Explanatory Memorandum
(Circulated by authority of the Minister representing the Acting Treasurer, the Hon. J.C. Moore, M.P.)Main features
The main features of the Income Tax Laws Amendment Bill (No. 3) 1981 are as follows:
Income Tax Laws Amendment Bill (No. 3) 1981
Taxation of public unit trusts (Clauses 10, 32 to 38 and 40)
The Bill will give effect to proposals, announced in detail on 16 July 1980, concerning the taxation treatment of certain public unit trusts. Broadly, the taxable income of a unit trust that is to be subject to the new rules will be taxed at the rate applicable to companies - currently 46 per cent - and distributions to unitholders of trust income or other profits derived by the trustee will be taxed on the basis applicable to dividends paid by a company.
The unit trusts to which the proposed amendments will apply are those formed as part of an arrangement for the reorganisation of a company or company group. A unit trust will fall within the scope of the new rules if, as part of the arrangement for the reorganisation, a business or other property of a company was transferred to the unit trust and shareholders of the company involved in the reorganisation received entitlements to take up units in the unit trust.
Two further tests will have to be satisfied before a unit trust will be taxed as a company. The first is that, as part of the arrangement for the reorganisation, units in the unit trust were to be held or dealt with in such a way that the trust would become a "public unit trust", as defined. The other test is that the unit trust is, in fact, a "public unit trust" in relation to the relevant year of income.
The term "public unit trust" is to be defined as a unit trust whose units are listed on a stock exchange, whose units are held by 50 or more persons, or whose units are available for investment by the public. A unit trust will not, however, be regarded as a public unit trust if 20 or fewer persons hold 75 per cent or more of the beneficial interests in the income or property of the trust. For this purpose, a person and his or her relatives or nominees will be regarded as one.
The income of a unit trust which, in relation to a year of income, meets the tests specified will be subject to tax at the general company tax rate. Distributions (referred to as "unit trust dividends") made to unitholders out of income or other profits derived by the trustee during a year of income for which the trust has been or is to be taxed as a company will constitute assessable income in the hands of the unitholders as if they were dividends paid by a company.
To the extent that the income of a taxable unit trust consists of dividends paid by a company (or unit trust dividends paid by another unit trust), the trustee will be entitled to a rebate of tax in the same way that dividend income derived by a company is rebatable. Correspondingly, unit trust dividends received by a company will also qualify for rebate. The anti-avoidance provisions of the Income Tax Assessment Act relating to dividend stripping operations are also to be made applicable to cases where stripping operations are carried out in connection with unit trust dividends paid by a trustee.
The proposed amendments will apply in relation to the 1980-81 year of income and subsequent years for public unit trusts established after 11 July 1980. For such trusts established on or before 11 July 1980 the amendments will apply from the commencement of the 1983-84 year of income.
A number of related safeguarding measures will support the intended operation of these proposals.
The amendments in relation to public unit trusts to be made to the Income Tax Assessment Act 1936 are contained in Part II of the Bill. By it, a new Division (Division 6B - Income of certain unit trusts) will be inserted in Part III of the Assessment Act. Parts III and IV of the Bill contain consequential amendments to the Income Tax (International Agreements) Act 1953 and to the Income Tax (Rates) Act 1976. Part V of the Bill contains miscellaneous amendments and, in relation to unit trusts, will enable the Commissioner of Taxation to amend assessments of income tax to give effect to the amendments proposed by this Bill.
The Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Bill 1981 will impose tax at the rate of 46 per cent on the net income of those public unit trusts to be subject to the new basis of taxation.
Friendly society dispensaries (Clauses 4 and 5, 11 to 14 and 41)
It is proposed that a friendly society dispensary (FSD) be taxed in accordance with the mutuality principle which applies in the assessment of clubs and other non-profit organisations generally. This principle excludes from the income tax base of such bodies all receipts from members, but leaves to be taxed net profit attributable to trading with and receipts from non-members and any investment income.
Under the existing law, an FSD is taxed on 10 per cent of the aggregate of the following:
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- amounts received from the Commonwealth under the National Health Act 1953 in respect of the supply of pharmaceutical benefits; and
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- gross proceeds from the sale or supply of medicines and other goods sold or supplied in the ordinary course of business (including amounts received under the Repatriation Act 1920), but not amounts received from a friendly society for the supply of benefits to members of that society.
By the amendments, an FSD will be taxed on profits (taxable income) arising from the following classes of receipts:
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- all amounts received from the Commonwealth under the National Health Act and the Repatriation Act for the supply of pharmaceutical benefits, whether to members or non-members;
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- any receipts from non-members for the supply of pharmaceutical benefits;
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- proceeds of sale or supply of pharmaceutical products and other goods and services, to non-members; and
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- investment income.
The amendments are to apply to assessments in respect of income derived during the 1982-83 income year and subsequent years.
The rate of tax applicable to an FSD is to be the rate which applies to non-profit companies generally and the rate for 1982-83 income will, in the normal course, be determined by the Act that fixes rates of tax payable by companies for the 1983-84 financial year.
Amendments proposed by clause 9 will extend the gift provisions of the income tax law under which deductions are available for gifts of the value of $2 or more made to specified funds, authorities or institutions in Australia.
The first of the amendments will make tax deductible gifts of the value of $2 or more made after 30 June 1981 to the Victorian Arts Centre Trust. Further amendments will authorise a deduction for such gifts made during the current financial year to a public fund established and maintained by a committee appointed by the Commonwealth, a State or the Northern Territory for the promotion of the observance of, or the furtherance of the aims or principles of, the International Year of Disabled Persons, where the fund is maintained for those purposes.
Deductions for capital expenditure incurred in the development of a mine or oil field (Clauses 6 to 8 and 15 to 30 and 40)
Deductions in respect of specified capital expenditures incurred in developing a mining property or oil field are calculated by reference to the lesser of the estimated life of the mine or field, or six years.
In respect of allowable capital expenditures incurred after 18 August 1981 (unless incurred under a contract entered into on or before that date or, in respect of property constructed by the taxpayer, where construction commenced on or before that date) the deductions allowable on a life-of-mine or life-of-field basis will be calculated by reference to a maximum statutory life of ten years instead of six.
Provisional tax for 1981-82 year of income (Clause 39)
Provisional tax for 1981-82 is to be calculated, basically, by applying 1981-82 rates of tax to 1980-81 taxable income as increased by 10 per cent, and by allowing dependant rebates at 1981-82 levels.
Income Tax (Individuals) Bill 1981
The second Bill, the Income Tax (Individuals) Bill 1981, will formally impose tax payable for the 1981-82 financial year by individuals and trustees generally, at the rates of tax, as varied by the half-indexation factor of 1.038, already declared for that year by the Income Tax (Rates) Act 1976.
Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Bill 1981
The third Bill, the Income Tax (Companies, Corporate Unit Trusts and Superannuation Funds) Bill 1981, will declare and impose the rates of income tax payable for 1981-82 by companies, trustees of corporate unit trusts and trustees of superannuation funds.
The rates for companies and superannuation funds are the same as for 1980-81. The rate imposed on the net income of a corporate unit trust is to be 46 per cent, the same as for companies.
A more detailed explanation of the Bills is contained in the following notes.