tax is applied to it.

Sub-section 27B(1) provides a formula for calculating the part of an eligible termination payment that is to be included in assessable income. The formula is

A - (A*B)/(C) - D

, where:

A
is the amount of the eligible termination payment less any part of the payment that is a bona fide redundancy payment, approved early retirement payment or invalidity payment. This ensures that this group of payments, which is assessable only as to 5%, is excluded from the calculation of the fully assessable part of the eligible termination payment;
B
is the number of days in the eligible service period (a term defined in section 27A) occurring before 1 July 1983;
C
is the number of days in the whole eligible service period. That is, the component AB/C is the part of the eligible termination payment that is referable to the period before 1 July 1983 and this part is taxed on a concessional basis under section 27C (for further explanation see the note on that section);
D
is the part of the eligible termination payment that is attributable to contributions to a superannuation fund after 30 June 1983 that have not attracted a tax deduction.

By deducting the components

(A*B)/(C)

and D from the component A, the formula arrives at a "relevant amount", which is to be included in full in assessable income, except to the extent that the amount is applied in accordance with section 27D, that is, it is paid within a 90 day roll-over period to a superannuation or approved deposit fund or is applied in purchasing an annuity from a life assurance company or a registered organization (see the note on section 27D and the notes on sub-sections 27A(12) and (13) for a more detailed explanation).

The formula in sub-section (1), as explained above, excludes from the part of the payment that is assessable in full the component

(A*B)/(C)

- that is, the part of the payment that is referable to the period before 1 July 1983. Sub-section (2) provides an alternative basis for calculating the component

(A*B)/(C)

. It permits the Commissioner to substitute for the component

(A*B)/(C)

such greater amount as is appropriate, having regard to the payment that the taxpayer could have expected to have received on 30 June 1983 had the taxpayer terminated his or her employment (paragraph (a)) or superannuation fund membership (paragraph (b)), as the case may be, on that date.

Paragraph (c) of sub-section (2) allows the Commissioner, in exercising his discretion, to have regard to any previous application of the sub-section in respect of the taxpayer. The purpose of this paragraph is primarily to ensure that the benefit of the sub-section is not necessarily available where an eligible termination payment is attributable to an earlier termination payment that has been only partly rolled-over in accordance with section 27D.

For example, a taxpayer who receives an eligible termination payment that is referable to a period of service that commenced before 1 July 1983 and has the benefit of the Commissioner's exercise of the discretion in sub-section (2) to substitute a greater amount for the component

(A*B)/(C)

in the apportionment formula in sub-section (1), might decide to pay one-half of that component to an approved deposit fund within the 90 day roll-over period and to retain the other half. When the approved deposit fund repays that amount, with income accretions, as a later eligible termination payment, it would not be appropriate to modify the ordinary operation of the sub-section (1) formula on the second payment by again substituting the greater notional 30 June 1983 amount for the

(A*B)/(C)

component. Paragraph (c) therefore effectively prevents a full aggregation of periods of service fund membership for the purposes of successive applications of the apportionment formula in cases where not all of the

(A*B)/(C)

component of an earlier eligible termination payment is rolled-over and it is complementary to the approach taken in sub-section 27A(10) of truncating an eligible service period when only part of the

(A*B)/(C)

component is rolled-over.

Paragraph (c) would also apply where, for example, 2 or more eligible termination payments are made from the same superannuation fund. A substitution under sub-section (2) of the notional 30 June 1983 payment would be allowed in respect of only 1 of the eligible termination payments. If, however, the notional amount exceeded the whole of the first eligible termination payment, it would be appropriate to take into account the balance of the notional amount in applying sub-section (2) to the second eligible termination payment.

The combined effect of sub-section 27A(10) and paragraph 27B(2)(c) will be to ensure that the concessional treatment provided by sub-section 27C(1) for the part of an eligible termination payment that is referable to the part of the eligible service period occurring before 1 July 1983 is not excessive in the more complex cases.

Paragraph (d) of sub-section (2) allows the Commissioner to consider any other relevant matter in exercising the discretion. Under this paragraph the Commissioner could, for example, decide not to substitute the 30 June 1983 notional payment in relation to an eligible termination payment if the probability existed that the

(A*B)/(C)

component of a first eligible termination payment from a superannuation fund, together with the

(A*B)/(C)

component of a later eligible termination payment from the same superannuation fund would in total exceed the notional amount. It may sometimes be appropriate in such a case to wait until a later payment is made to have a better or overall picture of the situation before exercising the discretion in favour of a taxpayer.

Section 27C : Assessable income to include 5% of certain amounts

Section 27C will perform 2 quite distinct functions:

(a)
it will ensure that the

(A*B)/(C)

component of an eligible termination payment - that is, the part referable to the period before 1 July 1983 - is treated for tax purposes in the same way as it would have been treated under the law applying before the amendments made by this Bill. Generally, that means that only 5% of that component will be included in assessable income; and
(b)
it includes in assessable income 5% of the "concessional component" of an eligible termination payment (the notes on sub-section 27A(1) and sections 27E, 27F and 27G explain the make-up of this component in detail).

Sub-section 27C(1) applies to the

(A*B)/(C)

component of an eligible termination payment. Paragraphs (a) and (b) ensure that the sub-section applies only where the eligible service period commenced before 1 July 1983 because in any other case there will be no

(A*B)/(C)

component.

Paragraph (c) is the operative paragraph of the sub-section and contains the formula used to ascertain the proportion of the

(A*B)/(C)

component 5% of which is to be included in assessable income under the paragraph. The component X in the formula is to be arrived at in one of three alternative ways. By sub-paragraph (c)(i), X is either the component

(A*B)/(C)

of the formula in sub-section 27B(1) or the amount, if any, substituted for that component under sub-section 27B(2) as the notional payment that the taxpayer could have expected to receive on 30 June 1983.

Sub-paragraph (c)(ii) recognises the possibility that the sum of the components

(A*B)/(C)

and D in the sub-section 27B(1) formula may exceed the amount of the eligible termination payment. Where that happens it is generally more advantageous (but never disadvantageous) to the taxpayer for full recognition to be given to the whole of the D component (tax-free undeducted contributions) and to effectively reduce the

(A*B)/(C)

component, for the purposes of sub-section 27C(1), to the amount remaining after deducting the component D from the amount of the eligible termination payment. In such a case this lesser amount is to be the component X in the paragraph (c) formula.

In line with the overall scheme of sections 27B and 27C, any part of the component X that is applied in accordance with section 27D (that is, rolled-over within 90 days) is not to be included at all in assessable income and is, by the operation of the formula, not within the scope of sub-section (1). This is the purpose of component Y.

Paragraph (c) will apply, for example, to the wide range of eligible termination payments that would have been within the terms of the existing paragraph 26(d) of the Principal Act (to be repealed by clause 11) if received prior to 1 July 1983. In these cases 5% of the amount ascertained by the formula will be included in assessable income.

Paragraph (d) of sub-section (1) will apply to those eligible termination payments which the Commissioner considers would have been included in assessable income to a lesser extent than 5% under the law as it would apply but for the changes to the law being made by this Bill. In those cases the amount ascertained under the formula in paragraph (c) will be included in assessable income only to the extent (being less than 5%) that the law as it applied up to 30 June 1983 would have required its inclusion.

Examples of eligible termination payments which would be within paragraph (d) are :

·
a payment to which section 26AE of the Principal Act (to be repealed by clause 12) would have applied. Under that section, certain benefits received from a superannuation fund for the benefit of self-employed persons or of employees without superannuation support from their employers were taxable as to 5% on so much of the benefit as was attributable to contributions after 19 August 1980 and not taxable at all on the balance; and
·
a payment in commutation of an annuity. If received before 1 July 1983 such a payment would have been exempt from tax.

Sub-section 27C(2) includes in assessable income 5% of the concessional component of an eligible termination payment. This component is defined in sub-section 27A(1) as being the total of any bona fide redundancy payment (section 27F), approved early retirement scheme payment (section 27E) and invalidity payment (section 27G) included in the eligible termination payment. Consistent with sub-sections 27B(1) and 27C(1), any part of a concessional component that is applied in accordance with section 27D is excluded, by component B in the formula contained in sub-section 27C(2), from the operation of the sub-section.

Section 27D : Roll-over of eligible termination payments

Section 27D, in conjunction with sub-sections 27A(12) and (13), sets out the legislative conditions that have to be met before a component of an eligible termination payment will be deemed to have been "applied in accordance with section 27D". As explained in the notes on sections 27B and 27C, a consequence of deeming a component or any part of it to have been applied in accordance with section 27D is that that amount is exempt from tax at the time the payment is received.

Plan of roll-over provisions

Sub-section 27A(12) describes the circumstances in which a payment is a "qualifying eligible termination payment" for the purposes of Subdivision AA - essentially for the purposes of section 27D. The notes on sub-section (12) indicate the kinds of payments that, if made within the relevant 90 day roll-over period, will cause an eligible termination payment to be designated as a qualifying eligible termination payment. A taxpayer who wishes to have all or part of any of the components of a qualifying eligible termination payment deemed to have been applied in accordance with section 27D and so freed from tax will be required by section 27D to complete an election which, in effect, will specify:

·
the sub-section 27A(12) payments (called "qualifying roll-over payments" in section 27D) made in the 90 day roll-over period for that eligible termination payment; and
·
the various components of the eligible termination payment which the qualifying roll-over payments are to be taken as being an application of. An election is required for each qualifying eligible termination payment, notwithstanding that a taxpayer does not wish to apply to it any part of a qualifying roll-over payment. An amount so applied in terms of the election under section 27D is deemed by sub-section 27A(13) to have been applied in accordance with section 27D.

Sub-section 27D(1) provides that, where a qualifying eligible termination payment is made (paragraph (a)) and the taxpayer makes an election in relation to the payment that specifies the qualifying roll-over payments made in the 90 day roll-over period and the manner in which the taxpayer wishes to have the various components of the qualifying eligible termination payment regarded as having been expended in making the various qualifying roll-over payments, the qualifying eligible termination payment is to be taken to have been applied in accordance with the election.

The requirements of the election are set out in paragraph (b) of sub-section (1). Sub-paragraph (b)(i) requires that each sub-section 27A(12) payment made during the roll-over period - a qualifying roll-over payment - be listed on the election document. By sub-paragraph (ii) the taxpayer is called upon to specify the amounts - applied amounts - of the qualifying eligible termination payment that the taxpayer wishes to have regarded as having been expended in making each qualifying roll-over payment. If an eligible termination payment consists of only one component, say the component otherwise assessable in full under section 27B, the taxpayer would simply need to specify how much of the whole payment is to be applied against each qualifying roll-over payment.

If, however, an eligible termination payment has 2 or more components - for example, a component that, but for section 27D, would be assessable in full and another component that would otherwise be assessable in part under sub-section 27C(1) - it is essential to the working of those other sections that the applied amounts of the eligible termination payment are broken into parts each of which is treated as an application of a particular component of the eligible termination payment in accordance with section 27D.

Sub-paragraph (b)(iii) requires the taxpayer to specify the manner in which he wishes to subdivide the applied amounts (see sub-paragraph (ii)) of a qualifying eligible termination payment into the 4 "eligible components" described in the 4 sub-sub-paragraphs of sub-paragraph (iii):

·
Sub-sub-paragraph (A) describes the component that is referable to the part of the eligible service period occurring after 30 June 1983;
·
Sub-sub-paragraph (B) describes the component that is referable to the part of the eligible service period occurring before 1 July 1983; and
·
Sub-sub-paragraphs (C) and (D) refer to the undeducted contributions component and concessional component respectively.

Sub-section 27D(2) is an anti-avoidance measure designed to prevent exploitation of the fact that otherwise taxable components of an eligible termination payment are to be exempt from tax if, by virtue of a valid election under sub-section 27D(1), these components are deemed to have been applied in accordance with section 27D. Scope for exploitation lies especially in the fact that a particular payment may be a qualifying roll-over payment within the meaning of sub-paragraph 27D(1)(b)(i) in relation to 2 or more eligible termination payments because it is paid within the roll-over period in relation to each of those eligible termination payments. Sub-section 27D(2) provides that any attempt to have amounts of eligible termination payments that in total exceed the amount of a qualifying roll-over payment applied against that roll-over payment will result in all elections made by the taxpayer under section 27D being of no effect.

The form of an election and the timing and manner of its lodgment are dealt with in sub-section 27D(3). By paragraph (a) the Commissioner is to provide an approved form in which the election is to be made. Paragraph (b) provides for regulations to be made prescribing the time within which and the manner in which the election is to be lodged with the Commissioner.

Sections 27E, 27F and 27G

The provisions of Subdivision AA of Part II define in sub-section 27A(1) and refer elsewhere in that subdivision to amounts of "concessional components". These are eligible termination payments or parts of eligible termination payments which are to be included in assessable income as to only 5 per cent thereof under sub-section 27C(2) and if applied in accordance with section 27D retain their identity for the purposes of any future application of section 27B in relation to an eligible termination payment attributable wholly or in part to that application. Where "rolled-over" into an annuity, the concessional component forms part of the undeducted purchase price in relation to that annuity.

Section 27E : Approved early retirement scheme payments

The first of the "concessional component" payments is a payment of an amount, under an early retirement scheme which meets certain requirements and has been approved by the Commissioner of Taxation, which is over and above the amount of the eligible termination payment which the taxpayer would otherwise have received on resignation.

Sub-section 27E(1) provides the conditions to be met by a scheme in order that it qualifies as an approved early retirement scheme. The first condition, contained in paragraph (1)(a), is in relation to the category of employees who may participate in the scheme. The purpose of this condition is to ensure that the scheme is available to employees generally and not just to a select few. Under paragraph (a) the categories are:

(i)
all of the employees of the employer;
(ii)
all employees of the employer who have attained a particular age;
(iii)
all employees of the employer who have a particular occupational skill;
(iv)
all employees of the employer who have a particular occupation skill and have attained a particular age;
(v)
all employees of the employer who constitute a class of employees approved by the Commissioner.

The terms used in sub-paragraphs (i) to (iv) are self explanatory. An example of a class to which sub-paragraph (v) might apply would be where all employees of the employer at a particular location were offered early retirement as an alternative to dismissal or having to move their location of employment or place of residence.

Paragraph (1)(b) contains the second condition for approval which is in relation to the purpose of the implementation of the scheme. Paragraph (b) provides that, for a scheme to be approved, it must be implemented by the employer with a view to rationalising or re-organising the operations of the employer by means of one or more arrangements as provided under the paragraph. These are :

(i)
replacement of employees of one particular occupational skill with employees having a different occupational skill. For example, this could apply where lathe operators are replaced by computerised machinery operators;
(ii)
replacement of employees of, or over, a particular age (not less than 55 years) with younger employees;
(iii)
cessation, or reduction in output of all or part of the operations of the employer;
(iv)
moving the location of all or part of the operations of the employer;
(v)
introduction of new technology, processes or systems, or increases in productivity;
(vi)
any other change to the operations of the employer or to the nature of the work-force of the employer approved by the Commissioner of Taxation.

It will generally be the case that the method of rationalisation or re-organisation will be one which fits the kinds of arrangements in sub-paragraph (i) to (v). However, the legislation recognises that with changing industrial attitudes to employment and to working conditions there may be cases where an employer may undertake rationalisation or re-organisation of his business in a way that does not fall within those sub-paragraphs. Accordingly, sub-paragraph (vi) has been provided to enable an early retirement scheme implemented under such other change to gain approval by the Commissioner of Taxation.

Under the new arrangements, the third condition required by section 27E is, by paragraph (1)(c), that the Commissioner of Taxation has, before the scheme is implemented, approved the scheme as an approved early retirement scheme. This is to ensure that, before the scheme is acted upon, the Commissioner is satisfied that it meets the requirements mentioned above.

Notwithstanding that a scheme does not comply with all of those requirements, sub-section (2) enables the Commissioner of Taxation to approve the scheme if he is satisfied that, by reason of special circumstances that exist in relation to the scheme, it is reasonable to treat the scheme as if it had complied. Sub-section (3) makes specific provision that special circumstances for the purposes of sub-section (2) will include the circumstance that the scheme was implemented before the commencement of the provisions of this Bill. Arrangements which are already in existence for the early retirement of employees and which meet the requirements of section 27E can therefore qualify for the purposes of the section.

Sub-section (4) is the operative part of section 27E and provides that, where the requirements provided for under that sub-section are satisfied, then so much of the eligible termination payment received as a consequence of the early retirement scheme as exceeds the amount which the taxpayer would otherwise have received on resignation qualifies as an approved early retirement scheme payment.

The requirements in relation to a payment for it to qualify as an approved early retirement scheme payment are, firstly under paragraph (4)(a) that the payment is an eligible termination payment (as defined in section 27A(1)) made in relation to the taxpayer under a scheme which has satisfied the conditions in sub-section (1) or been treated as doing so.

Paragraph (b) requires that the time of the termination of the taxpayer's employment occurred before the date on which the employment of the taxpayer could "normally" have come to an end. Under sub-paragraph (b)(i), where there are, in the industry in which the taxpayer was employed, arrangements under which retirement occurs, or may occur, at an age earlier than the community norm of the taxpayer having attained 65 years of age, the termination of the taxpayer's employment must occur before that date for section 27E to apply. Sub-paragraph (i) also refers to the taxpayer completing a particular period of service. This would be relevant to those occupations where retirement is ordinarily available on the completion of a particular period of service or to the case where the employment of the taxpayer was for a limited period. In cases where these circumstances apply, a payment could not be an approved early retirement scheme payment where the taxpayer's employment was terminated after the expiry of either of those periods.

Sub-paragraph (b)(ii) addresses the situation where there are no circumstances by which the taxpayer could have voluntarily retired at an age earlier than the community norm or where the employment could have been terminated by reason of the taxpayer having completed a particular period of service. In such cases, the taxpayer's employment needs only to have been terminated before the 65th birthday of the taxpayer.

As a means of safeguarding the special treatment to be given to approved early retirement scheme payments, paragraph (c) addresses the position where the retiring employee and the employer were not at arm's length in relation to one another. For a payment in these circumstances to qualify for the special treatment it must not be greater than the amount that could reasonably be expected to have been paid if the parties had been dealing with each other at arm's length.

Under paragraph (d) a payment cannot qualify as an approved early retirement scheme payment if, at the time when the taxpayer's employment was terminated under an approved early retirement scheme, there was an agreement in force between the taxpayer and the employer, or between the employer and some other person, to employ the taxpayer.

Section 27F : Bona fide redundancy payments

This section relates to the second of the "concessional components" in the definition of that term in section 27A(1), for which the taxation treatment is to include only 5 per cent thereof in assessable income. In some respects, where a taxpayer's employment has been prematurely terminated it may seem that, except for the absence of an approved scheme, some of the matters referred to in paragraph 27E(1)(b) were in existence in relation to the taxpayer's former employer. However, in section 27F the only test to be satisfied as to the reason for the cessation of the taxpayer's employment is that he or she was dismissed by reason of his or her "bona fide redundancy".

The terms "dismissal" and "redundancy" are not defined in the legislation and, therefore, should be given their ordinary meanings. "Dismissal" carries with it the concept of the involuntary (on the taxpayer's part) termination of his employment. "Redundancy" carries the concept that the requirements of the employer for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place where they were so employed, have ceased or diminished or are expected to cease or diminish. Redundancy, however, would not extend to the dismissal of an employee for personal or disciplinary reasons or for reasons that the employee was inefficient.

As to whether the redundancy was bona fide, regard could be had to matters such as the length or time by which the date of dismissal fell short of the "normal" termination date (see notes below to paragraph (b)) and the amount of the excess of the eligible termination payment over what the taxpayer could reasonably have expected to receive on voluntarily resigning his employment on the date of dismissal in relation to the unexpired part of his expected period of employment.

Under sub-paragraph (b)(i), where there are, in the industry in which the taxpayer was employed, arrangements under which retirement occurs or may occur at an age earlier than the community norm of the taxpayer having attained 65 years of age the termination of the taxpayer's employment must occur before that date for section 27F to apply. Sub-paragraph (i) also refers to the taxpayer completing a particular period of service. This would be relevant to those occupations where retirement is ordinarily available on the completion of particular period of service or to the case where the employment of the taxpayer was for a limited period. In cases where these circumstances apply, a bona fide redundancy situation would not exist where the taxpayer's employment was terminated after the expiry of either of those periods.

Sub-paragraph (b)(ii) addresses the situation where there are no circumstances by which the taxpayer could have retired at an age earlier than the community norm or where the employment could have been terminated by reason of the taxpayer having completed a particular period of service. In such cases the taxpayer's employment needs only to have been terminated before the 65th birthday of the taxpayer.

As a means of safeguarding the special treatment to be given to approved early retirement scheme payments, paragraph (c) refers to the position where the retiring employee and the employer were not at arm's length in relation to one another. For a payment in these circumstances to qualify for the special treatment it must not be greater than the amount that could reasonably be expected to have been paid if the parties had been dealing with each other at arm's length.

Under paragraph (d) a payment cannot qualify as an approved early retirement scheme payment if, at the time when the taxpayer's employment was terminated under an approved early retirement scheme, there was an agreement in force between the taxpayer and the employer, or between the employer and some other person, to employ the taxpayer.

Where the conditions specified in paragraphs (a) to (d) have been met, section 27F operates in relation to whatever part of the eligible termination payment received by the taxpayer exceeds the amount that taxpayer could reasonably expected to have been paid had that person voluntarily terminated his services on the date he was dismissed. That excess amount is the "approved early retirement scheme payment" which receives the special treatment given to "concessional components".

Section 27G : Invalidity payments

The third of the "concessional components" is in relation to an invalidity payment, that is a payment made where the taxpayer's employment is prematurely terminated by reason of his physical or mental incapacity to continue in that employment. Section 27G will, by means of a special formula, alleviate the effects of the new lump sum arrangements upon any lump sum received by the taxpayer as a consequence of that termination of employment.

Paragraph (a) commences with a reference to an eligible termination payment having been made in relation to the taxpayer in consequence of the termination of his employment.

Paragraph (b) sets the other criterion for the application of the section by requiring that the termination of that employment must have been by reason of the taxpayer's physical or mental incapacity to engage in that employment (sub-paragraph (b)(i)) and that the termination occurred before the last retirement date (defined in sub-section 27A(1)) in relation to the employment. It is noted that the physical or mental incapacity referred to in paragraph (b) is not total physical or mental incapacity, but physical or mental incapacity to engage in that employment. For example, a pilot whose employment is terminated because of failure to meet the medical standards necessary for the continuance of his commercial licence would qualify for assessment of any eligible termination payment arising from that termination of employment under this section.

Section 27G goes on to provide that where the conditions in paragraphs (a) and (b) exist then so much of an eligible termination as ascertained in accordance with the formula

(A*B)/(C)

is an invalidity payment in relation to the taxpayer. It is thus assessable to tax only under sub-section 27C(2).

Component A of the formula is the amount of the eligible termination payment.
Component B is the number of whole days in the period from the date on which the termination occurred until the last retirement date (the date on which the taxpayer would ordinarily have been expected to have had to retire).
Component C is the number of whole days in the eligible service period (as defined in sub-section 27A(1)) of the taxpayer to the date on which the termination occurred aggregated with the number of whole days in component B. The aggregate so obtained gives the period which would have been the total period of his service had he continued to be employed until his "last retirement date".

The effect of the formula is, therefore, that the proportion of the eligible termination payment that the uncompleted period of the taxpayer's employment bears to what would have been the total period of the taxpayer's employment is excluded from the amount of the eligible termination payment which is subject to the before/after formula in section 27B.

Section 27H : Assessable income to include annuities and superannuation pensions

Section 27H will provide for the assessability of annuities and superannuation pensions which commence to be paid on or after 1 July 1983. It also contains revised rules - which were previously contained in section 26AA - for deducting from an annuity the amount of any undeducted purchase price.

Paragraph (1)(a) of section 27H provides that the taxpayer's assessable income is to include the amount of any annuity derived by the taxpayer. As with repealed section 26AA, the assessable amount is to exclude the amount of any undeducted purchase price which is attributable to the annuity.

Under paragraph (1)(b), the new section is to encompass amounts which are paid as supplements to annuities or pensions, including ex gratia payments and payments made under an agreement or by compulsion of law. Nor will it matter whether or not the payment is an isolated one or one of a series of recurrent payments. Paragraph (b) will, in relation to payments made after the date of introduction of the Bill, overcome a deficiency in the existing law as disclosed in the decision of F.C. of T. v Harris, 30 ALR 10, which held that, where a former employer made a gratuitous supplementary payment to a retired employee, such a payment was not subject to tax.

The amount to be excluded from an assessable annuity under sub-section 27H(1) is to be calculated in accordance with the formula in sub-section 27H (2). The formula is

(A*(B-C))/(D)

, the components of which are:

Component A is the relevant share (a term defined in sub-section (4)) of the annuity received by the taxpayer. In the most common case, where the taxpayer receives the entire annuity, this component will be 1. Where an annuity is payable jointly to more than one person, then the component for each annuitant will be the fraction that that annuitant's share is of the whole annuity.
Component B is the amount of the purchase price of the annuity that has not attracted a tax deduction. A full explanation of that term is given in the notes on the definition of "undeducted purchase price" appearing in sub-section 27A(1).
Component C is included in the formula to reduce the undeducted purchase price where there is an ascertainable residual capital value in relation to the annuity. "Residual capital value" is defined in sub-section 27A(1) and is explained in the notes on that definition. A residual capital value may be specified by amount in the annuity agreement or it may be an amount which is ascertainable at the time when the annuity is first derived under the terms of that agreement.
Component D divides the net undeducted purchase price as ascertained by components A, B and C of the formula (as discussed above) by a denominator called the "relevant number". That term is also defined in sub-section (4) and explained in more detail in the notes on that sub-section. Broadly speaking, component D is the number of years (including a fraction of a year) during which the annuity can reasonably be expected to be payable, having regard to such matters as the terms and conditions on which the annuity is issued and the life expectations of those persons to whom the annuity could be expected to be payable for the duration of their lifetimes.

In the case of some annuities (e.g., an indexed annuity), the amount to be excluded as ascertained under the formula in sub-section (2) may bear no real relationship to the capital component of the annuity. Sub-section (3) will in such cases permit the exclusion from the annuity of an amount which more accurately represents that part of the undeducted purchase price which is more appropriate to the amount of the annuity received in the particular year of income.

Paragraph (3)(a) provides the first criterion for the application of sub-section (3), that being that the annuity is payable for a term of years certain or that the annuity is payable only during the lifetime of one person. The other condition for the application of sub-section (3) is that the Commissioner is of the opinion that the deductible amount calculated under the sub-section (2) formula is not appropriate having had regard to the terms and conditions applying to the annuity and other relevant matters.

Where those two conditions precedent are satisfied, sub-section (3) allows the Commissioner to determine the amount to be excluded from the annuity in arriving at the assessable amount. In ascertaining that amount, the Commissioner is required to have regard to:

(a)
the terms and conditions applying to the annuity (paragraph (c));
(b)
any certificate of an approved actuary or approved actuaries (a defined term) as to the extent that the annuity derived by the taxpayer during the year represents the undeducted purchase price (paragraph (d)); and
(c)
such other matters as the Commissioner considers relevant (paragraph (e)).

Sub-section (4) contains several definitions necessary for, and relevant only to, the operation of the section.

"annuity" is defined to include a superannuation pension.
"approved actuary" is a person who is an actuary for the purposes of the Life Insurance Act 1945. Under an amendment made, but at this time awaiting Proclamation, to section 4A of that Act, an actuary means a person ordinarily resident in Australia who is:

(a)
a Fellow of the Institute of Actuaries of Australia, or
(b)
a person approved as an actuary by the Life Assurance Commissioner under sub-section 4A(3) of the Life Insurance Act 1945.

Until that Act is proclaimed, the following persons will also qualify as approved actuaries, if ordinarily resident in Australia:

·
a Fellow of the Institute of Actuaries incorporated by Royal Charter;
·
a Fellow of the Faculty of Actuaries in Scotland;
·
a Fellow of the Society of Actuaries incorporated under the law of the State of Illinois (U.S.A.).

"life expectation factor" is a term used to describe the period of the life expectation of a person who is a recipient of an annuity. The term is used in the definition of "relevant number" for the purposes of ascertaining the value of component D in the formula in sub-section (2). The period of a person's life expectancy will, under regulations to be made, be ascertained by reference to the Australian Life Tables published by the Australian Statistician as at the time when the annuity first commenced to be payable.
"relevant number" for the purposes of component D in the formula in sub-section (2) is defined by reference to various types of annuities. Paragraph (a) deals with the simplest form of annuity - that payable for a term of years certain. In such a case the relevant number is the number of years in the term.

The second relatively straight-forward form of annuity is where it is payable during the lifetime of any nominated person (who may not necessarily be the recipient of the annuity). Under paragraph (b) the "relevant number" is the life expectation factor as described above of that person.

Paragraph (c) of the definition provides a range of matters which are to be taken into account by the Commissioner of Taxation in determining the "relevant number" in cases other than the two straight-forward cases mentioned in paragraphs (a) and (b). The first of these, in sub-paragraph (i), is the terms and conditions applying to the annuity, which would usually be found in the agreement or policy under which the annuity is issued, but in the case of an annuity payable under a statute would generally be contained in the statute.

Under sub-paragraph (ii), the Commissioner of Taxation is to take into account the number of years in the total period during which it is reasonable to expect the annuity to be payable. For example, if an annuity is payable to one person for his lifetime, who under the Life Tables has a life expectation of, say, 11 years from the time the annuity commences to be payable and, after his death, to his son, aged 5 at the time when the annuity commences to be payable, until the son reaches 21 years of age, then it would generally be reasonable to expect that the annuity will be payable for 16 years. Similarly, if an annuity is payable firstly to a man with a life expectation of 18 years from the time the annuity commences to be payable and on his death to his present wife who has a life expectation of 25 years from that time, then generally it is reasonable to expect that the annuity would be payable for 25 years. Other factors may, of course, require a variation to the general expectation.

A further matter that the Commissioner is to have regard to is specified in sub-paragraph (iii) and concerns the case where an approved actuary has provided a certificate as to the extent to which he considers the annuity paid in a year represents the undeducted purchase price. This matter may be particularly significant in those annuities where the quantum of the annuity is variable according to particular circumstances or conditions which were taken into account at the time the terms of the annuity were formulated. For example, an annuity may be high in amount in early years and low in later years or low early and high later. A different case for weight to be given to an actuarial certificate could be where a pension of one amount is paid to a person until death and a lesser amount then paid to the survivor spouse. The purchase price would, on actuarial principles, be allocated in greater proportions to the pension payable to the original annuitant than to the pension payable to the survivor spouse.

Sub-paragraph (iv) requires the Commissioner to have regard to any changes in the circumstances that were taken into account in the previous year of income to ascertain the relevant number in that year. For example if an annuity is payable to a person for his lifetime and he has, at the commencement of the period in which the annuity is payable a life expectation of, say, 10 years and thereafter to his spouse with a life expectation at that time of say 20 years, the relevant number would initially be 20. But if the spouse pre-deceased that person, it would no longer be appropriate to expect that the annuity would be payable for 20 years, but for 10 years. The Commissioner will be able to alter the relevant number to be used as component D in the formula in sub-section (2) and, thus, the amount of undeducted purchase price to be deducted from the annuity will correspondingly alter.

Because the range and types of annuities which may be offered in the market is vast, sub-paragraph (v) provides for maximum flexibility in allowing the Commissioner to have regard to other relevant matters.

"relevant share" is the last of the defined terms. As previously discussed in the notes on component A in the formula in sub-section 27H(2), this term is relevant in the case where an annuity is payable jointly to more than one person. It is also relevant where one purchase price is used to provide more than one annuity and the price is not allocated separately to each annuity. In such cases the "relevant share" is the fraction of the total annuity payable which the amount payable to the taxpayer proportionately represents.

Clause 16: Divisible deductions

This clause proposes technical amendments to section 50G, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. The amendments are consequential upon the new section 77F proposed by clause 21 to authorise deductions in respect of moneys paid on shares in licensed Management and Investment Companies.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event", e.g., on the occurrence of a 50% or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test or the alternative "same business" test.

For the purposes of these provisions, section 50G describes a category of deductions as "divisible deductions" and directs how such deductions are to be taken into account under the provisions. Very broadly, divisible deductions are those allowable deductions of a year of income which are apportioned or spread in an appropriate manner over the relevant periods of the company in relation to the year of income for the purpose of determining the notional taxable income or notional loss of the company in relation to each of its relevant periods.

The amendments proposed by clause 16 will ensure that, where necessary, a deduction authorised by new section 77F in respect of moneys paid on shares will be treated as a divisible deduction and apportioned between relevant periods on a pro-rata basis in the year of income in which the moneys were paid.

Clause 17: Loss on property acquired for profit-making

Clause 17, which is consequential on clause 10, proposes amendments to section 52 of the Principal Act which authorises the allowance of a deduction in appropriate circumstances for a loss incurred by a taxpayer on the sale of property or from carrying-on or carrying-out any undertaking or scheme. In general terms, a deduction is not allowable under section 52 unless any profit which might have been derived from the particular sale or undertaking would have been included in the taxpayer's assessable income.

New section 25A, which is proposed to be inserted in the Principal Act by clause 10, will operate in certain circumstances to deem the taxpayer to have acquired property for the purpose of profit-making by sale, with the result that the profit, if any, arising from the sale by the taxpayer of the property concerned will generally be included in his or her assessable income. It is necessary to make a number of complementary amendments to section 52 to deal with certain situations in which property that a taxpayer is deemed by the operation of new section 25A to have acquired for the purpose of profit-making by sale, is in fact sold at a loss. To this end, clause 17 proposes to amend section 52 to insert four new sub-sections - sub-sections (2) to (5).

Proposed sub-section 52(2) relates to the measures contained in new sub-sections 25A(5) and (8), the operation of which is explained in the notes on clause 10. Briefly, those sub-sections will deem a taxpayer to have acquired property for the purpose of profit-making by sale where the property concerned is acquired by the taxpayer by way of gift or for inadequate consideration in a non-arm's length transaction from another person who had acquired that property for that purpose. Those provisions also apply to a distribution in specie to a shareholder or beneficiary from a company or trust which had acquired the property so distributed for the purpose of profit-making by sale. Where, in any of these circumstances, a taxpayer is deemed to have acquired property for a profit-making purpose the taxpayer will be subject to tax on any profit arising on the subsequent sale of the property on the basis described in the notes on clause 10 relating to proposed sub-sections 25A (9) and (10).

Sub-section (2) will operate to allow a deduction for any loss which might result from the sale of property deemed to be acquired for a profit-making purpose in one of the ways just described, and sets out the various conditions which must be satisfied in this regard.

Under paragraph (a) of sub-section (2) the property in respect of which a loss may be allowed is confined to certain property that the taxpayer is deemed by sub-section 25A(5) or (8) to have acquired for the purpose of profit-making by sale, i.e., property transferred to the taxpayer in a manner described above.

Paragraph (b) of sub-section (2) requires the Commissioner to be satisfied that the property sold has not been held or used by the taxpayer to whom it was transferred in a manner that is inconsistent with a profit-making purpose. If, for example, a taxpayer acquired by gift in a non-arm's length manner, a motor vehicle claimed to have been purchased originally for the purpose of profit-making by sale, and then used the vehicle for private purposes for a period after which it was of little or no value, it could be expected that the Commissioner would not be satisfied that this test was met.

By paragraph (c) of sub-section (2), the Commissioner is required to consider certain matters to determine whether it would be appropriate for a loss to be deemed to be incurred by the taxpayer on the sale of the property concerned. Sub-paragraph (c)(i) requires the Commissioner to have regard to the amount the transferor paid for the property or interest that was transferred to the taxpayer. Under sub-paragraph (c)(ii), the Commissioner is to have regard to such other matters as he considers relevant, which would include the extent to which the transferred property consists of, or is attributable to, the property acquired by the transferor.

Where the conditions specified in paragraphs (a), (b) and (c) are fulfilled, the taxpayer will be taken to have incurred a loss on the sale of the property of such amount as the Commissioner determines.

Sub-section (3) will ensure that a taxpayer is not entitled to a deduction under sub-section 52(1) for a loss incurred on the sale of property that he or she is deemed to have acquired for the purpose of profit-making by sale because of a transfer for inadequate consideration otherwise than in accordance with sub-section (2). The primary purpose of this provision is to guard against the allowance of more than one deduction in respect of the one item of property.

Sub-section (4) is concerned with the determination of a loss made on the sale of property that is deemed to have been acquired for profit-making purposes under sub-paragraph (b)(ii) of sub-section 25A(6). That sub-paragraph refers to the sale of property in which is merged an interest in property acquired for the purpose of profit-making by sale. Because sub-section 25A(6) treats the whole of the property sold as the "relevant property", sub-section (4) limits the deduction that might otherwise be allowable to the taxpayer to that portion of the loss that is attributable to the interest that was acquired for the profit-making purpose.

Sub-section (5) will ensure that a loss is not allowable to a taxpayer under sub-section 52(1) in respect of two types of transactions to which proposed section 25A will apply, namely -

·
the sale of property acquired by one person for the purpose of profit-making to another person for inadequate consideration in a non-arm's length transaction (paragraph (a)); and
·
the sale of property, being shares in a company or an interest in a partnership or trust estate, which a taxpayer is deemed by proposed sub-section 25A(2) to have acquired for the purpose of profit-making by sale by virtue of the effective disposal of property owned by a company, partnership or trust estate, but not being property consisting of shares or an interest actually acquired by the taxpayer for that purpose, (paragraph (b));

By virtue of the operation of sub-clause 62(8), the amendments made by clause 17 will apply to losses incurred on the sale of property after 23 August 1983.

Clauses 18, 19 and 20: Repairs and other expenditure not wholly to produce assessable income

Introductory Note

Under section 53 of the Principal Act, expenditure incurred for repairs to property held, occupied or used by a taxpayer for the purpose of producing assessable income, or in carrying on a business for that purpose, is an allowable deduction.

A decision handed down by a Taxation Board of Review held that a deduction was allowable 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 the year. The decision, although accepted as correct in law, gave a result that is not in keeping with past practice in relation to the application of section 53 and is out of step with the general principle of the law that expenditure is deductible only to the extent that it is incurred for the purpose of producing assessable income.

Clause 18 of the Bill will clarify the operation of section 53 where property is used only partly for the purpose of producing assessable income. It also proposes - in clauses 19 and 20 - amendments to three other provisions of the law which might be affected by the principles emerging from the Board's decision. These are the provisions which authorise deductions for expenses of borrowing (section 67), expenses relating to lease documents (section 68) and expenses relating to the grant of patents and registration of designs and copyrights (section 68A) to similarly clarify the extent to which deductions for the relevant expenditures are allowable where there is other use of the property, etc., in respect of which the expenditure was incurred.

Clause 18: Repairs

Clause 18 proposes the insertion in section 53 of a new sub-section - sub-section (3) - to make clear that a deduction in respect of expenditure on repairs to property that is held, occupied or used by a taxpayer only partly for the purpose of producing assessable income or only partly in carrying on a business for that purpose, is to be allowable only to the extent that the expenditure is incurred for such purposes. The amendment will apply, by the operation of sub-clause 60(13), to expenditure incurred after 18 April 1984. Accordingly, any expenditure on repairs to property attributable to private or domestic use, or to earning exempt income, after that date will not be an allowable deduction.

Clause 19: Expenses of borrowing

Section 67 of the Principal Act authorises a deduction for expenditure incurred by a taxpayer in borrowing money that is used for the purpose of producing assessable income. Such expenditure is deductible over the period of the loan, or five years, whichever is the shorter period. If such borrowing expenses incurred in a year of income do not exceed $100, the whole of the expenditure is an allowable deduction in that year.

Clause 19 proposes the insertion in section 67 of a new sub-section - sub-section (4) - which will authorise the Commissioner, where expenditure is incurred in borrowing money which is used by a taxpayer only partly for the purpose of producing assessable income, to determine the extent to which the expenditure is to be taken into account in calculating the amount of the deduction allowable.

Sub-section (4) will enable the apportionment of expenditure incurred in a year of income to ascertain the amount attributable to earning assessable income, so as to permit the allocation of the relevant portion of the expenditure over the period of the loan. The $100 limit under which expenditure is allowable as a deduction in the year in which it is incurred will also apply to that reduced amount of expenditure.

The amendment will apply, by the operation of sub-clause 60(13), to expenditure incurred after 18 April 1984.

Clause 20: Expenses relating to lease documents and expenses relating to grant of patents, etc.

This clause will repeal existing sections 68 and 68A of the Principal Act and replace them with two new sections. Basically, each new section will retain the same operation as the section it replaces, except that provision is made to allow the Commissioner to determine the deduction allowable where the relevant property, etc., in respect of which the expenditure is incurred is used other than wholly for the purpose of producing assessable income.

Under new section 68, a deduction will be allowable in full for expenses associated with the lease of property only where the property concerned is to be, or has been, held wholly for the purpose of producing assessable income. If, the property is to be, or has been, held only partly for the purpose of producing assessable income, only so much of the expenditure as is attributable to that purpose will be an allowable deduction.

New section 68A will authorise a full deduction for expenditure incurred in obtaining, or seeking to obtain a grant, extension or registration of a patent, design or copyright, as the case may be, only if it is wholly for the purpose of producing assessable income. In cases where expenditure incurred in obtaining, or seeking to obtain a grant, extension or registration of a patent, design or copyright is only partly for that purpose - for example, such expenditure incurred partly for the purpose of producing exempt income - the deduction allowable is to be limited to such part of the expenditure as relates to the production of assessable income.

The repeal of the existing sections, and the operation of the replacement sections apply, by virtue of sub-clause 60(13), to expenditure incurred by a taxpayer after 18 April 1984.

Clause 21: Moneys paid on shares in management and investment companies

This clause proposes to amend the Principal Act to insert new section 77F to authorise deductions for eligible capital subscriptions to companies that have been granted a licence under the Management and Investment Companies Act 1983 (the "MIC Act").

The deduction will be allowable in the year of income in which subscription moneys - that is, application and allotment moneys, calls, and any amounts paid as share premiums - are paid by the initial subscriber for shares in a licensed Management and Investment Company (MIC). In order to retain the full benefit of the deduction, the subscriber will be required to retain ownership of the shares for a 4 year period commencing on the date on which the shares become fully paid-up or, in the case of shares that a subscriber disposes of when they are only partially paid-up, the last date on which a share subscription was paid.

A deduction for subscriptions paid on MIC shares will be wholly withdrawn if, within 2 years after the shares become fully paid-up or after the last payment on the shares, the shareholder disposes of the shares. Fifty per cent of the deduction will be withdrawn if the shareholder disposes of the shares in the third year, and 25 per cent will be withdrawn if there is a disposal in the fourth year.

For the purposes of those rules, a shareholder will be treated as having disposed of a holding in MIC shares, or an appropriate proportion of them, if any of the following events occurs -

·
the MIC's licence is revoked or is not renewed by the Management and Investment Companies Licensing Board;
·
the shares are redeemed by the MIC;
·
the shares are cancelled or paid-off by the MIC as part of a capital reduction;
·
the shares are forfeited for non-payment of a call; or
·
the shares are partially paid-off.

A person who acquires MIC shares from the initial subscriber will not be entitled to deductions for any calls he or she may pay subsequently, except in a case where the change of ownership occurs as a consequence of the death of the initial subscriber.

Moneys paid on shares will generally be deductible only if made at a time when the MIC is licensed under the MIC Act, but subscriptions made before the grant of a licence may be eligible for deduction if the Management and Investment Companies Licensing Board notifies the Commissioner of Taxation that, in its opinion, the subscriptions were made in anticipation of, or to ensure that the company would be eligible for, the grant of a licence.

Safeguarding provisions will prevent the clawback rules being circumvented by persons who hold their interest in MIC shares indirectly through an ownership of shares in a company, or through partnership or trust interests. They will enable the Commissioner of Taxation to treat a private company, a partnership or the trustee of a private trust estate as having disposed of such number of MIC shares as, in his opinion, is commensurate with the shareholding, or partnership or trust interest disposed of by a shareholder, partner or beneficiary who has indirectly benefited from deductions allowed to the company, partnership or trust.

It is noted that existing provisions of the Principal Act which generally preclude the allowance of deductions under more than one section for particular outgoings may also apply in respect of moneys paid on shares in a licensed MIC. A deduction that would be allowable under more than one provision of the Act is allowable only under the particular provision that the Commissioner of Taxation considers appropriate. Where profit on the sale of property is included in assessable income or a loss on sale is an allowable deduction, any earlier deduction allowed in relation to the property is not again deducted in calculating that profit or loss.

Against that background, detailed notes on the operation of proposed new section 77F follow.

Sub-section 77F(1) defines certain terms used throughout the section -

"Act" means the Management and Investment Companies Act 1983 which established the Management and Investment Companies Licensing Board (the MIC Board) and provides for the licensing of Management and Investment Companies (MICs);
"agreement is given an extended meaning, common to other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise or undertaking, or any scheme, plan, proposal, action, course of action or course of conduct;
"approved capital" means the maximum amount of share capital a MIC may call up within the terms of its licence;
"Board" means the MIC Board;
"licence" means a licence granted under section 21 of the MIC Act;
"licensee" means a company that has been granted such a licence, i.e., a licensed Management and Investment Company;
"owner" includes a beneficial owner;
"prescribed share capital", as in the MIC Act, means ordinary and preference share capital;
"private company" and "private trust estate" are given the same meanings as in section 26AAA, which are, respectively, a company other than one the shares in which are listed for quotation on a stock exchange and a trust estate other than a unit trust the units in which are listed for quotation on a stock exchange or are ordinarily available for public subscription or purchase.

Sub-section (2) is a drafting measure that clarifies the meaning of a number of terms used in the section.

Paragraph (2)(a) makes it clear that a share issued at a premium is to be taken as being fully paid-up only if both the par value and the premium have been paid.

Paragraph (2)(b) defines what is meant by "moneys paid on shares" for the purpose of the deduction allowable under proposed sub-section 77F(4) in respect of such moneys. They are moneys, including premiums, paid to a company after 13 September 1983 in respect of shares in the company by the owners of the shares. Any such payments will not be deductible, however, if they are made in respect of shares issued on or before 13 September 1983, or issued after that date under terms and conditions announced or arranged on or before that date.

Paragraph (2)(c) makes clear that moneys unpaid on shares includes any premiums unpaid.

By Paragraph (2)(d), consistent with paragraph (2)(c), any reference to paying off a share issued at a premium includes a reference to the paying off of the premium; and

Paragraph (2)(e) makes clear that a reference to a share in a licensed MIC is a reference to a share in the ordinary and preference share capital of the MIC.

By sub-section (3), unless a company applies moneys paid on a share towards its paid-up value or as a premium on the share, those moneys will not be treated as having been paid for the purposes of the new section.

Sub-section (4), the operative provision of new section 77F, authorises a deduction in the year of payment for the amount of moneys paid on shares by a taxpayer to a licensed MIC.

Any deduction so allowed, however, will be subject to either total or partial disallowance under proposed sub-section (5) if the taxpayer sells or otherwise disposes of shares within a period of 4 years from what has been termed the "prescribed day" (as defined in sub-section (6)). The effect of sub-section (5) is that the whole of a taxpayer's deduction will be disallowed if he sells or disposes of shares within 2 years after the "prescribed day", one-half will be disallowed if there is a sale or disposal of shares in the third year after the "prescribed day", while one-quarter will be disallowed if the sale or disposal occurs in the fourth year.

Sub-section (6) defines the "prescribed day" as the day on which a share that was fully paid-up when it was sold or disposed of became fully paid-up. In relation to a share that was not fully paid-up, the "prescribed day" is the latest day before the sale or disposal of the share on which subscriptions on the share where paid. In certain cases - explained later in these notes in relation to proposed sub-section (15) - a shareholder may be entitled to a deduction for moneys paid on shares in a company before that company became a licensed MIC. If, in such a case, the shares are fully paid-up at the time the licence is granted, the "prescribed day" is the day on which the licence was granted.

The combined effect of sub-sections (5) and (6) is that, in order to retain full entitlement to the deductions authorised by sub-section (4), a shareholder would need to retain ownership of MIC shares for 4 years after they became fully-paid up or, if they are not fully paid-up, for 4 years from the date of the last subscription. For shares fully paid-up at the time a licence is granted, the 4 year retention period commences from the date of the grant of the licence.

Proposed sub-section (7) will ensure that where a taxpayer has sold or otherwise disposed of MIC shares in consequence of an option or agreement with the purchaser, the date of sale or disposal for the purposes of the operation of sub-section (5) will be taken to be the date on which the option or agreement was entered into. This means, for example, that sub-section (5) will apply to the sale or disposal of MIC shares made more than 4 years after the "prescribed day" if the sale or disposal was made under an option or agreement entered into before the expiration of that 4 year period.

The effect of sub-section (8) will be that the "sale or disposal" rules contained in sub-section (5) will apply to appropriately withdraw or reduce deductions allowable in respect of MIC shares that are redeemed, cancelled, paid-off or forfeited for non-payment of a call. In those cases, the shareholder is to be treated as having sold or otherwise disposed of the shares on the day on which they are so redeemed, cancelled, paid-off or forfeited. In the case of shares that are only partly paid-off, the shareholder will be taken to have sold or disposed of such number of the shares as reflects the reduction of the paid-up value of the relevant shareholding.

Sub-section (9) will have application in a case where the MIC Board revokes or refuses to renew the licence of a licensed MIC. In either of those cases, shareholders in the MIC will be treated as having disposed of their shares on a day that is specified in writing by the Board. That day will generally be the day on which the MIC first acted in a way that constituted the grounds for the revocation or refusal to renew, but in any case will not be later than the actual date of revocation or expiration of the licence. Thus, the effect of sub-section (9) is that a shareholder will stand to lose the whole or a part of his or her deduction in accordance with the rules contained in sub-section (5) if, within the relevant 4 year period, the MIC contravenes its licence conditions in such a way as to lead the MIC Board to revoke or not renew its licence.

By proposed sub-sections (10) and (11), the Commissioner of Taxation will be authorised to treat a private company, a partnership or the trustee of a private trust estate as having disposed of shares held in a licensed MIC if, after the payment of moneys on those shares that would render the company, partnership or trust estate eligible for a deduction under sub-section (4), persons who hold an interest in the company, partnership or trust dispose of that interest or part of that interest. In that context, an interest includes both a direct interest as a shareholder, partner or beneficiary, and an indirect interest held through one or more interposed companies, partnerships or trusts. The combined effect of the sub-sections is that, where a person who held an interest at the time the company, partnership or trustee paid moneys on shares in a licensed MIC disposes of all or a part of that interest, the company, partnership or trustee will be taken as having contemporaneously disposed of so many of the MIC shares as the Commissioner considers appropriate. In deciding what is the appropriate number of MIC shares, the Commissioner will be required to take into account the period during which the person held an interest in the company, partnership or trust estate, the nature and extent of that interest, and effective benefit that would be derived by the person by virtue of a deduction allowable under sub-section (4), the extent to which the assets of the company, partnership or trust estate consist of MIC shares, and such other matters as the Commissioner considers relevant.

Sub-section (12) will apply so that, in a case where, by reason of the death of a shareholder, there is a change of ownership of MIC shares, those shares will not be treated as having been disposed of for the purposes of the "clawback" rules contained in sub-sections (5) and (10). Those provisions will thus not apply to disallow or reduce the deceased shareholder's deduction entitlements, but the new owner will be entitled to deductions in respect of any calls he or she may subsequently pay on the shares.

Sub-section (13) will operate to deny deductions for moneys paid on MIC shares where either (as in paragraph (a)) the payment is made at a time when the MIC has raised more share capital than has been approved by the MIC Board or (as in paragraph (b)) the effect of the payment is that the company's paid-up share capital exceeds its approved capital. In the first case, a deduction will not be allowable under section 77F in respect of the payment, while the deduction in the second case will be reduced by the amount of the excess.

Sub-section (14) makes it clear that a deduction under section 77F is allowable only to initial subscribers for shares in MICs, and not to persons who subsequently acquire them. The only exception, as explained earlier in the notes in relation to sub-section (12), is where shares devalue on the death of the initial subscriber.

For various reasons, a company that has applied or intends to apply to become a licensed MIC may find it necessary to raise equity capital before it actually becomes licensed. Indeed, it is a requirement of obtaining a licence that a company has a minimum paid-up capital of $200,000. Accordingly, for the purposes of the deduction requirements of sub-section (4), sub-section (15) has the effect that pre-licence payments on shares in a company that subsequently becomes a licensed MIC are to be treated as though they were made after it became licensed. They will be so treated however, only if the MIC Board notifies the Commissioner in writing that, in its opinion, the payments were made in anticipation of, or to ensure that the company would be eligible for, the grant of a licence.

In forming its opinion, the Board is, by sub-section (16), required to have regard to the date on which the moneys were paid, the date on which the company applied for a licence, the nature and effect of the company's business activities on both dates, and any other matter the Board considers relevant.

Where, by reason of sub-section (15), a deduction is allowable in respect of moneys that were paid on shares in a year of income before the year of income in which a company was granted a licence, sub-section (17) stipulates that the deduction is allowable in the latter year of income rather than in the year of payment.

Clause 22: Gifts, calls on afforestation shares, pensions, etc

The purpose of this clause is to authorise income tax deductions for gifts to the African Famine Appeal conducted by the International Disaster Emergencies Committee.

Section 78 of the Principal Act authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the taxpayer within the twelve months preceding the making of the gift, to a fund, authority or institution in Australia that is specified in paragraph (1)(a).

Paragraph (a) of clause 22 will amend section 78 by inserting new sub-paragraph (1xxix) in paragraph (1)(a) which will specify the "I.D.E.C. African Famine Appeal" as a fund to which the deduction authorised by section 78 applies.

Paragraph (b) will insert new sub-section (6AF) in section 78 which will have the effect of restricting the deductibility of gifts to the I.D.E.C. African Famine Appeal to gifts made on or after 27 June 1983 and before 1 December 1983. Gifts made to that appeal on or after 1 December 1983 are tax deductible as gifts to the general I.D.E.C. overseas aid fund which is a fund approved by the Treasurer under sub-section 78(8).

Clause 23: Repeal of section 79

As indicated in the notes on clause 8, it is proposed to repeal section 79 of the Principal Act which at present provides for the taxation of superannuation funds for gainfully occupied persons on a concessional basis and substitute a new section 23FB which will exempt the income of such funds from tax.

One result of the repeal of section 79 is that the deduction for 5% of the cost of certain assets of a section 79 fund previously allowable under that section will be abolished. It was this deduction which, in practical terms, substantially reduced the effective tax rate applying to funds from the nominal rate of 50%. Under proposed section 23FB, the investment income of funds which in future meet the tests previously contained in section 79 - and to be re-enacted in section 23FB - will, as explained above and in the notes on clause 8, be totally exempt from tax. Clause 23 will effect this repeal.

Clause 24: Limitation on certain deductions

Section 79C of the Principal Act provides that certain deductions allowable under the Principal Act cannot in aggregate exceed the taxable income of a taxpayer before those deductions are taken into account. Thus, deductions under sections 77B, 77C, 78, 78B, 79 and 82AAT cannot produce or increase a loss which under section 80 of the Principal Act can be carried forward and offset against income of a subsequent year. The reason for this is that the deductions in question are concessional in nature.

The repeal of section 79 of the Principal Act by clause 23 of the Bill and, in particular the abolition of the special deduction for 5% of the cost of certain assets under that section, makes the reference in section 79C to section 79 no longer appropriate. Clause 24 will accordingly delete that reference.

Clause 25: Deduction for contributions to fund for employees

Subdivision AA of Division 3 of Part III of the Principal Act contains a code governing the deductibility of superannuation contributions made by an employer for employees who are engaged in producing the assessable income of the employer or who are residents of Australia and engaged in the business of the employer. Section 82AAC - the operative provision of that Subdivision - allows an income tax deduction for amounts paid or set apart for the provision of superannuation benefits for an employee or his or her dependants where the rights of the employee and dependants are fully secured.

As part of the series of changes to the taxation treatment of superannuation benefits and funds, it is proposed to reduce the rate of taxation on most of the existing taxable funds. A new kind of "non-complying" superannuation fund, but one which nevertheless meets the basic requirement that it be one established and maintained solely to provide retirement benefits for persons in gainful employment or for dependants of such persons in the event of their death or to meet other circumstances approved by the Commissioner of Taxation, is to be introduced by the insertion by clause 42 of a new section 121DAB operative for 1984-85 and later income years. Funds which do not meet the requirements of that new section, but nonetheless are still superannuation funds within the broad meaning of Division 9B of the Principal Act, will continue to be assessable and pay tax at the specified rate under section 121DA of the Principal Act.

Special conditions are to be applied for funds to which section 121DA applies after 30 June 1984. In respect of those funds which have never enjoyed an exemption from tax under paragraph 23(ja), (jaa) or (jb) or section 23F or the proposed section 23FB, or which have never been subject to a rate of tax on their investment income less than the rate under existing section 121DA, superannuation benefits paid by such funds will not be "eligible termination payments" for the purposes of the new Subdivision AA of Division 2 (see discussion in notes on definition of "superannuation fund" in proposed section 27A) and, therefore, will not be subject to tax under that Subdivision.

For this reason, from 1 July 1984, amounts paid to a fund to which section 121DA applies will no longer attract a tax deduction for an employer under section 82AAC of the Principal Act. This is achieved by clause 25 which introduces a new sub-section 82AAC(2) to deny deductibility for amounts which are paid to a superannuation fund of the kind which in future, attracts the application of section 121DA.

Clause 26: Interpretation

Section 82AAS of the Principal Act contains definitions of terms for the purposes of Subdivision AB of Division 3 of that Act, which authorises deductions to non-employer supported persons for their contributions to a "qualifying superannuation fund", a term which is defined in sub-section 82AAS(1). Clause 26 will make two amendments to that definition, the first, by paragraph (a), is a formal amendment to insert in paragraph (a) of the definition a reference to Division 9C which was overlooked when that Division was inserted by the Income Tax Laws Amendment Act 1981. The second, by paragraph (b), is consequential on the repeal of section 79 of the Principal Act and the insertion of the new section 23FB and will insert in paragraph (b) of the definition of "qualifying superannuation fund" a reference to section 23FB in lieu of the present reference to section 79.

Clause 27: Income of deceased received after death

Section 101A of the Principal Act provides for the assessment of an amount received by the trustee of the estate of a deceased person where the amount would have been assessable income of that person had it been received during his or her lifetime.

Clause 27 will add new sub-section (3) to section 101A to deal with amounts received by the trustee of a deceased person's estate which are eligible termination payments in respect of the deceased. Proposed sub-section 27A(3) will ensure that an eligible termination payment made after the death of the taxpayer to the trustee of the estate of the taxpayer is nevertheless an eligible termination payment in respect of that taxpayer. In doing that, sub-section 27A(3) will ensure that the provisions of new Subdivision AA of Division 2 will, subject to new sub-section 27A(4) - see notes on that sub-section - operate in the same way in relation to such a payment as they would had the payment been made to the taxpayer immediately prior to his death. As a result, the eligible termination payment would be apportioned into the "after 30 June 1983" and "before 1 July 1983" components and any concessional components which would have been assessed as to 5% thereof had it been received by the deceased taxpayer.

Sub-section 101A(3) brings into the assessable income of the trust estate those various components of the eligible termination payment and deems it to be income to which no beneficiary is presently entitled. The trustee is then liable to pay tax on that income on the same basis as the deceased taxpayer would have been liable.

Clause 28: Private companies

Section 103A is contained in Division 7 of Part III of the Principal Act and is largely concerned with the "public" or "private" status of companies for income tax purposes.

Clause 28 proposes to include a new sub-paragraph - sub-paragraph (iia) - in paragraph 103A(2)(d) of the Principal Act to ensure that friendly societies and other organisations, which are to be assessable on certain income by the operation of new Division 8A which is proposed by clause 36 to be inserted in Part III of that Act, will qualify as public companies for income tax purposes. Such bodies thus will be outside the scope of the provisions of Division 7 which impose additional tax on certain undistributed income of private companies.

Clause 29: Interpretation

Section 110 of the Principal Act contains definitions necessary for the operation of Division 8 of that Act which provides a special assessment code for life assurance companies.

Clause 29 proposes to insert several new definitions into, and to make certain other amendments to, section 110 consequential upon amendments made by other clauses of this Bill.

Paragraph (a) will insert a definition of "annuity business" which is relevant to the definition of "life assurance business" to be inserted by paragraph (f). It means the business of, or in relation to, the granting of annuities, or the undertaking of liability in respect of annuities.

Paragraph (b) makes a formal amendment to the definition of "Australian statutory fund" by omitting "insurance business" and substituting "assurance business" in the expression "life insurance business". The change reflects the insertion of a definition of "life assurance business" and will not change the present meaning of the definition.

Paragraph (c) will add three new definitions:

·
"deferred annuity" is a term relevant to the definition of "roll-over annuity" and means an annuity which is not presently payable to a natural person.
·
"eligible policy" refers to the three kinds of life assurance policies the income in respect of which is to be exempt under section 112A of the Principal Act (as amended by clause 32). For this purpose, and for the purposes of the definition of "exempt statutory fund" (see note below) "eligible policy" means:

(a)
a superannuation policy (a term already defined in section 110 of the Principal Act);
(b)
a life assurance policy in relation to an "immediate annuity", viz., an annuity which is presently payable to a natural person; and
(c)
a life assurance policy in relation to a "roll-over annuity" (see notes below on the meaning of that term).

·
"exempt statutory fund" is a term which encompasses a fund maintained by a life assurance company solely in respect of a class of life assurance business relating to policies which are "eligible policies" as described above. Broadly, it means a fund maintained solely for that business of a life company, the investment income from which is exempt from tax under section 112A of the Principal Act. Thus, it would include any fund which is maintained exclusively for business relating to superannuation policies, or exclusively for business relating to immediate or roll-over annuities, or exclusively for any combination of those businesses. The term "exempt statutory fund" is used in sections 115 and 115A in relation to the calculation of the special deduction a life assurance company receives in respect of its calculated liabilities.

Paragraph (d) makes an amendment to the definition of "exempt superannuation fund" which is consequential on the repeal of section 79 of the Principal Act (by clause 23) and the introduction of section 23FB (by clause 8) to apply to those superannuation funds previously covered by section 79. The reference to section 79 is, by this amendment, to be changed to section 23FB.

The formal amendment made by paragraph (e) follows from the insertion of a definition of "life assurance policy" (see notes on paragraph (g)). The reference to "policies" in the definition of "future premiums" will now, more appropriately, refer to "life assurance policies".

Five further definitions are to be inserted in section 110 by paragraphs (f), (g) and (h) :

·
"immediate annuity", a term used in the definition of "eligible policy", is defined as being an annuity that is presently payable to a natural person.
·
"life assurance business" is a term used throughout Division 8 of the Principal Act and, to remove any doubt, is to be defined as including annuity business.
·
"life assurance policy" is another term used throughout Division 8 and, again to overcome any doubt, is now to be defined as including an instrument securing the grant of an annuity, whether or not for a term dependent upon human life. An annuity for a term certain will accordingly come within this definition.
·
"premium" is also a term used in the provisions of Division 8 - it will now include any consideration received or receivable from annuity business.
·
"roll-over annuity" refers to an annuity which is not presently payable to a natural person, but which has been purchased wholly by a "rolled-over amount" within the meaning of that term in new section 27A introduced under clause 15, that is, it has been purchased by the whole or part of an amount which is an eligible termination payment for the purposes of Subdivision AA of Division 2.

Paragraph (j) proposes the omission of the existing definition of "superannuation statutory fund" which has been subsumed in the new definition of "exempt statutory fund".

The amendment made by paragraph (k) to the definition of "valuation of liabilities" is another formal amendment to ensure that the word "policies" includes policies in relation to annuities. The term "valuation of liabilities" is relevant to section 114 of the Principal Act in relation to the meaning of "calculated liabilities".

Clause 30: Premiums not assessable income

Section 111 of the Principal Act is to be replaced, by clause 30, with a new section which reflects both contemporary drafting style and the removal of the reference to "considerations received in respect of annuities granted" which now forms part of the definition of "premium" inserted in section 110 by clause 29.

As amended section 111 will provide that the assessable income of a life assurance company is not to include premiums received in respect of life assurance policies issued by the company, but that, for certain purposes, "total income" is to include such premiums. The practical operation of section 111 is not affected by the amendments.

Clause 31: Deductions not allowed

Section 112 of the Principal Act denies a life assurance company any deductions for expenditure incurred exclusively in gaining premiums in respect of life assurance policies and considerations received in respect of annuities granted which are, by section 111, exempt from tax. Clause 31 proposes to omit from section 112 a reference to such considerations which has become redundant as a consequence of the inclusion, by paragraph (h) of clause 29, in the definition of "premium" of a reference to consideration received in respect of annuities.

Clause 32: Exemption of income attributable to superannuation policies and certain annuities

Section 112A of the Principal Act exempts from tax so much of the investment income of a life assurance company as is derived from a fund of the company that relates to exempt superannuation business of the company. Generally, the exemption applies only to those companies that satisfy the 30/20 ratio requirement of holding public securities.

The exemption from tax under section 112A is to be extended to that part of the assessable income of a life assurance company referable to a wider group of policies, referred to as "eligible policies" (see the notes on that term in clause 29) and accordingly, the reference in sub-section 112A(1) to "superannuation policies" is to be changed by paragraph (a) of clause 32 to a reference to "eligible policies".

Sub-section 112A(2) of the Principal Act allows a life assurance company to elect that, for the purposes of the calculation of the exemption under sub-section 112A(1), the expressions "superannuation policies" and "policies" will mean only those policies which are "Australian policies" (a term presently defined in section 110 of that Act as meaning those policies on a register located in Australia). The reference to "superannuation policies" in sub-section (2) is, for the reasons mentioned above to be changed by paragraph (b) to a reference to "eligible policies".

Paragraph (c) of clause 32 adds new sub-section (5) to section 112A which makes it clear that the references in the section to "policies" are references to "life assurance policies"

Clause 33: Deductions in relation to calculated liabilities

A life assurance company is, in addition to its normal deductions, entitled to a special deduction in relation to its calculated liabilities ascertained in accordance with one of five formulae expressed in sub-section 115(1) of the Principal Act, depending on the circumstances of the company and the elements of the formulae in relation to the company. The components of the formulae are defined in sub-section 115(2).

Components j, l and n used in the various formulae in sub-section (2) contain references to "superannuation statutory funds" of a life company. As is explained in the notes to clause 29, the classes of life assurance business the income in respect of which is to be exempt from tax, are to be expanded to include business in respect of policies which are defined as "eligible policies" and the statutory funds maintained solely in relation to this expanded class of life assurance business are to be referred to as "exempt statutory funds".

Clause 33 will, accordingly, change the references in sub-section 115(2) from "superannuation statutory funds" to "exempt statutory funds". The effect of this will be that, in calculating the special deduction under section 115, funds relating exclusively to exempt businesses will be excluded.

Clause 34: Adjustment of cost of assets

Where a life assurance company elects that section 115A of the Principal Act will apply, that section modifies the components contained in the formulae in section 115 of that Act used for calculating the special deduction available to life assurance companies under that section.

Paragraph 115A(3) (b), like sub-section 115(2), makes references to policies included in a "superannuation statutory fund". As explained in relation to clause 33, it is now appropriate to refer to an "exempt statutory fund" instead of "superannuation statutory fund". References to that latter expression are to be changed by paragraph (a) of clause 34 to references to the new term, "exempt statutory fund".

Under paragraph (b) the reference to "superannuation policies" in paragraph 115A(3) (b) is to be changed to "eligible policies" so as to encompass that wider class of exempt business. The notes on clauses 29, 32 and 33 explain in more detail the reason for the change.

Paragraph (c) will change another reference to a "superannuation statutory fund" to a reference to an "exempt statutory fund" - this time in sub-section 115A(4) of the Principal Act - for the reasons set out in the notes on those earlier clauses.

Clause 35: When calculated liabilities exceed assets

Clause 35 will make a formal amendment to section 116 of the Principal Act to delete the expression "the business of life assurance" and to substitute the defined term "life assurance business". The amendment has no practical effect on the operation of the section.

Clause 36: Annuity and insurance business of certain organisations

Introductory Note

This clause will insert a new Division - Division 8A - in Part III of the Principal Act to give effect to a proposal announced in the 19 May 1983 Economic Statement to impose income tax on friendly societies in respect of investment income from their life, disability and accident insurance business for the 1983-84 and later income years. Additional details of the proposal were announced on 17 April 1984. The income of friendly societies, other than friendly society dispensaries, that are not carried on for purposes of profit or gain to their individual members is presently exempt from tax. Subject to the measures proposed in respect of their life, disability and accident business and some annuity business described below, such bodies will remain exempt from tax on their other income, including income arising from superannuation business or from their traditional types of business, namely, sickness and funeral business.

The amendment proposed by this clause will include in the assessable income of friendly societies income, profits or other amounts (other than premiums) derived from their life, disability or accident insurance business that would, but for any exempting provision in the Principal Act, be assessable income of the societies. In addition to taxing friendly societies on certain insurance business, the new Division 8A proposes to tax them, as well as trade unions and employee organisations registered under the Conciliation and Arbitration Act 1904, (referred to in the new Division as "registered organizations"), on investment income from certain annuity business. The income from annuity business which will be included in the assessable income of these bodies will be the same kind of income as is included in the assessable income of life assurance companies from that type of business. Broadly, these registered organisations will be assessed on the income from annuity business (but not any consideration received in respect of granting an annuity) other than:

·
an annuity issued in respect of a superannuation policy;
·
an annuity which is presently payable to a natural person (immediate annuities); or
·
an annuity purchased by the "roll-over" of an eligible termination payment. This aspect is discussed in more detail in the notes on clause 29.

Under the proposed amendments, the taxable income of a friendly society or other registered organization will be ascertained by deducting from its assessable income as described above, 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 to expenditure incurred exclusively in earning exempt income, determined on the basis that assessable income bears to total income.

The rate of tax to be imposed on the taxable incomes of friendly societies and other registered organisations as determined on the basis outlined above is to be 20 per cent. This will be declared and imposed by the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Bill 1984.

The scheme established by the new Division 8A to tax friendly societies and other registered organisations does not contain any of the special provisions of Division 8 that apply in the assessment of life assurance companies. Nor will friendly societies and other registered organisations have to satisfy the 30/20 rules to obtain exemption on relevant income.

The amendments proposed by this clause will, by the operation of sub-clause 60(4), apply to assessments in respect of income of the year of income that commenced on 1 July 1983 and of all subsequent years.

Notes on the individual provisions of proposed Division 8A follow.

Section 116E : Interpretation

Section 116E contains a number of definitions of certain expressions used in proposed new Division 8A. The definitions of specific types of annuities (deferred, immediate and roll-over annuities), as well as the definition "premium" correspond with similar definitions proposed to be inserted in Division 8 of the Principal Act by clauses 29 and 32 and are explained in the notes on those clauses. The remaining definitions are:

·
"annuity business" is the term used to define the class of business the investment income from which is to be included in the assessable income of registered organisations other than friendly societies. It is in identical terms to the definition proposed to be inserted in section 110 of the Principal Act by clause 29 for purposes of determining the assessable income of a life office from this type of business.
·
"eligible annuity" is defined as having the same meaning as in Subdivision AA of Division 2 which is proposed to be inserted in the Principal Act by clause 15. As indicated in the notes on that clause, the term is to mean an annuity payable under a superannuation policy, an immediate annuity or a roll-over annuity. The effect of this definition, when read together with proposed new sub-section 116G(2), is to exclude from the assessable income of registered organisations (which is itself a defined term) other than friendly societies, investment income that is attributable to such annuities.
·
"eligible insurance business" is the term used to describe the particular activities of friendly societies, the investment income from which is to be included in the assessable income of these bodies by virtue of proposed sub-section 116G(1). The activities concerned are those of issuing, or undertaking liability under, the types of insurance policies described in the definition of eligible insurance policy. In other words, it will only be in relation to particular policies in respect of which friendly societies themselves bear the risk (as opposed to policies or parts of policies which they provide as an agent for other insurers) that any tax consequences will arise for these bodies.
·
"eligible insurance policy" is used to describe the particular types of policies which, when issued by friendly societies, will comprise the "eligible insurance business" of these bodies. The term is limited to insurance policies that are life assurance, accident or disability policies. It does not include a sickness policy or a funeral policy, and specifically excludes so much of any life, accident or disability policy issued by a friendly society as is for sickness or funeral insurance. This means that the investment income derived by friendly societies from their traditional business of issuing sickness and funeral policies will be excluded from the operation of the new Division 8A. The term also specifically excludes an "eligible policy" (see below).
·
"eligible policy" is the term used to define various classes of life assurance policies which, in application to friendly societies, will be excluded from the operation of Division 8A. The policies to be so excluded are superannuation policies and those related to immediate or roll-over annuities. The definition is identical to that proposed to be inserted in section 112A of the Principal Act by clause 32 to ensure that investment income from this type of business is excluded from the assessable income of life offices. In practical effect, it corresponds with the term "eligible annuity" described earlier which will exclude income from this type of business that is derived by other registered organisations.
·
"life assurance policy", like the identical definition proposed to be inserted in section 110 of the Principal Act by clause 29, is to have its ordinary meaning, but is defined to include an instrument securing the grant of an annuity whether or not for a term dependent upon human life. This expression, when read in conjunction with the three earlier definitions, will ensure that investment income derived by friendly societies from annuity policies, other than such policies included in the definition of "eligible policy", will be assessable income in the hands of these bodies. As indicated earlier, the same result is to be achieved for other registered organisations by the terms "annuity business" and "eligible annuity".
·
"registered organization" is, as indicated earlier, the term used to specify the bodies to which the proposed new Division is to apply. These bodies are:

-
an association registered under a State Act or law of a Territory as a trade union;
-
a friendly society (defined in section 6 of the Principal Act to mean a society duly registered as a friendly society under any Act or State Act or under any law in force in a Territory of Australia); and
-
an association of employees that is registered as an organization under the Conciliation and Arbitration Act 1904.

However, application of the new Division to such an association or society is conditional upon the income of the particular body being otherwise exempt from tax by virtue of either paragraph 23(f) or sub-paragraph 23(g)(i) of the Principal Act, even though that income might also be exempt from tax by virtue of another provision of that Act, for example, under paragraph 23(q) which exempts foreign source income that is taxed in the country of source. Those first two mentioned provisions respectively exempt from tax the income of trade unions and other registered employee organisations, and of friendly societies (other than friendly society dispensaries) that are not carried on for the purpose of profit or gain to individual members. If, for example, a friendly society is carried on for profit or gain to its individual members and is not therefore exempt from tax by virtue of sub-paragraph 23(g)(i), it would be subject to tax as a public company on all of its income as determined in accordance with the general provisions of the Principal Act, and proposed new Division 8A would have no application to such a society.
·
"superannuation policy" is defined to have the same meaning as in Division 8 of the Principal Act. Briefly, it is a policy effected for the purposes of certain superannuation funds or schemes which are also defined in that Division.
·
"total income", in relation to a registered organization, is to mean the income, profits or other amounts that would, but for the operation of any exemption provision in the Principal Act, be assessable income of such a body. The term includes premiums, and is particularly relevant to the application of section 116H which provides for the apportionment of certain allowable deductions on the basis of the ratio that a registered organisation's assessable income (which, by virtue of section 116H, does not include premiums) bears to its total income.

Section 116F : Division to have exclusive operation in ascertaining assessable income of registered organisations

Section 116F proposes that the assessable income of a registered organization, as defined, will be ascertained only in accordance with Division 8A. However, for the purpose of determining a registered organisation's assessable income, section 116 does not exclude the application of the provisions of Part IVA of the Principal Act, which relate to schemes to avoid income tax.

Section 116G : Assessable income of registered organisations

Proposed section 116G will have the effect of identifying the assessable income of a registered organization which is to be taxed in accordance with Division 8A.

Sub-section 116G(1) specifies that the assessable income of a friendly society is to include only so much of the total income of a society as is derived from its "eligible insurance business", other than income in the form of premiums arising from that business. The practical effect, taken together with the definition of eligible insurance business and other relevant definitions described earlier, is to limit the assessable income of a friendly society to which the Division applies to the amount of investment income which the society derives from its life, disability and accident policies, other than policies which are superannuation policies or are related to immediate or roll-over annuities.

Sub-section 116G(2) applies to a registered organization other than a friendly society. Taken together with the definitions of "annuity business" and "eligible annuity", which are described earlier, it will effectively limit the assessable income of such a body to the amount of investment income it derives that is attributable to the issue of annuity policies, other than an annuity payable under a superannuation policy, an immediate annuity or a roll-over annuity.

Section 116H : Deductions allowable from assessable income of registered organisations

Proposed section 116H identifies the deductions which, notwithstanding any other provision of the Principal Act, are to be allowable to a registered organization in determining the taxable income of that organization. This provision is necessary to ensure that the fundamental purpose of Division 8A is not effectively negated by the allowance of deductions that totally or partially have no relevance to the limited income that is to be treated as assessable income of these bodies.

Paragraph 116H(a) specifies that all deductions allowable under the Principal Act in a year of income that relate exclusively to the production of that income of a registered organization that is, by the operation of section 116G, to be included in its assessable income, will be allowable to the organization in determining its taxable income of that year.

Under paragraph 116H(b) any other deductions otherwise allowable to a registered organization in a year of income, - such as several overheads, but not including those deductions that relate exclusively to the production of exempt income of the organization, for example, rates and taxes on a property used solely to produce exempt income - will be allowable in the proportion that the assessable income of the year of income bears to the total income of the organization of that year. In this context, as noted earlier, total income includes premiums.

Section 116J : Effect of Division on rebate under section 46 or 46A

Reflecting the special basis on which they are to be taxed, this section will ensure that the rebate allowable under section 46 or 46A of the Principal Act to a company for dividends included in its assessable income will not be available to registered organisations.

Clause 37: Heading to Division 9B of Part III

Because of the insertion by clause 42 of a new section 121DAA into Division 9B of Part III to provide for the assessment of the income of "ineligible approved deposit funds", that Division will in future relate to more than "Superannuation Funds". By clause 37 the heading to Division 9B is to be amended to read "Superannuation Funds and Ineligible Approved Deposit Funds".

Clause 38: Definitions

Section 121B of the Principal Act contains definitions for the purposes of the application of Division 9B of that Act. Clause 38 will insert in section 121B a definition of "ineligible approved deposit fund", the income of which will be subject to tax (see the note to clause 42). An ineligible approved deposit fund is defined as a fund that is an approved deposit fund within the meaning of Subdivision AA of Division 2 (see clause 15 notes), that had, at the end of the year of income, an approved trustee or approved trustees (see clause 15 notes) and which is not exempt from tax under section 23FA (see notes to clause 8).

Clause 39: Repeal of Section 121BA

Section 121BA of the Principal Act serves two purposes in relation to superannuation funds to which the former section 79 of the Principal Act (to be repealed by clause 23) applied.

It is used to establish what is the net income of such a fund. Net income specifically excludes amounts which, broadly speaking, are amounts of excessive non-arm's length income. The net income then forms the first component of the assessable income of the fund which is assessed under section 121CB of the Principal Act. Income which was net income of a fund to which section 79 applied will, from the 1984-85 income year, be exempt under proposed section 23FB (refer to clause 8).

It also contains the provisions which relate to amounts of private company dividends derived by the fund which are, in the opinion of the Commissioner, excessive having regard to matters specified in section 121BA and to amounts of income derived by the fund from transactions where the parties were not at arm's length in relation to the transaction where the amount of the income derived is greater than would have been derived if the parties had been at arm's length. Those provisions are now to be found in sub-sections (13) to (15) of the new section 23FB (see the notes to those sub-sections in clause 8). That excessive non-arm's length income will continue to be assessable under section 121CB as amended by clause 40 of this Bill.

Clause 40: Assessment of income of superannuation funds established for the benefit of employees and other persons

Section 121CB of the Principal Act operates to assess the trustee of a superannuation fund to which section 79 of the Principal Act applies upon the aggregate of the net income (ascertained in accordance with sub-section 121BA(1) of the Principal Act) and the net amount of excessive non-arm's length income as is excluded from that net income under sub-sections 121BA(2) to (5) of that Act.

Sections 79 and 121BA are to be repealed by, respectively, clauses 23 and 39 of this Bill and some of their sub-sections will form part of the new section 23FB (to be inserted by clause 8). As a consequence of the changes made by clauses 8, 23 and 39, section 121CB is to be repealed by clause 40 and a new section 121CB inserted to provide for the assessability of the excessive non-arm's length income of the funds to which the new section 23FB will apply.

Under the new section 121CB, the trustee of a superannuation fund, to which the proposed section 23FB will apply, is to be assessed and liable to pay tax on the amount of income (excessive private company dividends and other non-arm's length income) which is not exempt under section 23FB, less any losses or outgoings to the extent that they are incurred in gaining or producing that income, not being losses or outgoings of a private or capital nature.

Clause 41: Assessment of Income of Other Superannuation Funds

The income derived by a trustee of a superannuation fund is, under the Principal Act, treated in two ways. Certain funds comply with requirements laid down in certain sections of the Principal Act and are assessable to tax only upon their non-arm's length income. Other funds which do not comply with those requirements are assessed on all of their income and, until the amendments proposed in this Bill and in a Bill amending the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983, were liable to pay tax at the rate of 60 per cent.

The provisions of section 121DA which assess those non-complying funds specifically exclude from its operation, by reference to the sections under which their assessable income is made liable to tax, the funds which comply with the relevant requirements for what might be called "preferred" tax treatment.

As is mentioned in the notes to clause 42 it is proposed to introduce a new class of superannuation fund which, although it fails to meet any of the criteria for exemption, still meets the basic test of providing benefits for members for their retirement or for dependants on a member's death. Such funds are to be assessed on their investment income under proposed section 121DAB and liable to pay tax at a rate of 46 per cent under an amendment to the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983. Clause 41 proposes to add to the list of sections relating to "preferred" classes of funds a reference to the new section 121DAB.

Clause 42: Assessment of income of ineligible approved deposit funds

This clause will insert two new sections - sections 121DAA and 121DAB - into the Principal Act to provide for the assessment of the investment income of ineligible approved deposit funds and certain "non-complying" superannuation funds.

Under proposed section 121DAA an approved deposit fund that is not entitled to an exemption from tax is to be assessed on the amount remaining after deducting from the fund's assessable income, calculated as if the trustee of the fund were a taxpayer in respect of that income, all allowable deductions except concessional deductions. In other words, apart from concessional deductions, the taxable income of an ineligible approved deposit fund will be calculated on the same basis as for any other taxpayer. The rate of tax to apply to the fund's taxable income is, under an amendment proposed to the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983, to be 46%.

Clause 42 also proposes to introduce a new section 121DAB which will govern the assessment of certain superannuation funds established for traditional superannuation purposes (that is, to provide benefits only to members in the event of retirement or to dependants of members in the event of the member's death) which, fail to meet the requirements of those provisions of the Principal Act which exempt from tax arm's length investment income. These funds which are currently subject to tax under section 121DA at the penalty rate of 60%, will fall for consideration under the new section as from 1 July 1984 and be subject to tax at 46.1%. Other funds to which section 121DA applies and which do not meet the conditions set down in section 121DAB will remain taxable at 60% under section 121DA.

Paragraph (a) sets out the purposes for which a fund must be established in order to come within the section. A fund must be an indefinitely continuing fund (although a clause in the trust deed to overcome "rule against perpetuities" would not disqualify a fund) established and maintained for:

(a)
the provision of superannuation benefits for members of the fund in the event of the member's retirement from any gainful employment in which he or she is engaged. A person whose only income was, for example, investment income, could not, be a member of such a fund;
(b)
the provision of superannuation benefits for the dependants of members in the event of the death of the member; or
(c)
such incidental and ancillary purposes as the Commissioner of Taxation approves.

Similar requirements exist in other provisions of the Principal Act relating to superannuation funds (for example, section 23F).

The section then goes on in paragraph (b) to exclude from its operation those funds which, although they meet the tests in paragraph (a), are taxable under section 121CA, 121CB or 121D as funds which are essentially exempt from tax but which have assessable income from non-arm's length transactions or which do not meet the 30/20 investment rule.

The trustee of a superannuation fund which meets the purpose tests in paragraph (a) and is not a fund of a kind referred to in paragraph (b) is to be taxable at a rate of 46% in 1984-85 on the existing basis for funds to which section 121DA applies - that is on assessable income of the fund (excluding contributions to the fund, calculated as if the trustee were a taxpayer deriving that income, less all deductions, other than concessional deductions and deductions in respect of amounts of benefits paid to members or their dependants.

Clause 43: Taxation of income of superannuation funds and ineligible approved deposit funds

Section 121DB of the Principal Act ensures that, except as provided by Division 11A, which deals with dividends and interest paid to non-residents of Australia, Division 9B has an exclusive operation in relation to the taxing of the income of superannuation funds. Clause 43 will extend that exclusive operation to ineligible approved deposit funds.

Clause 44: Taxable income

Section 121DC of the Principal Act is a drafting device to deem the amount upon which the trustee of a superannuation fund is assessed and liable to pay tax as provided by Division 9B to be taxable income of the fund for the purposes of that Act.

With the introduction into Division 9B of two new sections - section 121DAA in relation to ineligible approved deposit funds and section 121DAB in relation to the new class of "non-complying" superannuation fund (see notes to clause 42) - it is necessary to make two consequential amendments to section 121DC.

Paragraph (a) will insert a reference to "ineligible approved deposit funds" in section 121DC to reflect the extension of Division 9B to those funds.

References to new sections 121DAA and 121DAB are to be included in section 121DC by paragraph (b). This will mean that funds to which those new sections apply will, for the purposes of the Principal Act, be deemed to have a taxable income.

Clause 45: Rebates and provisional tax

Section 121DD of the Principal Act provides that the trustee of a superannuation fund is not entitled to a rebate of tax in respect of certain public securities issued before 1 November 1968 nor to the inter-company dividend rebate. It also provides that, with the exception of "non-complying" superannuation funds, a superannuation fund is not liable to pay provisional tax under Division 3 of Part VI of the Principal Act.

That section is to be repealed by clause 43 and replaced with a revised section 121DD with essentially the same purpose but which applies also to ineligible approved deposit funds which, like superannuation funds, are to be assessed under Division 9B of the Principal Act.

The revised section 121DD will also extend the exception to the non-payment of provisional tax referred to above to both ineligible approved deposit funds and those "non-complying" superannuation funds to which new section 121DAB applies. Trustees of ineligible approved deposit funds and superannuation funds assessed under section 121DA or 121DAB will, therefore, be liable to pay provisional tax in respect of the investment income of those respective funds.

Clause 46: Interpretation

Division 9C of the Principal Act in which section 121F appears has the purpose of countering tax avoidance arrangements which seek to exploit the tax-exempt status of certain bodies. In broad terms, income diverted to such tax-exempt bodies from persons who would otherwise be taxable on that income, is subject to tax at the maximum personal rate of tax - presently 60%.

Clause 46 proposes to insert references to two new tax-exempt bodies - eligible approved deposit funds to which new section 23FA refers and superannuation funds for persons in gainful employment to which new section 23FB refers - in the definition of "relevant exempting provision" in section 121F. This will ensure that the tax-exempt bodies to which those sections refer will not be able to exploit their tax-exempt status by being the recipients of diverted income.

Clause 47: Interpretation

Clause 47 will amend section 123 of the Principal Act, which defines a number of terms and ascribes particular meanings to certain expressions that are used in Division 10AAA of Part III. Division 10AAA provides deductions, over 10 or 20 years at the option at a taxpayer, 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 or unrefined petroleum away from the site of mining operations. The amendments proposed by this clause will have the effect of extending the application of Division 10AAA to capital contributions by a taxpayer to expenditure incurred by a government or tax-exempt government authority on railway rolling-stock.

Paragraph (a) of clause 47 will insert in sub-section 123(1) of the Principal Act a definition of "prescribed body". For the purposes of Division 10AAA, "prescribed body" will mean the Commonwealth, a State, the Administration of a Territory or any of their public authorities the income of which is wholly exempt from income tax.

Paragraphs (b), (c) and (d) will amend sub-section 123(2) so that a reference in Division 10AAA to capital expenditure on a railway, road, pipeline or other facility will include capital expenditure incurred by a prescribed body on railway rolling-stock. At present, sub-section 123(2) specifically excludes all capital expenditure on railway rolling-stock.

Clause 48: Application of Division

This clause will amend section 123A of the Principal Act and is part of the proposed extension of Division 10AAA of Part III to allow deductions for capital contributions by a taxpayer to expenditure incurred by a government or tax-exempt government authority on railway rolling-stock used for the transport of minerals, mineral products or unrefined petroleum away from the site of mining operations.

Section 123A sets out the capital expenditure to which Division 10AAA applies. By virtue of amendments proposed by clause 45 of the Bill, section 123A will apply to capital contributions by a taxpayer to capital expenditure incurred by a government or tax-exempt government authority on railway rolling-stock. Proposed sub-section 123A(1E) will make it clear that section 123A will only apply to such contributions where they are incurred by a taxpayer after 9 March 1984 - the date of the Treasurer's announcement of the proposed extension.

Proposed sub-section 123A(1F) is designed as a safeguarding provision against the substitution of expenditure incurred on or before 9 March 1984 in an attempt to gain eligibility for a deduction under Division 10AAA. The sub-section will apply where a person has incurred expenditure on or before 9 March 1984 by way of capital contribution to expenditure of a government or tax-exempt government authority on railway rolling-stock and, after that date, a taxpayer (whether or not the same person) also has incurred capital contributions to expenditure by such a body on railway rolling-stock. Where the Commissioner is of the opinion that the later expenditure was incurred by the taxpayer in lieu of the original expenditure and for the purpose of obtaining a deduction under Division 10AAA, he may refuse to allow a deduction under the Division for that expenditure.

Proposed sub-section 123A(1G) is a drafting measure to ensure that a reference in proposed sub-section (1F) to an amount of capital expenditure will include a reference to a part of such an amount.

Clause 49: Interpretation

Division 10C of the Principal Act, in which section 124ZA appears, provides a deduction for capital expenditure incurred by taxpayers on the construction of certain traveller accommodation. Sub-section 124ZC(6) which also appears in that Division safeguards against tax-exempt bodies attempting to benefit in an indirect way from deductions allowable under the Division. This could, apart from sub-section 124ZC(6), occur under arrangements which confer entitlement to those deductions on a taxable entity on terms that the whole or a substantial part of the resulting tax benefit to that entity is to be enjoyed by the tax-exempt body.

It is proposed, therefore, by clause 47 to extend the safeguarding provisions to cover the two new classes of tax-exempt bodies - eligible approved deposit funds and gainfully employed superannuation funds to which section 23FA and section 23FB refer - by including a reference to those sections in the definition of "exempt body" in section 124ZA of the Principal Act.

Clause 50: Life insurance premiums, etc.

Section 159R of the Principal Act provides that amounts paid as life insurance premiums or contributions to a superannuation fund or for other specified purposes are to be rebatable amounts up to a limit of $1200 in any year of income for the purposes of the general rebate for eligible concessional expenditure in excess of $2000. Sub-section 159R(8) limits the eligibility for the rebate in relation to contributions to superannuation funds to funds of the kinds specifically mentioned in the sub-section including funds to which section 79 of the Principal Act applies.

As from 1 July 1984, following the repeal of section 79 (see notes on clause 23), those funds previously dealt with by section 79 will become exempt from tax under proposed section 23FB. The reference to section 79 is, therefore, by paragraph (a) of clause 48 to be omitted and a reference to section 23FB substituted.

Similarly, paragraph (b) will substitute a reference to section 23FB for the reference to section 79 in the definition of "policy of life insurance" in sub-section 159R(9).

Clause 51: Rebate in respect of amounts assessable under section 26AH

This clause proposes the amendment of section 160AAB of the Principal Act to extend the rebate of tax it provides in respect of bonuses on life assurance policies that are assessable under section 26AH to those paid by friendly societies.

Section 26AH includes in assessable income bonuses paid on short-term life assurance policies issued after 27 August 1982 and depending upon the date of commencement of a policy, applies to amounts received under the policies either during the first 4 years of the policy or during the first 10 years of the policy. Section 160AAB presently allows a rebate, at the standard rate of tax, in respect of certain bonuses received in respect of short-term policies, but only in relation to policies issued by a life assurance company other than a life assurance company the whole of the income of which is exempt from tax.

Reflecting the fact that friendly societies are, by new Division 8A proposed to be inserted by clause 34 of the Bill, to be subject to income tax on their life assurance business, clause 49 proposes to omit sub-section 160AAB(1) and to substitute a new sub-section (1) which, in addition to it effectively retaining the operation of the existing sub-section in so far as it operates to allow a rebate for bonuses paid by life assurance companies, will extend the availability of that rebate to bonuses paid on life policies issued by friendly societies.

By the operation of sub-clause 58(4), the amendment proposed by clause 49 will apply to assessments of income in respect of the year of income that commenced on 1 July 1983 and of all subsequent years of income.

Clause 52: Rebate in respect of annual leave, long service leave and eligible termination payments

Clause 52 will replace section 160AA of the Principal Act which has hitherto allowed a rebate of tax in assessments of taxpayers who receive lump sum payments of accrued annual leave and long service leave that are included in full in assessable income under section 26AC or sub-section 26AD (2), (3) or (4) and who, but for the rebate, would pay tax on the lump sum at a rate in excess of 30%. Under section 160AA such a taxpayer has been entitled to a rebate which limits the tax on such a lump sum to 30%.

The new section 160AA will continue to provide a rebate in the circumstances outlined above but, in addition, will ensure that a rebate of tax is available to taxpayers in respect of the component of any eligible termination payment (refer to the note on the definition of this term in proposed sub-section 27A(1) of new Subdivision AA of Division 2 to be inserted in the Principal Act by this Bill) that is included in assessable income under proposed sub-section 27B(1). The new section will also contain some technical changes to ensure that the rebate allowed to non-residents and certain primary producers whose income is subject to averaging is calculated in the manner intended by the section.

Sub-section 160AA(1) differs from the former sub-section (1) in that

·
the introductory words of paragraph (a) have been expanded to deal with the possibility of more than one amount to which the section applies being received by a taxpayer in the one income year;
·
sub-paragraphs (i), (ii) and (iii) have been included in paragraph (a) to list the 3 types of possible payment to which the section applies
·
paragraph (b) has been changed to ensure

·
that the section can apply, where required, to bring down to 15% the effective rate of tax on the first $50,000 of assessable eligible termination payments to taxpayers over 55 years of age; and
·
that the section can apply to all primary producers whose income is averaged, irrespective of the level of taxable income;

·
paragraph (1)(d) is changed to divide into 2 components the description of the "target" level of tax on the amounts in question (in the former section referred to as "30% of the relevant income amount") to which the section is required to reduce the taxpayer's tax liability on those amounts. Sub-paragraph d(i) will now refer to a target level of tax for assessable parts of the first $50,000 of eligible termination payments made to taxpayers over 55 (the $50,000 limit is a lifetime limit) of 15% of such amounts. Sub-paragraph (ii) will set a target level of tax of 30% for amounts already within the scope of the section and also for assessable parts of eligible termination payments made

(a)
to taxpayers referred to in sub-paragraph (i) to the extent that the amount exceeds the available balance of the lifetime threshold of $50,000; or
(b)
to taxpayers not over 55 years of age.

Sub-paragraph (2) is to have a definition of "eligible termination payment" added and changes have been made to other relevant definitions to include references to amounts of eligible termination payments included in assessable income under sub-section 27B(1). In the definition of "relevant income amount", paragraph (a) will now exclude primary producers who are subject to averaging but paragraph (b) has been changed in a complementary fashion so that it is to refer not only to non-residents but also to primary producers whose income is subject to averaging. The reason for the change is to take account of the fact that, following the introduction of recent amendments to the operation of the averaging provisions a primary producer's taxable income can be $4595 or less but be taxed at a rate in excess of 15% or 30%, as the case may be. The rebate will now apply in such a case. The other change to paragraph (b) of the definition of "relevant income amount" is to ensure that the "target" level of tax to which the section reduces a taxpayer's tax liability on the income in question is calculated by reference to an amount that does not exceed the taxable income of the taxpayer (for example, where losses reduce the taxable income to a level below the amount to which the section refers). The new definition, "residual amount", will ensure that the 15% tax rate on the first $50,000 of assessable amounts of eligible termination payments in relation to a taxpayer over 55 years of age is applied in a way that takes account of any previous absorption of a part of the $50,000 lifetime limit in respect of earlier eligible termination payments and allows the concessional rate to apply only to the balance remaining from time to time.

Clause 53: Amendment of assessments

The general rules governing the amendment of income tax assessment are laid down in section 170 of the Principal Act, which contains certain limitations on the power of the Commissioner to amend assessments. Sub-section (10) of the section authorises the re-opening of assessments at any time, without the limitations usually applying to the making of amended assessments and either to increase or reduce liability, where this is necessary to give effect to specified provisions of the Principal Act.

Clause 53 of the Bill will insert in sub-section 170(10) a reference to sub-section (5) of new section 77F that is being included in the Principal Act by clause 21.

Sub-section 77F(5) may be applied to withdraw or reduce deductions allowable in respect of moneys paid on shares in licensed Management and Investment Companies if, within a specified 4 year period, the shares are sold or otherwise disposed of. The reference to sub-section 77F(5) that is to be inserted in sub-section 170(10) by clause 53 will enable assessments to be amended at any time to give effect to that intention.

Clause 54: Interpretation

As part of the Pay-As-You-Earn (PAYE) system, section 221C of the Principal Act requires an employer to deduct tax instalments from payments of "salary or wages" as defined in section 221A. The definition of "salary or wages" is also central to the definitions of "employer" and "employee". Very broadly, an employer is defined to mean a person who pays or is liable to pay salary or wages, while an employee means a person who receives or is entitled to receive salary or wages. Clause 54 proposes amendments to section 221A which will bring "eligible termination payments" within the scope of the PAYE system. By sub-clause 60(12), the extension of the PAYE system is to apply to eligible termination payments made on or after 1 August 1984.

Paragraph (a) of clause 54 will insert in section 221A a new definition of "eligible termination payment" for the purposes of Division 2 of Part VI of the Principal Act - the PAYE provisions. Section 221A contains a number of defined terms which are used throughout the PAYE provisions. "Eligible termination payment" is to have the same meaning as that expression has for the purposes of new Subdivision AA of Division 2 of Part III.

Paragraph (b) proposes the insertion of a reference to "eligible termination payments" in the definition of "salary or wages" in section 221A of the Principal Act. As explained earlier in the notes on this clause, persons making such payments (including former employers, fund trustees and other organisations) and recipients of such payments will, for the purposes of the PAYE system, have the same rights and responsibilities as other classes of persons who are defined as "employers" or "employees" for those purposes.

As payments of exempt income are ordinarily excluded from the definition of "salary or wages" in the Principal Act, paragraphs (c) and (d) of clause 54 make it clear that, for the purposes of the definition of "salary or wages", no part of an eligible termination payment is exempt income. To the extent that any part of an eligible termination payment is exempt from tax or is subject to a reduced rate of tax, the regulations prescribing the rate of PAYE deductions from such payments will take this into account.

Clause 55: Deductions by employers from salary or wages

Clause 55 proposes the insertion of two new sub-sections - sub-sections (1AD) and (2C) - in section 221C of the Principal Act. These relate to the prescription, by regulation, of the rates at which PAYE deductions are to be made from eligible termination payments.

Existing sub-section 221C(1) provides that the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive in respect of a week or part of a week. Those rates of deductions, because they reflect the progressive rates of tax, are inappropriate for eligible termination payments which are to bear tax at varying flat rates up to 30% (or in some cases to be tax-free) depending on the components of the payment.

Accordingly, paragraph (a) of clause 55 will provide that regulations may prescribe special rates of deductions in respect of eligible termination payments and in respect of different classes of such payments. Paragraph (b) of clause 55 will deem the recipients of eligible termination payments to have received those payments in respect of a week. This will ensure that the general regulation making power in sub-section 221C(1) is extended to such payments.

Clause 56: Group employers

This clause proposes amendments to section 221F to -

·
require certain persons paying eligible termination payments to apply for group employer registration;
·
require a group certificate to be issued to recipients of eligible termination payments in respect of PAYE deductions from those payments.

Under paragraph (a) of clause 56, a person who is not already registered as a group employer will be required to apply to the Commissioner for registration where the person makes 10 or more eligible termination payments in any 12 month period commencing on or after 1 July 1983. The application will need to be made within 14 days of the end of the 12 month period. Trustees or managers of superannuation funds or approved deposit funds, for example, who ordinarily do not have 10 or more employees - and who are therefore not at present obliged to register as a group employer - will be required to apply for such registration where the number of payments made exceeds the specified level.

In some cases a person may manage several superannuation funds on behalf of the respective trustee or trustees of those funds. In that situation it may be more efficient if that manager becomes registered as a group employer in a representative capacity. The Commissioner of Taxation has, under the existing law, the power to register a person as the representative of 2 or more employers where that is appropriate.

The purpose of paragraphs (b) and (c) of clause 56 is to require group employers to issue a group certificate in respect of tax deducted from an eligible termination payment in addition to any other group certificate the employer may be required to issue in respect of other salary or wages. The group certificate must be issued within 7 days of payment of the eligible termination payment. This requirement will facilitate the refund of tax instalments in the case where the eligible termination payment is "rolled-over" within the 90 day roll-over period. (See notes on clause 58).

Paragraph (b) of clause 56 proposes the amendment of paragraph 221F(5)(c) of the Principal Act to provide that the group certificate that relates to the ordinary salary or wages of an employee does not include any deductions made from an eligible termination payment that the employee may have received. Under proposed paragraph (c), the employer will be required to issue a separate group certificate to the employee setting out the amount of deduction made from an eligible termination payment. Such a certificate is to be furnished to the employee within 7 days of the making of the deduction.

Clause 57: Employers other than group employers

Under the PAYE system, employers who are not group employers are obliged to purchase tax stamps to the value of tax deductions made from salary or wages. Section 221G of the Principal Act, which this clause will amend, sets down the general duties of such employers in relation to the purchase of, and accounting for, tax stamps.

The amendments proposed by this clause, as with the amendments proposed by clause 56, are necessary to extend the PAYE system to eligible termination payments and complement the new procedures for refund of tax instalment deductions in the case of such payments being rolled-over contained in the proposed clause 58. The mechanics of this refund process require a separate tax stamps sheet to be used in respect of tax deducted from eligible termination payments. Likewise, the refund procedure relies on employers who use tax stamps providing the employee with a tax stamps sheet as soon as a deduction is made from an eligible termination payment.

By paragraph (a) of clause 57 two new sub-sections - sub-sections (2A) and (2B) - are to be inserted into section 221G of the Principal Act. Proposed sub-section 221G(2A) is designed to ensure that existing sub-sections 221G(1) and (2), which contain the rules for dealing with tax stamps, tax stamps sheets and tax check sheets in relation to ordinary salary or wages, do not apply in relation to deductions from eligible termination payments.

Sub-section 221G(2B) will require a "tax stamps employer" to use a separate tax stamps sheet in respect of deductions from eligible termination payments, but substantially on the same basis as tax stamps sheets are at the present used for other types of salary or wages. Procedures for the use of tax stamps sheets, tax check sheets and tax stamps certificates in respect of eligible termination payments will be as follows -

·
an employer will be required to enter details of the eligible termination payment on the tax stamps sheets before making the deduction for tax and insert the amount of the deduction on the tax stamps sheet (paragraph (a)).
·
on the day the eligible termination payment is made the employer is to purchase tax stamps to the value of the deduction made from the eligible termination payment and securely affix those tax stamps to the tax stamps sheet (paragraph (b)).
·
the employer is then required to affix the corresponding tax checks to the tax check sheet and appropriately cancel both the tax stamps and tax checks (paragraph (c)).
·
on the same day as the eligible termination payment is made the employer will be required to complete and sign a tax stamps certificate (which certifies details of the payment and deductions made) and deliver it and the tax stamps sheet to the employee (paragraph (d)).
·
finally, the employer will be required to complete a summary of eligible termination payments made during each year ending on 30 June and forward that summary and corresponding tax check sheets to the Commissioner of Taxation within 14 days after the end of the year (paragraph (e)).

Under sub-section 221G(5) of the Principal Act, any employer who contravenes or fails to comply with any provision of section 221G which is applicable to that employer is guilty of an offence. Penalties for offences under sub-section (5) are prescribed in sub-section (6). By paragraph (b), sub-section (6) is to be amended to extend the penalty for failure to purchase and affix tax stamps to cases of failure to comply with the requirements in that regard contained in proposed paragraph 221G(2B)(b). The penalty, which is consistent with the existing penalty for a similar offence in relation to deductions from other classes of income subject to the PAYE system is to be a maximum fine of $1,000 or imprisonment for a period not exceeding 6 months.

Clause 58: Application of deductions in payment of tax

Clause 58 will amend section 221H of the Principal Act, which requires the Commissioner of Taxation to apply tax instalment deductions in payment, or part payment, of tax assessed and to refund any excess to the employee.

As discussed in the notes on clause 15, where a taxpayer has transferred the whole or part of an eligible termination payment to a superannuation fund or approved deposit fund or has applied it in purchasing an annuity and makes the required election, the amount rolled-over is, at that point, exempt from tax. Where the roll-over is not direct and has occurred after tax instalments have been deducted, proposed sub-section 221H(5A) will require the Commissioner to refund the whole or a part of the tax deducted either to the taxpayer or to the superannuation fund, approved deposit fund or annuity issuer (referred to in sub-section (5A) as the "eligible payee"), as appropriate.

Under paragraph 221H(5A)(a) before a refund of tax deducted is given under proposed sub-section (5A), the tax stamps sheet or a group certificate showing the tax deducted from the eligible termination payment must be surrendered to the Commissioner. To facilitate this requirement, amendments to sections 221F and 221G of the Principal Act are proposed by clauses 56 and 57 (see notes on those clauses) to ensure that a separate group certificate or tax stamps sheet is prepared in respect of deductions from eligible termination payments.

By sub-paragraph (b)(i) the Commissioner must, before refunding any part of the tax deducted, be satisfied that the whole or part of the eligible termination payment (referred to as the "applied amount") has been paid as mentioned in proposed paragraphs (a), (b) or (c) of sub-section 27A(12) (i.e., to a superannuation fund, approved deposit fund or used in purchasing an annuity from a life assurance company or registered organization) and that the taxpayer has made an election in accordance with section 27D.

Where the taxpayer has not, at the time of making application for a refund, rolled-over the eligible termination payment, but intends to do so within the 90 day roll-over period, then under sub-paragraph (b)(ii) the Commissioner must be satisfied that amounts that will be paid to a superannuation fund, approved deposit fund or applied in purchasing an annuity will be the subject of an election under proposed section 27D. Sub-paragraph (b)(ii) could apply where, for example, the taxpayer may have paid part only of the amount he or she proposes to roll-over and is relying on the refund by the Commissioner to fund the balance of the payment. This sub-paragraph may also operate where a taxpayer has applied an amount or amounts in a way mentioned in proposed sub-section 27A(12), but has not yet made the required election.

Paragraph (c) deals with the case where the applied amount is part only of the eligible termination payment. In such cases, proposed sub-section 221H(5A) will apply only where a tax deduction has been made from the applied amount. For example, if the applied amount consists entirely of the "before 30 June 1983 component", no tax would have been deducted.

Where the conditions set down in paragraphs (a), (b) and (c) are satisfied, the Commissioner will be required by paragraphs (d), (e) and (f) to refund amounts either to the person who received or was entitled to receive the eligible termination payment or to the eligible payee. Where the whole of the eligible termination payment has been, or will be, applied in accordance with proposed section 27D, all of the tax deducted from the eligible termination payment will be refunded. Where the applied amount is part only of the eligible termination payment, only such tax as is referable to the applied amount will be refunded. The Commissioner is required to pay as appropriate an amount or amounts -

·
to the person who received or was entitled to receive the eligible termination payment (paragraph (d));
·
to that person and the eligible payee(s) (paragraph (e)); or
·
to the eligible payee(s) (paragraph (f)).

While the total amount to be refunded is determined under paragraph (c), the amounts to be refunded to the taxpayer or paid to the eligible payee will be as follows. Where the whole of the applied amount has already been paid by a person to an eligible payee, the Commissioner will refund to that person the tax deductions applicable to the applied amount. Where a person pays to an eligible payee an amount equal to the difference between the applied amount and the tax deducted from the applied amount, the Commissioner will pay to the eligible payee the amount deducted. Where a person pays to an eligible payee an amount greater than the difference between the applied amount and the deductions therefrom, but less than the applied amount, the Commissioner will pay to the eligible payee the difference between the amount deposited by the person with the eligible payee and the applied amount, and the Commissioner will refund to the person the balance of the amount deducted from the applied amount.

Proposed sub-section 221H(5B) will ensure that, where the Commissioner of Taxation applies sub-section (5A), no person is entitled to receive any further benefit from a tax stamps sheet or group certificate, in respect of the amount paid or applied in accordance with that sub-section. Any credit on the tax stamps sheet or group certificate not paid or applied in accordance with sub-section (5A) will, of course, continue to be available for application against tax payable on assessment in accordance with existing sub-section 221H(2).

Clause 59: Repeal of section 221YHE

Division 3A of Part VI of the Principal Act - of which section 221YHE is a part provides for the collection of tax at source by deduction from certain payments for work - i.e., the prescribed payments system. Central to that system is the deduction form which, with the exception of prescribed payments received by some persons who hold deduction exemption certificates on the grounds of good tax compliance is used to record details of prescribed payments, of the persons making and receiving those payments, and of the tax, if any, deducted therefrom.

Section 221YHE requires a payee to forward with his or her annual income tax return a copy of all deduction forms that relate to prescribed payments made to the payee in respect of the year of income to which the return relates, and makes it an offence not to do so. As well as including copies of deduction forms in annual income tax returns, it has, always been expected that, payees would have to complete a schedule of deduction forms to accompany those returns.

As announced on 3 May 1984, these arrangements are to be modified in two respects to reduce the paperwork they involve in the preparation and lodgment of income tax returns.

Clause 59 will give effect to the first of these changes by repealing section 221YHE, thereby removing the statutory requirement on payees to include copies of deduction forms in income tax returns.

To ensure that the benefit of the amendment made by clause 59 is available in relation to the preparation and lodgment of returns for 1983-84 and later years, it will apply from the date of commencement of this provision, that is, the date of Royal Assent to the Bill.

The second change arises from the decision of the Commissioner of Taxation that the schedule of deduction forms to accompany a payee's return, in respect of the 1983-84 and later income years, will now only have to be completed in respect of those forms relating to prescribed payments from which tax deductions have been made. This information will form the basis for the allowance of credit in a payee's income tax assessment. In cases where taxpayers or their accountants compile, by computer or otherwise, a list of deduction forms for inclusion in returns, it will be necessary only to transcribe totals on to the schedule and to attach a copy of that list. Where lists have not been prepared and significant numbers of deduction forms are involved, the Commissioner of Taxation will, on request, make appropriate arrangements with the taxpayer concerned for completion of the schedule, short of listing details of individual deduction forms. Where no tax has been withheld from prescribed payments, it will suffice for total income recorded on deduction forms to be shown on the return form itself.

Clause 60: Application of certain amendments

This clause, which will not amend the Principal Act, will specify the year of income in which, or the dates from which, the various amendments proposed in the Bill will first apply. An explanation of the application provisions proposed is contained in the notes on the clauses to which each of the sub-clauses of clause 62 apply.

Clause 61: Transitional

As previously mentioned in the notes on clause 12, it is proposed not to disturb the taxation arrangements applying under section 26AA of the Principal Act for annuities (and pensions) which commenced to be payable before 1 July 1983. Clause 61 will do this by ensuring that, although section 26AA is to be repealed, it will continue to apply to annuities that were first payable before 1 July 1983, while the new section 27H will apply in cases where an annuity or pension was first payable after that date. The continuing application of former section 26AA is necessary because, in many cases, appropriate records will no longer be available to enable the fresh calculations that would be required if section 27H were to apply from the 1983-84 year of income in all cases.

Clause 62: Amendment of assessments

Clause 62, which will not amend the Principal Act, is a standard measure which will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law if that should be necessary in order to give effect to the various amendments that it contains.

INCOME TAX (COMPANIES, CORPORATE UNIT TRUSTS AND SUPERANNUATION FUNDS) AMENDMENT BILL 1984

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, by trustees of corporate unit trusts and of superannuation funds and by trustees of trust estates who are taxed on behalf of non-resident company beneficiaries.

The Bill will declare and impose tax on the taxable income of ineligible approved deposit funds, that is, approved deposit funds which fail to meet the requirements for tax exemption set out in the proposed Subdivision AA of Division 2 of Part III of the Assessment Act (see the notes on Clauses 8, 37, 38 and 42 of the accompanying Income Tax Assessment Amendment Bill (No. 3) 1984). The rate of tax will be that applicable to companies generally, viz., 46 per cent.

Clause 1: Short title, etc

The proposed Act is to be cited as the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Amendment Act 1984. The clause also provides formally for the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Act 1983 to be referred to as "the Principal Act" in the amending Act.

Clause 2: Commencement

By this clause it is proposed that the Bill will come into operation on the day on which the Income Tax Assessment Amendment Act (No. 3) 1984 comes into operation.

Clause 3: Interpretation

Clause 3 proposes to insert a definition of "ineligible approved deposit fund" in section 3 of the Principal Act. The term "ineligible approved deposit fund" is to have the same meaning as that term is to have in Division 9B of Part III of the Assessment Act which establishes liability for tax.

Clause 4: Rate of tax payable by trustees of ineligible approved deposit funds

Clause 4 proposes the insertion of a new section - section 8A - in the Principal Act. This section will impose a rate of tax of 46 per cent, payable by a trustee of an ineligible approved deposit fund, on the taxable income of the fund.


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