Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
Section 36A schemes of tax avoidance (Clauses 5, 11, 12 and 25 of the first Bill)
Amendments are proposed to counter tax avoidance schemes which attempt to exploit special provisions of the income tax law that apply to changes in interests in trading stock and related property, such as happens on the formation of a partnership.
Under such a scheme, a person with, for example, cattle about to be sold or a crop ready for harvesting enters into a partnership with a company associated with the scheme promoter. The cattle or crop is transferred to the partnership for an amount roughly equivalent to market value. However, the right of election under sub-section 36A(2) of the Principal Act is used so that the property is treated for tax purposes as having been transferred at the substantially lower value at which it would be brought to account at the end of the year if not sold or transferred.
The net result of the arrangements is that the former owner realises in cash terms an amount close to the market value for the property transferred, but is not taxed on the transfer on that basis, while the tax resulting from the subsequent disposal by the partnership falls largely on the promoter's company that in one way or another does not pay the tax.
To counter schemes of this kind, the proposed amendments will make ineffective an election under sub-section 36A(2) where the person who has disposed of an interest in relevant property receives consideration for the transfer that is substantially in excess of the amount that might reasonably have been expected if the relevant property had been valued at the amount applicable under the election. The consequence of the election being made ineffective will be that the person will be treated as having disposed of the property at its market value. Transfers made in ordinary family or commercial dealing will be excluded from the scope of the amendments.
The amendments will apply generally to changes in ownership or interests occurring after 30 January 1981. In addition, where the result of an earlier scheme entered into in 1979-80 or a prior year of income has been to produce a loss (allowable deductions being in excess of assessable income) the loss will not be available to reduce income derived in the 1980-81 income year or any subsequent income year. Where such losses have been produced in the 1980-81 income year from earlier schemes those losses will similarly not be able to be carried forward for deduction against income of the 1981-82 income year or subsequent years.
Special depreciation on storage facilities for petroleum fuel (Clauses 6, 7, 8, 13, 19 and 20)
An immediate deduction - by way of a 100 per cent depreciation allowance in the year of income in which the facilities are first used or installed ready for use - is to be allowed for the cost of facilities that are for use wholly and exclusively for the storage of liquid or gaseous petroleum fuel that is held for use in a business as fuel or as trading stock for disposal.
Ancillary plant necessary for the functioning of the storage facilities such as pumps, gauges and pipes that are part of the storage facilities is to qualify for the allowance. So are costs of installation of such plant.
The new allowance will be available for both new and secondhand facilities acquired under a contract entered into on or after 1 October 1980 (other than facilities that continued to be used at the place where they were installed before 1 October 1980) and, where the taxpayer constructs the storage facilities, to facilities which the taxpayer commenced to construct on or after that date.
Ships, units of railway rolling stock, road vehicles, pipelines, containers or other units of property for use in transporting fuel will not attract the allowance nor will property for the storage of fuel in or on any vehicle, ship, railway rolling stock or aeroplane.
Storage facilities that would otherwise qualify for deduction under the special provisions relating to mining equipment are to qualify for the new allowance.
Expenditure that qualifies for the new allowance is not also to qualify for the investment allowance.
Costs of mains electricity connection (Clauses 9, 13 and 14)
By these amendments it is proposed that capital expenditure on connecting mains electricity to a property on which a business is carried on will qualify for deduction in the year in which the expenditure is incurred.
The deduction will apply both to capital expenditure incurred on the initial connection of mains electricity to a property on which a business is carried on and to capital expenditure incurred on upgrading existing connections to such a property. A further requirement will be that the connection be, at least in part, for business purposes.
Capital expenditure incurred in bringing mains electricity lines to the point on the property where the supply authority meters consumption will qualify for deduction. The deduction will apply in lieu of any depreciation allowances that might otherwise have been allowable in respect of the electricity lines. Capital expenditure incurred on providing power to mining sites will be outside the scope of the deduction, and this expenditure will continue to qualify for deduction under the mining provisions of the income tax law.
Where expenditure in respect of which a deduction has been allowed is subsequently recouped to the taxpayer, the amount recouped will be included in assessable income in the year of income in which it is received.
The deduction will apply to connections effected under contracts entered into on or after 1 October 1980. Expenditure incurred by the owner of the property or by a lessee or sharefarmer or other person having an interest in the property will be eligible.
Gifts (Clause 10)
Amendments proposed by clause 10 will extend the gift provisions of the income tax law under which deductions for gifts of the value of $2 or more are available where gifts are made to specified funds, authorities or institutions in Australia.
The first of the amendments will introduce a scheme to authorise deductions for gifts to certain public funds maintained for the relief of persons in developing countries.
Under the proposed scheme, gifts made to a fund established by an organisation approved for purposes of the scheme by the Minister for Foreign Affairs will qualify for deduction where the Treasurer is satisfied that the fund is for the relief of persons in countries that, at that time, are under certification by the Minister for Foreign Affairs as developing countries and where the Treasurer has, by notice published in the Gazette, declared the fund to be an eligible public fund for purposes of the scheme.
Generally, gifts to an eligible fund will be deductible from the date specified in the Gazette in which the fund is declared to be an eligible fund for the purposes of the scheme, not being a date earlier than the date of the Gazette. Transitional arrangements will, however, apply in relation to gifts to a fund maintained by one of the 22 organisations nominated in a ministerial statement released on 18 September 1980. The arrangements will allow such gifts to qualify for deduction where made after that date.
Other amendments will apply to ensure that gifts to the I.D.E.C. African Relief Appeal will qualify for deduction where made after 30 June 1980. Further amendments will ensure the continuing deductibility of gifts to the I.D.E.C. Kampuchean Relief Appeal beyond the present termination date of 30 June 1980.
Clause 10 will also authorise deductions for gifts to the Herbert Vere Evatt Memorial Foundation Incorporated, made after 16 January 1981, and gifts made after 23 December 1980 to a public fund established and maintained exclusively for the purpose of providing religious instruction in government schools in Australia.
Expenditure recoupment schemes of tax avoidance (Clauses 11 and 15)
The provisions of Subdivision D of Division 3 of Part III of the Principal Act as they relate to "expenditure recoupment" schemes of tax avoidance are to be extended to counter further variants of those schemes. These latest variants involve the effective recoupment of expenditure formally incurred -
- in producing or marketing films or in acquiring a copyright or licence in a film;
- in operating a gold mine;
- in purchasing consumable supplies;
- in carrying out market research;
- in acquiring a licence in a copyright subsisting in computer software;
- by way of commission for collecting assessable income;
- by way of a fee in relation to the growing, care and supervision of trees;
- by way of an amount paid in relation to the enhancement of the value of shares held as trading stock; and
- by way of a fee for procuring the production of master sound recordings.
The proposed amendments will extend the operation of the existing law so that expenditure of these kinds will not be allowable as a deduction where the expenditure is incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date which provides for the receipt by the taxpayer (or an associate) of a compensatory benefit the value of which, when added to the tax benefit sought in respect of the expenditure, effectively recoups the taxpayer for the expenditure so that no real deductible loss or outgoing is suffered.
In addition, losses generated under such schemes entered into in the 1977-78 or a prior year of income will not be available to reduce income derived in the 1978-79 income year or any subsequent income year. Where scheme losses of this kind have been generated in the 1978-79 income year, those losses will not be deductible against income of the 1979-80 income year or subsequent years.
Deductions for expenditure in respect of home insulation (Clauses 4, 16 and 23)
New provisions will authorise concessional deductions in respect of amounts paid by certain resident taxpayers for thermal insulation of their homes. A deduction will be available in respect of amounts paid by a person for the cost of insulating his or her home (or, in the case of a married couple, their home) where the home is the sole or principal residence of the taxpayer in Australia and neither the taxpayer nor (in the case of a couple) his or her spouse previously owned and used as a residence - another dwelling in Australia. The concession is to apply to the cost of insulating new and secondhand dwellings that were purchased under contracts entered into on or after 1 October 1980, or the construction of which by the taxpayer commenced on or after that date. The deduction will apply in respect of the cost of thermal insulation materials and to the cost of installation of those materials.
As is customary in the case of concessional deductions, the new deduction will be restricted to the income of the relevant year and will not give rise to a carry-forward loss .
Tax avoidance through trust stripping arrangements (Clause 17)
This measure relates to amendments made in 1979 to overcome certain trust stripping arrangements that were designed to enable trading profits and other income derived by trusts to escape tax completely. Those arrangements involved a specially introduced "nominal" beneficiary being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. At the same time, the introduced beneficiary also escaped tax by one means or another, e.g., as a tax exempt body or organisation. The bulk of the income was then returned to the intended beneficiaries in a non-taxable form, e.g., by the receipt of a loan that was never intended to be repaid, or by the settlement of trust funds.
By the 1979 amendments (section 100A of the Principal Act), income to which a beneficiary is nominally made presently entitled under such "reimbursement" arrangements is treated as income of the trust estate to which no beneficiary is presently entitled, with the result that the trustee is taxable on the income at the maximum personal rate of tax (at present 60 per cent).
The amendments proposed by this Bill are to counter variations of earlier arrangements that have been devised to exploit the exclusion from the operation of the 1979 amendments of income of a trust estate to which a beneficiary becomes presently entitled as trustee of another trust estate. That exclusion was intended to ensure that section 100A would apply only in relation to the last link in a chain of distributions through interposed trusts. The variants exploit that exclusion under arrangements whereby income of the head trust is distributed either directly, or through interposed trust estates, to a beneficiary in the capacity of a trustee of another trust estate in circumstances where the beneficiary trustee does not need to redistribute the income to avoid any liability to tax, e.g., because of deductions created under the scheme.
To counter these variants, it is proposed by this Bill that the exclusion of income to which a beneficiary is presently entitled in the capacity of a trustee of a trust estate will be limited to so much of the income as is passed on by the trustee, acting as a trustee, as income to which a beneficiary of that trust estate is in turn presently entitled.
The purpose of the amendments now proposed will be to ensure both that the ultimate "nominal" beneficiary of income diverted under a reimbursement agreement (whether in the capacity of a trustee of another trust estate or not) will be treated as not being presently entitled to the relevant trust income and that such income will be subject to tax at the maximum personal rate in accordance with section 99A of the Principal Act.
The amendments are also designed to ensure that deductions for losses and outgoings incurred under reimbursement arrangements will not be available to be written-off against other income of beneficiaries introduced under the arrangements.
The amendments will apply generally to trust income paid to, or applied for the benefit of, a beneficiary after 5 March 1980 (the date of announcement to legislate against these variants) and to losses and outgoings incurred after that date.
Tax avoidance through exploitation of a body's exempt status for income tax purposes (Clause 18)
A new Division 9C in Part III of the Principal Act will counter tax avoidance schemes that seek to exploit the general exemption from income tax that is accorded income of certain charitable organisations, associations, funds and other bodies, and under which such bodies are used as vehicles for diverting taxable income from individuals and companies.
Under the schemes, the exempt bodies get little benefit from the diverted income because they are required to give to the individuals or companies (or other nominated entities), but in a tax-free form, consideration equal to the greater part of the diverted income.
In general terms, the proposed amendments will operate where an exempt body acquires, under a tax avoidance agreement entered into after 24 June 1980 (the date on which the measures were announced), property from which it derives income that would but for the general exemption be included in its assessable income and gives, in respect of the acquisition of the property, consideration which substantially exceeds what might reasonably be expected to have been given if the body were to be taxed on the income at public company rates of tax.
Where the amendments apply, the diverted income will, without deduction, be subject to tax at a rate equal to the maximum rate of personal tax.
Investment allowance (Clauses 26 and 27)
Amendments are proposed which will enable tourist buses to fall within the scope of the investment allowance, with effect from 1 January 1976.
Under the existing law, plant for use in connection with amusement or recreation, including tourist buses, is not eligible for the investment allowance where that plant was acquired under a contract entered into before 1 October 1980 or, if constructed by the taxpayer, the construction commenced before that date. The general exclusion of plant for use in connection with amusement or recreation was removed, with effect from 1 October 1980, by the Income Tax Assessment Amendment Act (No. 6) 1980.
By the amendments now proposed, the exclusion - for the period 1 January 1976 to 30 September 1980 - of plant for use in connection with amusement or recreation will be treated as not applying in relation to tourist buses.
Plant thus brought within the scope of the investment allowance will, of course, remain subject to the general requirements of the investment allowance provisions. For example, the general exclusion from the allowance of cars and other light vehicles will mean that buses designed to carry fewer than nine passengers will continue to be excluded from the allowance, as will buses of any size that are hired out on a "drive-yourself" basis.
The Bill imposes the rate of tax payable in pursuance of proposed Division 9C of Part III of the Principal Act on the "diverted income" of an exempt body, and is related to clause 18 of the Income Tax Laws Amendment Bill 1981.
The rate is that payable by a trustee of a trust estate in pursuance of section 99A of the Assessment Act (60 per cent for the 1980-81 year), being the maximum rate of personal tax.
More detailed explanations of each of the provisions of the Bills are contained in the notes that follow.