Explanatory MemorandumRELEASED BY AUTHORITY OF THE TREASURER, THE HON. P.J. KEATING, M.P. CANBERRA, 19 FEBRUARY 1990
The main features of this Bill are as follows -
The Bill will authorise the making of regulations to give effect to changes in the pensioner rebate arrangements for the 1989-90 and subsequent income years, proposed in the April 1989 Economic Statement.
Different levels of pensioner rebate of tax will be available for -
- married pensioners, where the pensioner receives the married-rate of pension during the year;
- married pensioners, where the pensioner receives the single-rate of pension during the year, because the couple are unable to live together due to infirmity or illness; and
- single pensioners, where the pensioner receives the single-rate of pension during the year of income.
The new rebates will allow a married pensioner couple to receive, in addition to the pension, a combined amount of non-pension income of $70 per week ($3,640 per annum) in 1989-90 and 1990-91, before becoming liable for tax. For single pensioners, the rebate will be set to allow them to receive, in addition to the pension, $25 per week ($1,300 per annum) non-pension income in 1989-90, and $40 per week ($2,080 per annum) in 1990-91, before becoming liable for tax. For 1991-92 and subsequent years, the amount of the non- pension income that can be received by both married or single pensioners before becoming liable for tax will be subject to indexation, as provided for by the law that authorises the payment of the pension.
The rebates will continue to shade-out at a rate of 12.5 cents for every dollar of taxable income in excess of the appropriate shade-out threshold.
For married pensioners any unused portion of their rebate and shade-out threshold will be transferred to the spouse.
A pensioner who is eligible for more than one level of rebate because, during the year of income, he or she receives more than one of the rates of pension outlined, will be entitled to the rebate which gives the greatest benefit.
The method of calculating the rebates and shade-out thresholds will be provided for in the Income Tax Regulations.
The Bill will authorise the making of regulations to give effect to changes in the beneficiary rebate arrangements to target them more effectively for the 1989-90 and subsequent income years, as proposed in the 1989-90 Budget. The beneficiary rebates are available for recipients of the Job Search Allowance, social security unemployment, sickness or special benefits, the Formal Training Allowance and the living allowances paid under certain Commonwealth education schemes. There will be separate rebates of tax for the following groups -
- single, under 18 years and living at home;
- single, under 18 years and living away from home;
- single, aged 18 to 20 years;
- single, 21 years and over;
- single, aged 60 to 64 years and in receipt of unemployment benefits for six months or more; and
The rebates will continue to be reduced by 12.5 cents for each dollar of taxable income in excess of the level of the appropriate shade-out threshold. The method of calculating the rebates and shade-out thresholds will be provided for in the Income Tax Regulations.
The Bill proposes to override the provisions of the Acts Interpretations Act 1901 which would otherwise prevent the making of regulations to apply retrospectively. This is because the drafting of the regulations will require numerous cross-references to the social security and veterans' affairs legislation, to identify the specific pension, allowance or benefit in respect of which each rebate is to be available. It follows that changes of the Income Tax Regulations following any amendments of the social security or veterans' affairs legislation may require retrospective application back to the date of effect of those amendments.
This Bill will give effect to the announcement in the 1989-90 Budget that a person who is otherwise personally exempt from the Medicare levy will no longer be required to pay half levy in respect of a year of income because he or she has a dependant, where the dependant is separately liable to the levy in respect of the year. Persons who may be exempt from the levy include those entitled to free medical treatment under repatriation legislation or as a member of the Defence Forces.
Two further concessions are also being extended. First, where a person who is otherwise personally exempt from the Medicare levy has a spouse who is separately liable to pay full levy, such a person will no longer be required to pay half levy in respect of a period because he or she had a dependant child during the period if the child is also a dependant of the spouse in that period.
Secondly, where in respect of a period a person who is otherwise personally exempt from Medicare levy has a spouse who would otherwise be exempt, only one of them will now be required to pay half levy in respect of a dependent child. In order to qualify they must agree as to which of them will pay the half Medicare levy.
These changes will apply to assessments in respect of income of the 1989-90 and subsequent years of income.
This Bill will give effect to the proposal announced in the 1989 Budget to remove the seven year limit on the carry-forward of all taxation losses incurred during the 1989-90 and later years of income.
Under the existing law, deductions for general losses, other than those incurred in engaging in primary production, are restricted to income derived during the seven years of income following the year in which the loss was incurred. Primary production losses are not under any such time restriction.
Film losses and foreign source losses are similarly subject to a seven year carry-forward restriction. Film losses incurred in a previous year, however, may only be deducted from film income and foreign losses from foreign source income.
The existing law also imposes a seven year restriction on the period over which debts paid in relation to losses incurred before a taxpayer became a bankrupt or was released from debts under the Bankruptcy Act are tax deductible. This restriction applies to general losses not incurred in engaging in primary production activities and to film losses.
The proposed amendments will allow general domestic losses, film losses and foreign source losses incurred during the 1989-90 and later years of income to qualify for deduction on the conditions of the existing law but with no time limit on the carry-forward period.
The Bill also proposes that debts voluntarily paid by a person who has become a bankrupt, or who has been released from any debts by the operation of an Act relating to bankruptcy, that relate to losses incurred before bankruptcy or release from debts will not be subject to a time limit on deductibility.
The introduction of two new classes of domestic losses and a new class of foreign source loss proposed by the Bill, means that there will be a total of five classes of domestic losses and two classes of foreign source losses. Consequently, changes are also proposed to the order in which losses are to be deductible where the taxpayer has incurred two or more different classes of losses to take into account the new classes.
The order in which losses are to be taken into account will be governed by the following underlying principles which are consistent with those contained in the existing law -
- losses subject to a seven year restriction take precedence over those not subject to that restriction;
- film losses take precedence over other losses (as they can only be offset against film income); and
- losses will otherwise be allowable in the order in which they are incurred.
This Bill will give effect to the proposal announced in the 1989-90 Budget to extend, from 16 August 1989, the general mining provisions of Division 10 and the mineral transport provisions of Division 10AAA of the Income Tax Assessment Act 1936 to include quarrying operations. These Divisions currently provide special deductions for certain capital expenditures such as site preparation, infrastructure, development and exploration expenditure and expenditure on certain facilities used in transporting minerals from a mine site on which mining operations are being carried on. The amendments will allow capital expenditures incurred on or after 16 August 1989 in carrying on quarrying operations to also qualify for these special deductions.
Division 10 will apply to quarrying operations on the same basis as it applies to mining operations with two exceptions. Currently, mine development expenditure is deductible in equal instalments over the lesser of the life of the mine or 10 years. Development expenditure in respect of quarrying operations will also be deductible but because quarrying operations are generally undertaken on extensive deposits which typically have a longer life than most mines, the expenditure is to be deducted in equal instalments but over the lesser of the life of the quarry or 20 years. This variation reflects the longer average life of quarries. Due to the remote location of most mine sites, Division 10 currently allows expenditure incurred on housing and welfare facilities to be eligible for the special deductions. However since quarries are more typically located near urban areas, expenditure on housing and welfare in respect of quarrying operations will be excluded from the provisions of Division 10.
Division 10 also provides an outright deduction for exploration and prospecting expenditure incurred by a taxpayer carrying on mining operations or in a business of exploring or prospecting for minerals which can be obtained by mining operations. The deduction is allowable against assessable income from all sources in the year in which the expenditure is incurred. The amendments will permit taxpayers engaged in quarrying operations to claim an outright deduction for exploration and prospecting expenditure incurred on or after 16 August 1989, from assessable income from all sources. As with general mining the deduction will also be available to taxpayers carrying on a business of exploring or prospecting for quarry materials.
Entitlements to deductions in relation to mine development and exploration and prospecting expenditure which have not been allowed as deductions to the vendor can be transferred to a purchaser of the mining or prospecting right or information under Division 10. Similarly, deductions for expenditure incurred after 15 August 1989 on quarrying operations or exploring or prospecting for quarry materials will be able to be transferred by the vendor to a purchaser of a quarrying or prospecting right or information.
Division 10AAA presently allows a deduction for expenditure of a capital nature incurred in connection with facilities used primarily and principally for the transport of minerals or processed materials obtained from carrying on mining operations, excluding the transport of minerals or processed materials wholly within the mine site. This expenditure is deductible in equal instalments over 10 years or, at the election of the taxpayer, 20 years under the provisions of Division 10AAA. The amendments will ensure that capital expenditure for the transport of quarry materials, incurred on or after 16 August 1989, is also deductible under Division 10AAA. Consistent with Division 10 this expenditure is to be deductible in equal instalments over 20 years.
The Bill will give effect to the Budget announcement of 15 August 1989 that not-for-profit bodies established for the promotion or encouragement of any game or sport would be exempted from income tax. This extends the exemption presently enjoyed only by athletic sports and athletic games in which human beings are the sole participants.
The Bill will also give effect to the announcement in the Budget that not-for-profit community service organisations such as Lions and Rotary would be exempted from income tax. Exemption will apply broadly to bodies established for the purpose of promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of members of the community in such particular need. However, bodies established for political or lobbying purposes will not qualify.
Exemption from income tax will apply to income of sporting bodies and community service organisations in the 1989-90 year of income and subsequent years.
The Bill will give effect to proposals announced in the 1989-90 Budget to withdraw the income tax exemption provided to the Australian Wool Testing Authority Ltd (AWTA) under paragraph 23(jd) of the Income Tax Assessment Act 1936. These amendments will ensure that any income derived by the AWTA from 1 July 1990 is subject to income tax in accordance with the provisions of the Assessment Act. The Bill contains transitional arrangements for applying the depreciation and capital gains tax provisions. Broadly, the amendments will ensure the following -
- Depreciation - that the accelerated depreciation provisions of sections 57AH and 57AL of the Assessment Act have no application to plant or articles owned by the AWTA. This will ensure that the effective life rate or the effective life rates plus loadings are used to calculate depreciation deductions.
- Capital Gains - that the Capital Gains provisions of the Assessment Act apply to the AWTA to exclude any capital gain or loss which has accrued during the tax exempt period, i.e., from the date when the asset was purchased, being a date after 19 September 1985, up to 30 June 1990. This will ensure that the tax treatment of any gain or loss is entirely prospective.
The Bill will give effect to the measures announced in the 1989-90 Budget to address dividend selection arrangements by amending the provisions dealing with the imputation of company tax. The amendments will remove tax advantages associated with dividend selection schemes in respect of dividends paid after 30 June 1990.
Under the existing law companies are required to frank to the same extent all dividends paid on a particular class of shares. Shares are of the same class if they have the same nominal value and the same dividend, voting and return of capital rights. Dividends are required to be franked to the extent of the surplus in the franking account on the day on which a dividend is paid.
Franking credits may accrue to a company from a number of sources including the receipt of a company tax assessment, the making of an initial or further payment of company tax and the receipt of a franked dividend. (A franked dividend is a dividend with an imputation credit attached.) Franking debits arise in circumstances such as when a company pays a franked dividend or receives an amended assessment reducing the amount of tax payable. Since franking debits and credits arise only where a company is resident, only Australian resident companies can pay franked dividends.
Individual resident shareholders receiving franked dividends are entitled to a franking rebate in respect of those dividends. This rebate reduces the personal income tax payable by those shareholders. The benefits flowing from franked dividends are of less value to shareholders on incomes with marginal rates of tax lower than the company tax rate as any excess of the franking rebate over the tax payable is not refundable.
Imputation credits are not available to non-resident shareholders. However, franked dividends derived by a non-resident shareholder, whether a company or an individual, are exempt from dividend withholding tax. Thus, imputation credits attached to franked dividends paid to non-resident shareholders are of less value to those shareholders than to most Australian residents.
Companies have been able to avoid franking the dividend paid on a single class of shares to the same extent for all shareholders by using dividend selection schemes to stream franked dividends to those shareholders able to benefit most from them. A central feature of a dividend streaming arrangement is that shareholders in the company are afforded a choice as to the manner in which their dividend entitlements are to be satisfied. Dividends paid to shareholders who have not exercised an option afforded by the arrangement are taken to be paid under a dividend streaming arrangement.
Some dividend selection schemes allow shareholders who so elect to forego the right to the cash dividend that would otherwise be paid and, instead, receive bonus shares paid out of a share premium account. In addition to being exempt from tax where these bonus shares are issued against shares held prior to 20 September 1985 no tax is payable on any capital gain arising on the disposal of the shares.
Dividend streaming can also be achieved by the use of stapled stock arrangements. Under these arrangements the holders of stapled stock may receive either a franked or unfranked dividend as determined by the company paying the dividend. Stapled stock arrangements can be used to stream franked dividends to Australian resident shareholders and unfranked dividends to non-residents.
The amendments proposed by the Bill will result in Australian resident companies being treated as having franked to the same extent all dividends paid on a single class of shares, including those paid by another company under an arrangement. They will also result in a company that has paid franked dividends under an arrangement incurring franking debits in respect of unfranked dividends paid by another company. Franking debits will arise where a company is a party to a dividend streaming arrangement and it -
- pays dividends franked at different levels on shares of the same class;
- issues bonus shares that are exempt from tax instead of paying a franked dividend;
- pays an unfranked or partly franked dividend to shareholders who receive that dividend instead of a franked dividend from another company; or
- pays a franked or partly franked dividend to shareholders who receive that dividend instead of an unfranked dividend from another company.
These franking debits will not flow through to shareholders. Thus, company shareholders will not acquire increased franking credits from which to pay franked dividends and individual shareholders will not become entitled to a greater franking rebate. If the application of these provisions results in a franking deficit at the end of the franking year, companies will be required to pay franking deficit tax. This will be the case even if the company incurs franking debits in respect of dividends paid by foreign companies from ex-Australian profits.
The Bill will give effect to the Budget announcement of 15 August 1989 that eligible securities lending arrangements will receive rollover relief for the purposes of the capital gains and capital losses provisions of Part IIIA of the Income Tax Assessment Act 1936 and will be relieved of adverse consequences under the general income provisions of that Act.
Rollover relief will apply to eligible securities lending arrangements entered into after the date of introduction of the Bill. Relief will apply automatically: there will be no requirement to make an election. Lenders will be treated as though they had not sold and repurchased securities; a borrower's position will also be adjusted.
This Bill will give effect to a proposal announced on 1 September 1989 concerning the treatment of profits from the disposal of live stock because of chemical contamination of live stock or property.
Each State and the Northern Territory has legislation under which chemically contaminated properties or live stock can be dealt with. This involves a quarantine process, initiated by a formal notification, from an officer or person in a Department of the State or Territory, which is usually issued as a result of tests carried out on stock at an abattoir. The process does not compel farmers to dispose of their live stock. However, the restrictions can make it economically essential that farmers dispose of their live stock to enable them to conduct farming operations that are not restricted due to chemical residues.
Section 36AA of the Income Tax Assessment Act 1936 provides a concessional basis for bringing to account profits resulting from the death or compulsory destruction of live stock in compliance with legislation for the control and eradication of disease. Section 36AAA of that Act allows profits from the forced disposal of live stock as a result of fire, flood or drought, or from the compulsory destruction of live stock in compliance with a law for the control and eradication of a disease, to be applied to reduce the deductible cost of replacement stock. Neither section deals with the voluntary disposal of live stock as a direct result of the chemical contamination of land, live stock or other property. In the absence of these provisions farmers could have abnormal receipts of income (to be taxed in relation to the year of receipt at possibly higher marginal rates than would apply under normal circumstances) and an earlier clawback of the live stock valuation concession. This Bill will extend to the voluntary disposal of contaminated live stock concessions similar to those available for forced disposals of stock.
Two options will be available. Under the first profits will be able to be applied to reduce the cost of replacement stock. Under the second option an election may be made to account for the profits over 5 years. The options will apply in relation to live stock disposed of on or after 1 July 1987.
Division 10BA of the Income Tax Assessment Act 1936 authorises the deduction of capital expenditure in the production of a qualifying Australian film where the expenditure is incurred for the acquisition of the initial copyright in the film. A pre-condition for the deduction is that moneys contributed towards the cost of producing a film be deposited in a film account opened in relation to the film in the Australian Film Industry Trust Fund.
As a consequence of changes announced by the Treasurer in May 1988 Division 10BA was amended by the Taxation Laws Amendment Act (No. 5 ) 1988 . The principal impact of these amendments was a reduction in the deduction available under Division 10BA or under transitional provisions in the amending Act. The reduced rate of deduction (of 100 per cent of the qualifying expenditure) applies to -
- capital moneys expended in producing, or by way of contribution to the cost of producing, a film under a contract entered into on or after 25 May 1988;
- moneys contributed in specified circumstances, after 24 May 1988, where an underwriting agreement was not lodged before 2 June 1988;
- moneys expended in specified circumstances under an underwritten contract, where the statutory lodgment provision was satisfied, after 30 June 1988;
- moneys not deposited in a film account opened in relation to a film before 9 June 1988 and where the film was not underwritten before 25 May 1988; and
- moneys expended under a contract entered into on or after 25 May 1988 in a situation where the film was not substantially in production before 25 May 1988.
The basic effect of the amendments made by the Taxation Laws Amendment Act (No 5.) 1988 is that, while some contributions could attract a deduction in excess of 100 per cent where expenditure was incurred up to and including 30 June 1988, no deduction at a rate exceeding 100 per cent is available after 30 June 1988 in relation to moneys -
- contributed to the cost of producing a film (and required on and after 1 July 1983 to be lodged in a film account); or
- expended in producing a film.
Consistent with the amendments made by the Taxation Laws Amendment Act (No. 5) 1988, this Bill will remove the requirement for funds invested in qualifying Australian films to be placed in the Australian Film Industry Trust Fund, pending their expenditure on the film, where the 100 per cent rate of tax concession applies.
This Bill will amend the tax file number provisions of the Income Tax Assessment Act 1936. The amendments apply to the use of tax file numbers in relation to investments with investment bodies. The use of tax file numbers in connection with investments is to commence from 1 July 1991 with a phase in period from 1 July 1990 for investments in existence at that time.
The requirement to report certain information to a Deputy Commissioner of Taxation will be streamlined. The existing requirement to send a range of declarations to the office of a Deputy Commissioner within 28 days of receipt will be modified so that it will only be necessary for an investment body to retain declarations as requested by the Commissioner of Taxation and to report details as required by the Commissioner. The declarations concerned are those declaring exemption from the tax file number requirements by children, pensioners, entities not required to lodge income tax returns and recently-arrived visitors to Australia. Another modification will permit statements reconciling the total amounts of deductions made by an investment body in respect of investors and non-residents to be forwarded to the Commissioner at the same time as annual investment income reports .
The Bill will streamline the tax file number quotation requirements of Part VA of the Assessment Act by providing for the quotation of an individual's file number where a trust tax file number does not exist for an informal trust. The provisions that require securities dealers and solicitors to retain tax file numbers for clients will also be removed. A further amendment will ensure that tax file numbers rather than details of exemptions are quoted for joint investments where a joint owner of the investment has a tax file number. Finally, persons and organisations in the business of lending money are to be excluded from the requirement to quote tax file numbers to borrowers.
The Bill will also amend the exemption provisions contained in Division 5 of Part VA of the Assessment Act. The arrangements applying to children under 16 years will be modified to ensure that children earning annually $420 or more income from an investment will not be excluded from the tax file number system. The exemption for recently-arrived visitors' to Australia is to be incorporated into the non-residents' exemption. Non-residents of Australia who would have been liable to pay non-resident withholding tax but for certain exemptions under the withholding tax provisions are to be exempt from quoting a tax file number.
The tax file number arrangements under Division 3B of Part VI of the Assessment Act are also being amended to raise from $1 to $120 per annum the threshold for deducting and remitting tax where a tax file number has not been quoted in respect of a new account or deposit with a financial institution.
The Bill will authorise deductions for gifts of the value of $2 or more made to the Borneo Memorials Trust Fund and the Guadalcanal and Solomon Islands War Memorial Foundation where the gifts are made after 9 November 1989 and before 1 July 1992.
Gifts to Australian Vietnam Forces Welcome Home ' 87 Pty Limited for the purpose of the Australian Vietnam Forces National Memorial project will also be an allowable deduction where made after 30 June 1989 and before 1 July 1990.
Deductions will also be authorised for gifts to a company that conducts life education programs under the auspices of the Life Education Centre.
Further, the Bill will specifically list the Life Education Centre in the gift provisions. These amendments will apply to gifts made after 9 November 1989.
Amendment of the Debits Tax Administration Act 1982 Exemption for amounts deducted where tax file number not quoted (Clause 4B)
This Bill will also amend the Debits Tax Administration Act 1982 to include amounts deducted in accordance with the tax file number arrangements in the exemption provisions of that Act. This will ensure that Debits Tax is not payable on amounts deducted from accounts in respect of which a tax file number has not been quoted.
The Bill will make two amendments to the First Schedule of the Sales Tax Exemptions and Classifications Act 1935.
The first amendment will exempt from sales tax uncut precious or semi-precious gemstones derived directly from mining activities outside Australia and imported in the rough without having been subjected to any process or treatment that would result in an alteration of their form, nature or condition.
The other amendment proposes an exemption for imported coins that are legal tender in a country other than Australia.
The amendments apply in relation to transactions, acts and operations effected or done in relation to goods on or after the twenty-eighth day after the Bill receives the Royal Assent.
A more detailed explanation of the provisions of the Bill is contained in the following notes.