House of Representatives

Income Tax Laws Amendment Bill 1981

Income Tax Laws Amendment Act 1981

INCOME TAX (DIVERTED INCOME) BILL 1981

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Notes on Clauses

INCOME TAX LAWS AMENDMENT BILL 1981

Clause 1: Short title

This clause provides formally for the citation of the amending Act as the Income Tax Laws Amendment Act 1981. This title is to be explained by the fact that the amendments contained in Part II of the amending Act are amendments of the Income Tax Assessment Act 1936 while the amendments contained in Part III relate to the Income Tax Assessment Amendment Act (No.6) 1980.

Clause 2: Commencement

Under this clause the amending Act will 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: Principal Act

This clause provides formally for the Income Tax Assessment Act 1936 to be referred to as "the Principal Act", in Part II of the amending Act.

Clause 4: Interpretation

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

Paragraph (a) of clause 4 proposes an amendment to the definition of "apportionable deductions" in sub-section 6(1). This is consequential upon the proposed insertion, by clause 16, in the Principal Act of a new Subdivision - Subdivision E of Division 3 of Part III - containing provisions authorising an income tax deduction for the cost of insulation of a person's first home.

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 prorata basis against various classes of income for purposes of certain provisions of the Principal Act and the Income Tax (International Agreements) Act 1953.

By amending the definition of "apportionable deductions" to include a reference to new Subdivision E, paragraph (a) will ensure that deductions allowed or allowable in respect of home insulation costs under the new Subdivision are apportionable on the same basis as other concessional deductions where apportionment is necessary under the relevant provisions of the Principal Act.

Paragraph (b) of clause 4 proposes to amend the definition of "concessional deductions" in sub-section 6(1) to include a reference to proposed Subdivision E of Division 3 of Part III so that the proposed deduction for home insulation costs will, for the purposes of the Principal Act, be treated as concessional deductions. This will mean that the allowance of deductions for home insulation costs will, as is customary with concessional deductions, not give rise to a loss to be carried forward for deduction against income of a subsequent year under the loss provisions of the income tax law, principally section 80.

Clause 5: Disposal on change of ownership or interests

This clause proposes amendments to counter further avoidance arrangements that seek to exploit the special election provisions of section 36A of the Principal Act.

Section 36A operates where the interests in trading stock or related property such as growing crops change - primarily, on the formation, variation or dissolution of a partnership - and is designed to ensure that such a change of interests is to be treated as a "disposal" of the trading stock or other property for the purposes of section 36 of the Principal Act.

That section requires that where trading stock or related property forming the whole or a part of the assets of a business is disposed of by a taxpayer other than in the ordinary course of carrying on the business, the value of the property is to be included in his or her assessable income. The value to be brought to account as assessable income of the former owner or owners in these circumstances is generally the value ascertained in accordance with sub-section 36(8), that is, the market value at that time. The stock is also taken to have been acquired at that value by the new owners.

However, the existing sub-section 36A(2) allows the operation of section 36 to be varied in cases where the former owner or owners retain an interest of 25 per cent or more in the property after the change. Sub-section 36A(2) allows the parties to elect that the property be regarded for the purposes of section 36 as having been transferred at the value that the property would have been brought to account for taxation purposes at the end of the year if there had been no change in its ownership. This value would normally be a cost value much lower than current market value and, in the case of growing crops in respect of which there is no requirement that an end of year value be brought to account, it would be nil. The effect of sub-section 36A(2) is to allow the deferral, until such time as stock is sold by the new owners, of any tax on the difference between the cost price to the former owners and the market value at the date of transfer.

The right of election under sub-section 36A(2) to adopt a "taxation value" applies even though the former owner may actually receive a much larger consideration than would reflect that value. This result is the basis on which schemes to exploit the special election provisions of section 36A have been developed.

Although the mechanics may vary, the following example illustrates how the schemes work.

A primary producer has cattle that are worth $525,000, but the cost of which for tax purposes is $50,000. The taxpayer enters into a livestock trading partnership with a company controlled by the scheme promoter. The taxpayer has a 25 per cent interest in the partnership and the company 75 per cent. The partnership then buys the cattle from the taxpayer for $500,000 and sells them for $525,000. After deducting selling expenses of $25,000 the partnership is left in a break-even cash position.

The parties to the scheme, however, lodge an election under sub-section 36A(2) which has the effect of treating the cattle as having been sold by the taxpayer to the partnership for $50,000. This means that the partnership has a tax profit of $450,000 ($525,000 sale price less deemed cost of $50,000 and selling expenses of $25,000). The profit is allocated for tax purposes between the taxpayer ($112,500) and the company ($337,500).

The claimed effect on the taxpayer is that he has assessable income of $112,500, which is reduced by commission and management fees of, say, $40,000 paid to another promoter controlled company. The taxpayer's assessable income might be further reduced by normal operating expenses of $50,000 leaving a balance of $22,500 on which tax of $7,000 might be paid. The taxpayer's actual financial position is in marked contrast. Against receipts of $500,000 from the sale of the cattle to the partnership there are the previously detailed expenses of $40,000 and $50,000. When further reduced by the tax of $7,000 the taxpayer has a cash profit of $403,000.

As in the case of other avoidance arrangements against which legislative action has been taken, there are variations in the schemes employed. There have been some in which by two successive changes in interest (each involving a 25 per cent continuity of interest entitling the parties to make a sub-section 36A(2) election) a person has, for a full and adequate capital consideration, divested himself of all interest in trading stock or related property without becoming liable for any tax at all.

To counter these arrangements, amendments to be made by clause 5 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 low tax value otherwise applicable under the election.

In the scheme illustrated above, the effect of this proposed rule would be that the taxpayer would be treated as having disposed of his trading stock for its full market value at the time that the variation in interest took place, with the result that the profit represented by the difference between the market value (sale price) of the trading stock and its cost would be subject to tax.

Transfers made in ordinary family or commercial dealing are specifically excluded from the scope of the amendments.

The amendments will apply generally to changes in ownership or interests occurring after 30 January 1981, the date on which these amendments were foreshadowed. In addition, as explained in the notes on clauses 11 and 12, further amendments will apply to prevent, with first effect for the 1980-81 income year, the carry-forward of losses generated by participation in schemes of this type prior to the first application or the proposed amendments.

To give effect to these proposals, clause 5 proposes the insertion of new sub-sections (8) to (12) in section 36A.

Proposed new sub-section (8) is the operative provision and will apply to render ineffective a sub-section 36A(2) election that is made in respect of a change in the ownership of, or of the interests of persons in, property, where the consideration received by the former owner or owners in connection with the change substantially exceeds the amount that might reasonably be expected to have been received if the value of the property had been the lower tax value applicable in accordance with the election. The operation of sub-section (8) is subject to the specific exclusion of ordinary family or commercial dealing.

Sub-section (8) will apply in relation to an election given after 30 January 1981 unless the persons giving the notice establish that the relevant change in ownership or interests occurred on or before that date.

Sub-section (8) will not however apply to property that is a chose in action or property in respect of which the existing anti-avoidance provisions of sub-section 36(9) apply. Elections in respect of changes in ownership of property of these kinds are already the subject of anti-avoidance amendments incorporated in sub-sections 36A(5), (6) and (7).

New sub-section (9) is a safeguarding provision designed so that the amendments proposed by sub-section (8) are not circumvented by arrangements under which consideration in respect of a change in ownership or interests is paid to a person other than the original owner in circumstances where the owner will benefit from that payment either by reason of that other person being an associate or as a result of arrangements entered into with that person.

For this purpose, sub-section (9) authorises the Commissioner of Taxation to treat an amount of consideration received or receivable by any person in connection with the relevant change in ownership or interests as consideration received by the former owner or owners, in circumstances where, on the basis of guidelines in sub-section (10), that is an appropriate course of action.

Sub-section (10) specifies the considerations which the Commissioner is to have regard to when determining whether it is appropriate that an amount of consideration received by another person be treated as consideration received by the former owner in respect of a change in the ownership or interests of property. These matters are set out in sub-paragraphs (a) to (d) and are -

(a)
any agreement entered into in connection with the change in ownership or interests;
(b)
any agreement entered into in connection with the payment or receipt of consideration where the owner or owners of the property before the change will benefit from the payment to, or receipt by, the other person of the consideration;
(c)
the nature of any connection between that other person and those who owned the property before the change; and
(d)
other relevant matters.

Sub-section (11) ensures that for the purposes of sub-sections (9) and (10), the term "agreement" is given the extended meaning found in other anti-avoidance provisions of the Act. Thus an agreement is defined to mean any agreement, arrangement or understanding, whether formal or informal, expressed or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

New sub-section (12) will ensure that sub-section (8) is not frustrated by arrangements under which the consideration for a change in interests is not paid formally as consideration. Accordingly, in determining whether the conditions necessary for the application of new sub-section 36A(8) have been satisfied, the amount or value of a benefit receivable by a person in connection with a change in ownership or interests in property is to be treated as consideration received by the person in that connection.

Clause 6: Divisible deductions

This clause proposes a technical amendment to section 50G, one of the "current year loss" provisions of Subdivision B of Division 2A of Part III of the Principal Act. This amendment is consequential upon the proposed insertion, by clause 8, of a new section - section 57AJ - in the depreciation provisions of the Principal Act to authorise a rate of depreciation of 100 per cent for storage facilities for petroleum fuels.

For purposes of the current year loss provisions, section 50G describes a category of deductions as "divisible deductions" and directs how such deductions are to be taken into account under those provisions.

Among the deductions treated as divisible deductions are those allowable in respect of depreciation under section 54, including deductions allowable under that section in accordance with other sections of the Principal Act. The effect of the amendment will be that a deduction that is allowable for depreciation of fuel storage facilities in accordance with new section 57AJ will be treated in the same way, for purposes of the current year loss provisions, as are deductions allowable for depreciation of fuel storage facilities under section 54.

By sub-clause 6(2), the amendment made by sub-clause 6(1) will first apply to assessments in respect of income of the year of income in which 1 October 1980 occurred.

Clause 7: Special depreciation on plant

This clause proposes an amendment to section 57AG of the Principal Act consequential upon the proposed insertion in the Principal Act, by clause 8, of a new section - section 57AJ - to allow a statutory rate of depreciation of 100 per cent on storage facilities for petroleum fuel. Under section 57AG, depreciation on plant to which that section applies is allowable at a rate that is 20 per cent higher than the rate that would otherwise apply for income tax purposes.

Paragraph 57AG(2)(b) excludes from the operation of section 57AG, and thus from eligibility for the 20 per cent loading, certain categories of property for which statutory rates of depreciation are provided in the income tax law. It is proposed by the amendment being made by clause 7, that fuel storage facilities that will qualify for the 100 per cent special rate of depreciation in accordance with new section 57AJ be treated in the same way. That is, such storage facilities are not also to be eligible for the 20 per cent loading applicable to general depreciation rates under section 57AG.

Clause 8: Special depreciation on storage facilities for petroleum fuel

This clause proposes to amend the Principal Act to insert a new section - section 57AJ - to authorise a special depreciation allowance at the rate of 100 per cent for storage facilities that are used wholly and exclusively for the storage in Australia of petroleum-based liquid or gaseous fuel. One of the conditions of the allowance is that the fuel that is stored in the facilities must be held wholly and exclusively for sale as fuel or for use as fuel in the course of carrying on a business. The new allowance is also to apply to ancillary plant that is used wholly and exclusively to convey fuel in and out of storage or to measure the amount of fuel stored. New section 57AJ will enable a taxpayer to write-off the cost of eligible storage facilities in the year of income in which the facilities are first used by the taxpayer for the purpose of producing assessable income or are first installed ready for use for such purposes and held in reserve.

The special depreciation allowance is to apply to both new and secondhand storage facilities acquired by the taxpayer under a contract entered into on or after 1 October 1980, or which the taxpayer commenced to construct after that date. However facilities acquired by a taxpayer from another person and that remain at the site at which they were installed before 1 October 1980 will not qualify. Nor will the allowance apply to a ship, a unit of railway rolling stock, a road vehicle, a pipeline or a container or other unit of property that is for use in the transport of fuel.

Sub-section (1) of new section 57AJ defines the term "petroleum fuel" as used in the section. In the context of the new concession for storage of petroleum fuel, this means "petroleum" as defined in section 6 of the Principal Act or a product obtained by refining petroleum, being petroleum or such a product that is in a liquid or gaseous state at a temperature of 20 degree Celsius and a pressure of 1 atmosphere (normal atmospheric pressure measured at sea level). The definition thus includes all petroleum based fuels including natural gas and liquid petroleum gas.

Sub-section (2) of new section 57AJ sets out the general conditions under which the special depreciation allowance will apply to a unit of property. Paragraph (a) of the sub-section requires that the plant be a unit of property in respect of which the taxpayer is entitled in the year of income to a depreciation allowance under section 54 of the Principal Act, or would but for section 122N or 124AN have been entitled to a depreciation allowance under that section. Subject to section 122N or 124AN not operating to prevent a deduction being allowed under section 54, depreciation is allowable under section 54 in respect of plant that is owned by the taxpayer and which, during the relevant income year, is either used by the taxpayer for the purpose of producing assessable income or is installed ready for use for that purpose and held in reserve.

Sections 122N and 124AN respectively operate to prevent a deduction being allowed under section 54 for depreciation of an item of plant in respect of which deductions are allowable under Division 10 or Division 10AA of the Principal Act. Deductions are allowable under those provisions in respect of an item of plant if the plant is used by the taxpayer in carrying on mining operations or in treating minerals obtained from such mining operations (Division 10) or in carrying on prescribed petroleum mining operations (Division 10AA), unless the taxpayer has elected to claim ordinary depreciation allowances rather than the special deductions under the general mining or petroleum mining provisions of the law.

When paragraph (a) is read in conjunction with the amendments that are being made by clauses 19 and 20, the effect will be that a deduction will be allowed for the capital cost of eligible fuel storage facilities, that are used for the storage of fuel that is for use in a prescribed general mining or petroleum mining operation, by way of a 100 per cent depreciation allowance in accordance with new section 57AJ, rather than as deductions under Division 10 or Division 10AA.

Paragraph (b) of proposed sub-section 57AJ(2) identifies the year of income in which the conditions specified in sections 57AJ(2) must be met in order for the facilities to qualify for the new allowance. This is the year of income in which the unit of property is first used by the taxpayer for the purpose of producing assessable income (not having been installed ready for use for that purpose and held in reserve in a previous year of income) or the year of income in which the unit of property is first installed ready for use for the purpose of producing assessable income and is held in reserve.

Under paragraph (c) of the sub-section, the special depreciation allowance is to apply to a unit of property that is acquired by a taxpayer under a contract entered into on or after 1 October 1980 or, if the unit was constructed by the taxpayer, the construction of the unit commenced on or after 1 October 1980.

Paragraph (d) of the new section 57AJ(2) will exclude from eligibility for the new deduction secondhand fuel storage facilities which are used for storage of fuel at a place where the facilities were installed before 1 October 1980.

Paragraph (e) has the effect of limiting the special 100 per cent deduction to petroleum fuel storage plant and ancillary plant.

To be eligible for the special allowance, plant must not, at any time during the year of income, have been used (or installed ready for use and held in reserve) otherwise than wholly and exclusively for the storage of petroleum fuel in Australia that was held for sale as fuel or for use as fuel in carrying on the taxpayer's business. This means, for example, that crude oil held at a refinery for further processing would not qualify.

Alternatively, plant may qualify if it is ancillary storage plant, that is, plant not used otherwise than wholly and exclusively to convey such petroleum fuel into or out of storage or to measure the amount of it in storage.

Sub-section (3) of section 57AJ specifically mentions certain categories of property that will not qualify for the special depreciation allowance under the section. These are -

(a)
a ship, a unit of railway rolling stock, a road vehicle, a pipeline, a container or any other unit of property that is for use in the transport of fuel; or
(b)
a unit of property that is for use for the storage of fuel in or on a ship, a unit of railway rolling stock, an aircraft or any other vehicle.

Sub-section (4) of section 57AJ fixes the special 100 per cent rate of depreciation for plant to which the new section is to apply. It displaces the ordinary basis for depreciation allowances under section 54 (in accordance with sections 55, 56, 56A and 57) of the Principal Act that would otherwise apply and, in relation to fuel storage related to the carrying on of general mining or petroleum mining operations, also displaces the basis for deductions under Divisions 10 or 10AA of Part III of the Act.

Sub-section (5) of section 57AJ will allow a safeguard in sub-section 56(4) of the Principal Act to apply also for purposes of calculating the amount of depreciation allowable in accordance with the new section, in the same way as it applies for purposes of paragraph 56(1)(b) in cases where the taxpayer elects to have depreciation allowed on a prime cost basis.

Sub-section 56(4) is directed against cases where transactions associated with the acquisition of a unit of property by a taxpayer involve parties who are not dealing with each other at arm's length and where the cost of the unit of property is greater than the amount that would have been the cost if they had been dealing with each other at arm's length.

Where the Commissioner of Taxation is satisfied that these circumstances exist, sub-section 56(4) deems the arm's length amount to be the cost of the unit for the purpose of calculating depreciation under paragraph 56(1)(b). When sub- section 56(4) is read in conjunction with sub-section 57AJ(5) it will have the same safeguarding effect for the purposes of the calculation of depreciation on eligible fuel storage facilities to which section 57AJ applies.

Paragraph (a) of sub-section (6) will enable other safeguarding measures contained in sub-sections 57AH(7), (8), (9) and (10) of the Principal Act to apply for purposes of new section 57AJ in the same way as those sub-sections apply for purposes of section 57AH, the provision that enables certain primary production plant to be written off at a special 20 per cent annual rate.

Sub-sections 57AH(7) and (8) are designed as safeguards against arrangements to overcome the limitation of the deduction under section 57AH to property acquired under contracts entered into on or after 1 October 1980. Without them the limitation could be overcome by rearrangement of prior contracts to make it appear that the property was acquired under a legal obligation entered into on or after 1 October 1980.

Sub-sections 57AH(7) and (8) are also expressed to apply in a case where a taxpayer commenced construction of a "substituted unit" on or after 1 October 1980.

The effect of section 57AJ(6) is that sections 57AH(7) and (8) will provide a corresponding safeguard against the rearrangements of contracts or construction arrangements relating to fuel storage facilities to overcome the limitation that the new allowance is to apply only to storage facilities acquired under contracts entered into on or after 1 October 1980 or facilities which the taxpayer commenced to construct after that date.

Sub-sections 57AH(9) and (10) are drafting measures which have the effect, so far as is relevant for present purposes, that references in sections 57AH(7) and (8) to a unit of property are taken as including a reference to a portion of a unit of property, and that references in those sections to the acquisition by a taxpayer of property are taken as including a reference to the construction of the property for the taxpayer by someone else.

Paragraphs (b), (c) and (d) of sub-section 57AJ(6) are drafting measures to take into account that substantially corresponding sub-sections of section 57AH and 57AJ do not have corresponding sub-section numbers.

Clause 9: Cost of mains electricity connections

This clause proposes the insertion of section 70A in the Principal Act to authorise deductions for capital expenditure in connecting mains electricity to a property on which a business is carried on. Also eligible will be the capital cost of upgrading an existing connection to a business property.

Deductions conferred by the section will be available in the year of income in which the qualifying expenditure is incurred. For this purpose, qualifying expenditure will be the capital costs incurred by an owner of the property, or by a lessee or sharefarmer, in connecting mains electricity to a point on the property where the supply authority meters consumption. Similarly, the capital cost of increasing the supply of electricity to a metering point will qualify for deduction.

The deduction will be available only where the connection or upgrading is, wholly or in part, to be used for business purposes in the production of assessable income.

The deduction conferred by the section will apply in lieu of any depreciation allowances that might otherwise have been allowable in respect of the connection. Capital expenditure incurred on providing power to mining sites will, however, be outside the scope of the deduction. This expenditure will continue to qualify under the mining provisions of the law.

Under the Bill, the concession is to apply with respect to connections or upgradings effected under contracts entered into on or after 1 October 1980. Where deductible expenditure 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 following notes explain the proposed section 70A in more detail.

Sub-section (1) identifies the type of expenditure which is to qualify for deduction.

First, the expenditure must be in respect of the connection of mains electricity facilities to land in Australia. As explained in the notes on paragraph (a) of sub-section (15), this requires that the expenditure be in respect of the connection of mains electricity cables up to the point at which the consumption of electricity is to be metered. Also included are costs in providing or installing the metering equipment and any other equipment for use directly in connection with the supply of electricity to the metering point. Eligible too will be expenditure in respect of any work undertaken, or equipment supplied, to increase the amount of electricity supplied to a metering point.

Secondly, the expenditure must be of a capital nature and be incurred by the owner of the land or a lessee, tenant or other person having an interest in land. Expenditure incurred by a sharefarmer could, as explained in the notes on paragraph (f) of clause 15, satisfy this requirement.

Finally, the relevant mains electricity facilities must be used, or installed ready for use and held in reserve, for the provision of electricity for use, either wholly or partly, in carrying on a business on the land for the purpose of producing assessable income. This requirement must be satisfied at the time when the expenditure is incurred or, alternatively, the Commissioner must be satisfied that, at that time, the facilities were intended for use in the provision of electricity for business purposes.

This requirement will be met where the electricity is used, or intended to be used, by the person who incurred the expenditure or by another person such as a lessee or sharefarmer conducting a business on the land. In these latter circumstances, however, it will be required that the person who incurred the expenditure hold an interest in the land at the time the business is carried on. Thus, for example, expenditure incurred by the owner of land could qualify for deduction where the electricity supplied is to be used in a business conducted on the land by a lessee.

As further explained in the notes on paragraph (b) of clause 15, expenditure will be eligible for deduction both where it is incurred directly to the relevant supply authority or by way of contribution to the cost of a project involving the connection of mains electricity to a number of properties.

Sub-section (2) is to the effect that the concession in relation to upgradings is to be restricted to upgradings commenced under contracts entered into on or after 1 October 1980. For this purpose, sub-section (2) applies, where an amount is incurred in respect of an upgrading under a contract entered into before 1 October 1980, to ensure that no deduction will be available in respect of any expenditure incurred in respect of the same upgrading under contracts entered into on or after that date.

Sub-section (3) applies similarly in relation to new connections that are commenced under contracts entered into before 1 October 1980.

Sub-section (4) operates to exclude from the concession expenditure that could otherwise qualify for deduction under the special mining provisions of the Principal Act. Broadly, a taxpayer engaged in "prescribed mining operations" or "prescribed petroleum operations" is entitled to deductions on a 20 per cent diminishing value basis for certain capital expenditures incurred in carrying on mining or petroleum operations. (Divisions 10 and 10AA of the Principal Act.)

Included in the categories of expenditure eligible for deduction on this basis is the cost of providing water, light or power for use on the mining site. By sub-section (4) those costs will continue to qualify for deduction under Division 10 or 10AA of the Principal Act and will not be eligible for deduction under section 70A.

Sub-section (5) is the operative provision which authorises deductions for qualifying expenditures incurred by a taxpayer. By sub-section (5) the deduction is to be available in the year in which the expenditure is incurred.

Sub-section (6) is a safeguarding provision that operates in conjunction with sub-section (1) to ensure that deductions are restricted to connections for use, in whole or in part, for business purposes.

As explained in the notes on sub-section (1), a deduction is to be available where, at the time the connection costs are incurred, the electricity supplied through the relevant mains electricity facilities is for use, or is intended for use, in the operation of a business on the land. Sub-section (6) ensures that a deduction will not be available in respect of the capital cost of any mains electricity connection where the relevant mains electricity facilities have not been used, or installed ready for use and held in reserve, for the provision of electricity for use in carrying on a business within twelve months after electricity is first supplied through those facilities.

In a case where a deduction has previously been allowed in respect of the cost of mains electricity facilities that do not satisfy the twelve-month requirement imposed by sub-section (6), the Commissioner of Taxation is to be authorised by amendments proposed in clause 23 to amend an assessment accordingly.

Sub-section (6) applies a similar within twelve months usage test to expenditure incurred on the upgrading of an existing mains electricity connection.

Sub-section (7) applies where the amount of any expenditure in respect of which a deduction has been allowed under section 70A is recouped to a taxpayer by a Government, an authority or any other source. In these circumstances, the amount recouped is to be included in the assessable income of the taxpayer in the income year in which the recoupment is made.

Sub-section (8) ensures that the amount of any consideration received by a taxpayer on the disposal of a right to a recoupment of expenditure in respect of which a deduction under section 70A has been allowed to the taxpayer is similarly included in the taxpayer's assessable income in the year of receipt.

As explained in the notes on proposed sub-section (12), any expenditure on mains electricity connections or upgradings by a partnership is to be treated as having been incurred by the respective partners. Sub-section (9) ensures therefore that the disposal by a partner of an interest in a partnership that carries with it a right to recoupment of expenditure in respect of which the partner has been allowed a deduction is treated for the purposes of sub-section (8) as a disposal of a right to be recouped in respect of that expenditure. The effect will be to ensure that so much of the amount of any consideration received in respect of the partnership interest as is attributable to the recoupment right is included in the assessable income of the taxpayer.

Sub-section (10) is necessary to ensure that the recoupment provisions described above may operate in a case where a taxpayer is reimbursed in a single amount that relates only partly to expenditure in respect of which a deduction has been allowed, and the amount that is in respect of that expenditure is not specified.

In these circumstances, the Commissioner is to be empowered to determine the extent to which the total amount constitutes a recoupment of the deductible expenditure.

Sub-section (11) applies to preclude any expenditure that is deductible under section 70A from also being taken into account in determining the amount of any deduction under any other provision of the Principal Act. The sub-section will ensure that expenditure on mains electricity facilities that gives rise to plant that is owned by the taxpayer will not result in depreciation allowances also being available to the taxpayer.

Sub-section (12) applies in the case where a partnership incurs mains electricity connection or upgrading costs. In these circumstances, the expenditure is not to be taken into account in the calculation of the net income of the partnership or the partnership loss, but each partner is to be deemed to have incurred so much of the expenditure incurred by the partnership as, by agreement between the partners, has been borne by each partner. Where the partners have not agreed as to the amounts of expenditure to be borne by the partners, the expenditure is to be deemed to have been incurred by each partner in proportion to his or her individual interest in the net income (or loss) of the partnership of the year of income in which the relevant expenditure was incurred. Each partner's deemed proportion of the expenditure is to be eligible for deduction in the partner's own assessment.

Sub-section (13) follows similar provisions contained in the Principal Act. The sub-section is designed as a safeguard against arrangements to get around the limitation of deductions to connections and upgradings effected under contracts entered into on or after 1 October 1980, e.g., by rearrangement of a contract to make it appear that a connection was carried out under a legal obligation entered into on or after 1 October 1980 in circumstances where a contract for the connection had in fact previously been entered into before that date.

Sub-section (14) applies a similar safeguard against attempts to substitute a pre-1 October 1980 contract entered into by one party with an interest in the land (e.g., the owner) with a post-1 October 1980 contract entered into by another party (e.g., a lessee).

Sub-section (15) defines a number of terms used in section 70A. The broad effects of these definitions have been referred to in the notes on the relevant sub-sections of section 70A.

Paragraph (a) of sub-section (15) applies to restrict deductions allowable under section 70A to capital expenditure incurred on the initial connection of mains electricity to a particular metering point on the relevant property or on increasing the supply of electricity to a metering point.

For this purpose, the connection of mains electricity facilities to land is defined to mean the connection of mains electricity cables to the metering point (sub-paragraph (a)(i)), and the provision or installation of the metering equipment or other equipment used directly in connection with the supply of electricity to the metering point (sub-paragraphs (a)(ii) and (iii)). Also covered is work undertaken or equipment installed for the purpose of increasing the amount of electricity that may be supplied to the metering point (sub-paragraph (a)(iv)).

Specifically excluded is any work undertaken or cables or equipment installed in the course of replacing or relocating any existing cables or equipment, otherwise than in the course of upgrading an existing connection.

Paragraph (b) ensures that the concession extends to contributions made towards a project involving the connection of mains electricity to a number of properties.

Paragraph (c) is a drafting measure that ensures that a reference in section 70A to mains electricity metering equipment is a reference to equipment designed to measure the amount of electricity supplied through mains electricity cables.

Paragraph (d) is a further drafting measure that ensures that a reference - in relation to expenditure incurred on the connection of mains electricity facilities to land - to the property in respect of which the expenditure is incurred is a reference to the mains electricity cables and equipment in respect of which the expenditure is incurred.

Paragraph (e) is a drafting measure that enables the use in section 70A of the shortened expression "assessable business" as a reference to a business that is carried on for the purpose of producing assessable income.

Paragraph (f) ensures that deductions conferred by section 70A are available in respect of expenditure incurred by a sharefarmer carrying on a business on the land to which the connection is made.

Clause 10: Gifts, calls on afforestation shares, pensions, etc.

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).

This clause will amend section 78 to authorise income tax deductions for gifts to four additional categories of funds, and continue the concession in relation to another. Gifts for overseas aid will qualify where made to a public fund maintained by an approved organisation exclusively for the relief of persons in certified countries and which the Treasurer has declared by notice published in the Gazette to be an eligible fund for purposes of the concession.

An approved organisation will be an organisation approved as such by the Minister for Foreign Affairs. A certified country will be a country that has been certified by the Minister for Foreign Affairs to be a developing country.

The clause will also authorise income tax deductions for gifts to the Herbert Vere Evatt Memorial Foundation Incorporated, to the I.D.E.C. (International Disaster Emergencies Committee) African Relief Appeal and to a public fund established exclusively for the purpose of providing religious instruction in government schools in Australia. The clause will also permit the continuing deductibility of gifts to the I.D.E.C. Kampuchean Relief Appeal.

To effect these amendments, paragraph (a) of sub-clause 10(1) will insert four new sub-paragraphs - sub paragraphs (1x), (1xi), (1xii) and (1xiii) - in paragraph 78(1)(a). Each sub-paragraph will specify an additional fund, or an additional class of fund, to which the income tax deductions authorised by paragraph 78(1)(a) will apply.

Sub-paragraphs (1x) and (1xi) specify the Herbert Vere Evatt Memorial Foundation Incorporated and the I.D.E.C. African Relief Appeal respectively. Sub-paragraph (1xii) specifies a fund that has been declared by the Treasurer, in accordance with proposed sub-section 78(8), to be an eligible fund for the purposes of that sub-paragraph. Sub-paragraph (1xiii) specifies a public fund established and maintained exclusively for the purpose of providing religious instruction in government schools in Australia.

Paragraph (b) of sub-clause (1) will insert a new sub-section - sub-section (6AAA) - in section 78 which will mean the continuing deductibility of gifts to the I.D.E.C. Kampuchean Relief Appeal. As the law is presently enacted, gifts to the Appeal are allowable deductions under sub-paragraph 78(1)(a)(1) only if made within the period 1 July 1979 to 30 June 1980 (sub-section 78(6AA)).

Through the mechanism of proposed sub-sections 78(8) and (10) in relation to gifts for overseas aid purposes, gifts to the I.D.E.C. Kampuchean Appeal are expected to qualify for deduction under new sub-paragraph (1)(a)(1xii) on and after 19 September 1980. Proposed sub-section (6AAA) will ensure the deductibility of gifts made to the Appeal in the interval between 1 July 1980 and 18 September 1980.

Paragraph (c) of sub-clause (1) will effect a consequential amendment to sub-section (6AA) to delete the reference in that sub-section to sub-paragraph (1)(a)(1) which has the effect of restricting the deductibility of gifts to the I.D.E.C. Kampuchean Relief Appeal to gifts made in the period 1 July 1979 to 30 June 1980.

Paragraph (d) of sub-clause (1) will insert a new sub-section - sub-section (6AC) - in section 78 which will have the effect of authorising deductions for gifts to the I.D.E.C. African Relief Appeal made after 1 July 1980. As with the amendments proposed by paragraph (b) in relation to the I.D.E.C. Kampuchean Relief Appeal, it is intended, through the authorisation mechanism of proposed sub-sections 78(8) and (10), to provide for the deductibility of gifts to the African Relief Appeal under sub-paragraph (1)(a)(1xii) on and after 19 September 1980. Proposed sub-section (6AC) means that gifts to the Appeal made between 1 July 1980 and 18 September 1980 will also be deductible, under paragraph (1)(a)(1xi).

Paragraph (e) of sub-clause (1) will insert five new sub-sections - sub-sections (8) to (12) - in section 78. These new sub-sections will provide the mechanism for conferring eligibility on certain kinds of funds for overseas relief for the purposes of proposed sub-paragraph (1)(a)(1xii).

New sub-section (8) will enable the Treasurer, if he is satisfied that a fund is a public fund that has been established by an "approved organisation" exclusively for the relief of persons in a "certified country" or countries, to declare that fund to be an eligible fund for the purposes of sub-paragraph (1)(a)(1xii).

A declaration that a fund is an eligible fund is to be effected by notice published in the Commonwealth Gazette declaring the fund to be an eligible fund for the purposes of the sub-paragraph. The terms "approved organisation" and "certified country" for this purpose are defined in proposed sub-section (12).

New sub-sections (9) and (10) will serve to determine the date from which gifts to a fund declared by the Treasurer to be an eligible fund will become deductible under sub-paragraph (1)(a)(1xii).

Sub-section (9) means that, subject to sub-section (10), a notice published in the Gazette in accordance with sub-section (8) for the purposes of sub-paragraph (1)(a)(1xii) will have effect on and after the date specified in the Gazette, not being a date earlier than the date of the Gazette.

Sub-section (10) permits a notice published in the Gazette in accordance with sub-section (8) before 1 July 1981, and which specifies 19 September 1980 as the date on and after which the notice has effect, to be treated as having had effect on and after that date. This will provide the formal avenue for authorising deductions for gifts made after 18 September 1980 to a fund established by any of the approved organisations listed in the attachment to the ministerial statement on this matter on 18 September 1980.

Proposed sub-section (11) will allow the Treasurer, by notice published in the Gazette, to revoke a declaration made in respect of a particular fund in accordance with sub-section (8). By sub-section (11), such a revocation will take effect on and after such date as is specified in the Gazette, not being a date earlier than the date of the Gazette.

New sub-section (12) defines, for the purposes of sub-section (8), the terms "approved organisation" and "certified country". An "approved organisation" is an organisation approved in writing by the Minister for Foreign Affairs for the purposes of sub-section (8). A "certified country" is a country correspondingly certified by the Minister for Foreign Affairs to be a developing country.

By sub-clause (2), deductions for gifts to the Herbert Vere Evatt Memorial Foundation Incorporated will be available for gifts made after 16 January 1981.

By sub-clause (3), deductions for gifts to a public fund established and maintained exclusively for the purpose of providing religious instruction in government schools in Australia will be available for gifts made after 23 December 1980.

Claims for deduction in respect of gifts to the funds and appeals specified in paragraph 1(a) can be expected to be made mainly in income tax returns lodged in respect of the 1980-81 and subsequent income years. However, some taxpayers with substituted accounting periods whose 1979-80 income year ends after 30 June 1980 may have made donations in the 1979-80 income year to one or more of these funds and appeals. Sub-clause (4) will accordingly give the Commissioner of Taxation authority to re-open an income tax assessment made before the enabling legislation becomes law if this should be necessary to allow a deduction for a gift made before that time.

Clause 11: Losses of previous years

Clause 11 proposes amendments to section 80 of the Principal Act so as to deny the carry-forward of losses generated by participation in section 36A schemes and further expenditure recoupment schemes of tax avoidance, prior to the date of effect of the remedial legislation proposed by clauses 5 and 15 respectively.

Under sub-section 80(2) of the Principal Act, a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of any of the seven succeeding years of income.

The availability of a deduction under sub-section (2) in respect of a carry-forward loss is at present subject to the operation of sub-section (5) which applies to preclude the carry-forward of losses from specified tax avoidance schemes. By the amendments proposed by paragraph (a) of clause 11, the availability of deductions under sub-section 80(2) is to be made also subject to the operation of proposed new sub-section 80(6). As explained later, new sub-section 80(6) will apply to prevent the carry-forward of losses generated under section 36A schemes entered into prior to the date of effect of the amendments proposed by clause 5.

As mentioned, sub-section 80(5) of the Principal Act requires that the amount of any deduction allowable in respect of a loss incurred in a previous year, other than from engaging in primary production, is determined for the 1978-79 and subsequent years of income as if anti-avoidance measures specified therein were taken to be applicable throughout the year of income in which the loss was incurred. Paragraphs (j) and (m) of that sub-section ensure that the amount of any deduction allowable in respect of a carry-forward loss is calculated as if 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 had been so applicable, i.e., as if those provisions were applicable irrespective of the date on which the relevant arrangement was entered into.

Paragraph (b) of clause 11 will amend paragraph 80(5)(m) to ensure that the restriction placed on the deductibility of carry-forward losses by virtue of paragraphs 80(5)(j) and (m) is determined by reference to the operation of the "expenditure recoupment" provisions of that Subdivision as proposed to be amended by clause 15 of this Bill.

The effect of the amendment to be made by paragraph (b) will be that losses created under schemes of the particular kind at which the amendments proposed by clause 15 of this Bill are directed, but which were implemented before the general operative date, 25 September 1978, will be disregarded in determining for 1978-79 and subsequent income years the amount of any deduction allowable under section 80.

Paragraph (c) of clause 11 proposes the insertion of new sub-section 80(6) in the Principal Act.

Sub-section (6) will operate in conjunction with existing sub-section 80(5) and is designed to ensure that, with first effect for the 1980-81 income year, the amount of any deduction allowable in respect of a carry-forward loss is calculated as if the amendments to section 36A as proposed by clause 5 had applied, i.e., as if those amendments were applicable irrespective of when the notice for the purposes of sub-section 36A(2) had been lodged and when the relevant change in ownership or interests had occurred.

The effect of sub-section 80(6) will be that where the result of participation in a section 36A scheme entered into in 1979-80 or a prior year of income has been to produce a loss, 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, those losses will similarly not be available to be carried forward for deduction against income of the 1981-82 income year or subsequent income years.

Clause 12: Losses of previous years incurred in engaging in primary production

Amendments proposed to section 80AA by clause 12 will complement the amendments proposed to section 80 of the Principal Act by clause 11.

By virtue of sub-section 80AA(4), a loss incurred in engaging in primary production may be carried forward indefinitely.

The availability of a deduction under sub-section 80AA(4) in respect of a carry-forward loss from engaging in primary production is subject to the operation of sub-section 80AA(9) which ensures that the amount of any deduction allowable is to be determined for 1978-79 and subsequent income years as if the anti-avoidance measures specified in sub-section 80(5) were applicable. Consequently, the amendment to sub-section (5) by paragraph (b) of clause 11 will ensure that the amount of any deduction allowable in respect of the 1978-79 or subsequent income years is determined as if the extension of the expenditure recoupment provisions proposed by clause 15 had been applicable irrespective of the date on which the arrangement was entered into.

The amendments proposed by clause 12 will ensure that the ban on the carry-forward of losses generated under section 36A schemes as proposed by the amendments to clause 11 will correspondingly apply in relation to the primary production losses to which section 80AA applies.

Paragraph (a) of clause 12 will mean that the availability of deductions under sub-section 80AA(4) is also subject to new sub-section 80AA(10).

Paragraph (b) of clause 12 will insert new sub-section 80AA(10) into the Principal Act to ensure that the amount of the deduction allowable under sub-section 80AA(4) in respect of losses incurred in engaging in primary production is determined for 1980-81 and subsequent years as if the remedial amendments to section 36A proposed by clause 5 had always applied.

Clause 13: Deduction under Subdivision to be in addition to certain other deductions

This clause, which relates to the investment allowance, proposes two amendments to section 82AM of the Principal Act that are consequential upon the insertion in that Act, by clauses 8 and 9, of new sections 57AJ and 70A to allow respectively an immediate deduction for the capital cost of storage facilities for petroleum-based liquid or gaseous fuel and for capital expenditure on the connection of a business property to mains electricity.

By paragraph (a) of clause 13 a reference to new section 70A is to be inserted in sub-section 82AM(2) of the Principal Act. The effect of this amendment will be that an investment allowance deduction will not be allowed to a taxpayer in respect of expenditure on the connection of a business property to mains electricity.

Paragraph (b) of clause 13 will insert a new sub-section - sub-section (4) - in section 82AM to preclude a deduction being allowed under the investment allowance provisions in respect of storage facilities for petroleum fuel that qualify for immediate write-off for taxation purposes under proposed section 57AJ.

The amendments that are being made by clause 13 accord with the general rule that the investment allowance is not available in respect of plant that qualifies for immediate deduction under other provisions of the Principal Act.

Clause 14: Deduction under Subdivision to be in addition to certain other deductions

Clause 14 proposes amendments to the Principal Act, consequential on the insertion in that Act by clause 9 of new section 70A which will grant an immediate deduction for capital expenditure on the connection of a business property to mains electricity.

Clause 14 will amend sub-section 82EJ(2) of the Principal Act to make it clear that expenditure on the connection of mains electricity facilities to a property, or on upgrading existing facilities, in connection with the replacement of oil-fired plant does not give rise to the special 40 per cent conversion allowance deduction conferred by section 82EB of the Principal Act.

Clause 15: Interpretation

Clause 15 proposes amendments to section 82KH of the Principal Act which will extend the operation of the "expenditure recoupment" provisions of Subdivision D of Division 3 of Part III so that they will apply to schemes of tax avoidance based on deductions for 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 respect of market research;
·
in acquiring a licence under 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 the production of, or for procuring the production of, master sound recordings.

Examples of recoupment schemes

Simplified examples of the expenditure recoupment schemes against which the amendments proposed by clause 15 are directed are outlined below.

In the case of the film, gold mining, computer software, afforestation and master sound recordings schemes, the recoupment arrangements commonly derive from the (often inflated) expenditure being financed substantially by a "non-recourse" loan. This is a loan in respect of which the lender has no recourse beyond particular income or particular assets of the borrower. The schemes are structured on the basis that little, if any, income will be received or the assets will be, in comparison with the amount of the loan, of nominal value. To the extent, therefore, that the loan is for those reasons not repaid, the taxpayer effectively recoups the claimed outlay. The recoupment arrangements used in the consumable supplies, market research and share trading schemes involve the (again often inflated) expenditure being financed by a debt or loan that is acquired by the taxpayer or an associate for a nominal amount. In the case of the commission scheme, the recoupment arrangement involves the expenditure being financed substantially by a loan which the taxpayer will never be called on to repay.

Film schemes

The film schemes seek to obtain deductions under either section 51 or Division 10B of the Principal Act for amounts formally expended in the production or marketing of a film or in the acquisition of a copyright or licence in a film.

Losses or outgoings incurred in producing or marketing films or in acquiring copyrights or licences in films may be deducted under section 51 - the general deduction provision of the law - if they satisfy the tests of the section, i.e., put broadly, if they represent losses or outgoings incurred in gaining or producing assessable income or in the course of carrying on a business for that purpose, and are not losses or outgoings of a capital nature.

Under Division 10B, capital expenditure (not otherwise deductible) incurred by a taxpayer in acquiring a unit of industrial property (e.g., the rights possessed by a person in or under a copyright subsisting in a film) is deductible by way of equal annual instalments over the "effective life" of the unit. In the case of a unit of industrial property that relates to a copyright subsisting in an Australian film the "effective life" will, by virtue of section 124UA, generally be deemed to be 2 income years.

Examples, in broad terms, of the film schemes developed to exploit these provisions are as follows -

·
A tax-exempt body channels funds - funds that it would otherwise have invested directly - into a film through a non-recourse loan made to a partnership of taxable investors. The partners contribute a relatively small amount from their own resources and that amount, as "geared-up" by the loan, is expended by them and sought as a deduction. Gearing of 3 or 4 to 1 has been common with the result that each investor seeks tax deductions of up to $5 for each $1 funded from his or her own resources. Any income from the film is shared among the various participants. The taxable partners are not entitled to income from overseas exhibition of the film and their effective profit share arising from local exhibition is based simply on their personal contribution. Correspondingly, the tax exempt body's effective profit share is calculated as if the amount lent to the partners had been risk capital contributed by it, as in reality it is.
Should the partners receive income totalling more than their personal contribution the excess would be earmarked for repayment of the loan. The terms of the loan are such that, otherwise, it does not have to be repaid.
·
A producer enters into an agreement with a promoter to pay the promoter, by way of a procuration fee, 94 per cent of all amounts received from investors introduced by the promoter. The promoter then introduces a partnership of investors who engage the producer to produce and market films on their behalf for a fee of $1m. Of that amount, only $150,000 is contributed personally by the partners, the remaining $850,000 being provided by way of a non-recourse loan from a company associated with the promoter. The $940,000 procuration fee is attributed by the production company as a tax-deductible cost of producing the film and is paid to the promoter.
Any income derived from the film in the first year is minimal so that when interest on the loan falls due the partnership, as pre-arranged, defaults and this causes the rights in the film to be transferred to the lender, thereby extinguishing the debt.
·
An associate of a promoter acquires a copyright in a film and disposes of it to an investor for an inflated price. The investor personally contributes 15 per cent only of the purchase price and the balance is left to be paid at a later date. The full purchase price is claimed to be deductible. The investor then assigns rights to 85 per cent of the income to a finance company associated with the promoter which, in consideration of the assignment, agrees to pay the investor's outstanding debt.

Gold mining schemes

The gold mining schemes seek to obtain a deduction under section 77 of the Principal Act for a loss incurred in carrying on a business of gold mining in Australia.

Income from gold mining in Australia is exempt from tax under section 23(o) of the Principal Act. Section 77, however, permits a deduction for a loss incurred in carrying on an exempt business in Australia. Section 77 requires that any profits generated by the exempt business in the succeeding three years, but only up to the amounts allowed as deductions, are to be included in assessable income.

Under one of the schemes that have been put into effect, a partnership of taxpayers seeking to avoid tax obtains a gold mining lease and incurs expenditure to a mining company, owned by the scheme promoter, to undertake the operation of the mine on the partnership's behalf. The amount incurred is financed to the extent of 85 per cent by way of a non-recourse loan made available by the promoter. The lender's only right of recourse to secure repayment of the loan is over the assets of the partnership, allied with a formal right to a share of the borrower's profits.

As pre-arranged, the partnership business fails to generate sufficient income to meet the first interest payment on the loan and, under the terms of the arrangement, the mining lease is assigned in satisfaction of the loan. The partnership gold mining business thus terminates and there can therefore never be a recoupment of the section 77 deduction against profits derived by the partnership.

Consumable supplies scheme

The consumable supplies scheme seeks to obtain a deduction under section 51 for amounts formally expended in the purchase, at a vastly inflated price, of consumable supplies.

A taxpayer who might be a doctor, dentist, manufacturer, commercial house or farmer buys a kit of items required for day-to-day use in the business. A doctor, for example, might purchase a supply of band-aids, surgical tape, surgical soap, cotton wool, etc. The true worth of the kit is about $500 but the doctor is liable to pay $30,000 for it and claims a deduction for that amount under section 51.

The scheme promoter from whom the kit is bought agrees to accept payment in 45 years' time, interest-free. As part of the arrangement the spouse or other associate of the taxpayer guarantees repayment of the $30,000 and pays $2,200 to the promoter as a deposit on the guarantee. This deposit is to bear 6 per cent interest and would, if maintained, accumulate to $30,000 in 45 years' time.

However, it is a further part of the arrangement that for an outlay of $2,200 payable by the guarantor to the promoter the guarantor can acquire the debt of $30,000 from the promoter. The deposit of $2,200 held by the promoter is used for this purpose. This amount represents the taxpayer's (and his or her associate's) only real outlay.

Market research scheme

The market research scheme attempts to obtain a deduction under section 51 for highly inflated expenditure on market research.

Under the scheme, a company is engaged by the taxpayer to carry out market research. For this purpose there are ready-prepared packages adapted for many classes of business. The highly inflated fee for the service is financed by a loan bearing interest at 5 per cent per annum which, together with the principal, is not repayable until 40 years after the loan is taken up. On donating a small amount to a specified charity the taxpayer becomes entitled to purchase the rights under the loan agreement for their current value. Because of the terms attached to the loan, this is a nominal amount only. While this amount represents the taxpayer's real outlay on the service, he seeks a deduction in respect of the total claimed fee.

Computer software scheme

The computer software scheme attempts to obtain deductions under Division 10B for an amount formally expended in the acquisition of an interest in a licence under a copyright subsisting in Australia in computer software.

Capital expenditure incurred on the purchase of a licence (or an interest therein) under a copyright subsisting in Australia in computer software is deductible by way of equal annual instalments over the period of the licence under Division 10B.

Under the scheme, an investor acquires an interest in an exclusive licence under a copyright in certain computer software. The purchase price is payable in instalments. The full purchase price is claimed to be deductible in equal instalments over the 10 year licence period under Division 10B.

The terms of payment of the purchase price are such that when, as part of the scheme, the investor defaults in payment his liability is satisfied by his interest in the licence.

Commission scheme

A taxpayer participating in the commission scheme attempts to obtain a deduction under section 64 of the Principal Act which authorises a deduction for amounts paid as commission for collecting assessable income. (Alternatively, deductions might be sought under the general deduction provision, section 51.)

Participants are formed into a partnership which borrows funds from a company associated with the scheme promoter. The partnership then invests those funds with a unit trust which is also associated with the promoter. The effect of these steps is to create a "matching" situation whereby the debt owed by the partnership is matched by the amount invested by it in the unit trust and the interest payments due by the partnership on its debt are in turn matched by its income entitlement from its investment with the unit trust. Correspondingly, any tax liability arising from its income entitlement is offset by deductions claimed by the partnership in respect of its interest liability.

A loss for tax purposes is then sought to be achieved by the partnership claiming a deduction for commission paid on the collection of its income from the unit trust. The commission is payable to a further company associated with the promoter and is financed by a loan from the unit trust which, as noted above, is itself associated with the promoter. The terms of the loan are such that the principal and interest are repayable only on demand and, because in overall terms the entities associated with the promoter are not out of pocket, it is intended that the partnership will never be called on to meet its liabilities under the loan.

Afforestation scheme

The afforestation scheme seeks a deduction under section 51 for an amount formally expended by way of a management fee in relation to the growing, care and supervision of pine trees.

Under the scheme, participants lease acreage on a pine plantation and engage a management company associated with the scheme promoter to tend to the growing, care and supervision of pine trees on the land. The fee payable to the management company is claimed to be deductible under section 51.

The bulk of the management fee is financed through a loan from a company associated with the promoter. The terms of the loan are such that when as intended the taxpayer defaults, his liability under the loan agreement is satisfied by the assignment to the lender of a percentage of his interest in the pine trees, the value of which is nominal when compared with the amount borrowed.

Share value enhancement scheme

The share trading scheme seeks to obtain a deduction under section 51 for an amount formally expended for the purpose of enhancing the value of shares held as trading stock.

Under one such scheme, an exempt body borrows funds from a finance company associated with the scheme promoter to acquire at a substantial premium the majority of shares in a particular company established for the purposes of the scheme. The balance of the shares are acquired by another entity associated with the promoter which subsequently gifts those shares to a partnership of scheme participants which claims to be carrying on a share-trading business.

The partners borrow funds from a further finance company associated with the promoter for the purpose of paying a substantial fee to the exempt body in return for which that body supports a special resolution converting its majority shareholding to preference shares having no voting rights. The effect of the special resolution is to place control of the company in the hands of the partnership, thereby substantially increasing the value of the partnership's shareholding and the "conversion cost" is claimed as a deduction under section 51.

The scheme is then wound up. The steps involve the exempt body using the conversion fee to discharge its liability in respect of the funds borrowed to acquire the shares. Subsequently, a bonus issue of ordinary shares is made to the exempt body. This returns control of the company to that body and, in turn, renders the shares held by the partnership practically valueless again. The loans to the partners then "collapse" to become virtually valueless to the lender who then assigns the loans to associates of the partners for a nominal amount. This has the dual effect of "recouping" the partners for the expenditure and, because the loans originated from the company, rendering the shares held by the exempt body valueless.

Master sound recordings scheme

The master sound recordings scheme seeks to obtain a deduction under section 51 for an amount formally expended by way of a fee for procuring the production of master sound recordings.

A partnership of investors is formed to carry on a business as financial producers of master sound recordings. The partnership pays a fee to a recording company associated with the scheme promoter as consideration for that company entering into a production contract with an independent recording company. The fee is claimed to be deductible under section 51.

Under the terms of the production contract, the promoter's recording company will over a period of years provide the independent recording company with funds to enable it to produce master sound recordings and in return the independent recording company will pay the partnership a fixed price per master payable out of royalties derived from the recordings. The copyright remains with the independent recording company.

The fee paid by the partnership to the promoter's recording company is substantially leveraged by a loan from a finance company associated with the promoter and security for the loan is limited to a deposit which is to be made with the finance company by the promoter's recording company, representing amounts received as fees from the partnership that have yet to be actually expended in the production of master sound recordings. The amount deposited is equal to the amount of the loan. Little income is derived by the partnership in its first years of operation and provision is made for the scheme to collapse. The finance company has no recourse against the partners personally for repayment of its loan to the partnership. Its recourse is limited to the deposit by the promoter's recording company.

General plan of the legislation

Broadly, the expenditure recoupment provisions deny a deduction for specified types of losses or outgoings where the loss or outgoing is incurred as part of a tax avoidance arrangement under which the taxpayer (or an associate) receives a compensatory benefit, the value of which together with the tax saving sought, effectively recoups the taxpayer for the loss or outgoing.

In meeting this objective the provisions require firstly that the particular loss or outgoing fits the description of "relevant expenditure". That term is defined in sub-section 82KH(1) and prescribes those types of losses or outgoings to which the expenditure recoupment provisions may apply. As presently defined, relevant expenditure includes losses or outgoings incurred in borrowing money, in discharging a mortgage, in purchasing trading stock, in respect of interest or rent or in writing off bad debts.

As a second step it is required that the relevant expenditure be "eligible relevant expenditure" as defined in sub-section 82KH(1F). Relevant expenditure will fit that description if it is incurred under an agreement that has a purpose, other than a merely incidental purpose, of tax avoidance and under the tax avoidance agreement the taxpayer or an associate is to obtain a benefit in addition to the benefits that flow in the ordinary course of events from the incurrence of the loss or outgoing sought to be deducted.

If the additional benefit relating to the particular eligible relevant expenditure, when taken together with the "expected tax saving" in respect of that expenditure, is equal to or greater than the expenditure itself then, by sub-section 82KL(1), a deduction is not allowable for the expenditure. The "expected tax saving" is defined in sub-section 82KH(1) and is to be determined primarily under sub-section 82KH(1B). Broadly, the expected tax saving in respect of an amount of eligible relevant expenditure is the amount by which a person's liability to tax in any year of income would be decreased if deductions were allowable in respect of the eligible relevant expenditure. Where eligible relevant expenditure is incurred by a partnership, sub-section 82KL(1) looks to whether the sum of the additional benefits to the partnership, the partners or their associates and the total expected tax savings of the partners equals or exceeds the partnership expenditure.

The amendments proposed by clause 15 to extend the operation of those provisions will ensure that expenditure of the kinds incurred under the latest variants of expenditure recoupment schemes can be taken as "relevant expenditure" to which the expenditure recoupment provisions can apply. The effect of the amendments will be that a deduction will not be available for expenditure of those kinds where the expenditure is incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date that involves the receipt by the taxpayer (or an associate) of a compensatory benefit, the value of which together with the amount of the tax savings sought in respect of the expenditure, is equal to or greater than the amount of the expenditure.

The measures proposed by clause 15 are explained in detail in the following notes.

Paragraph (a) of sub-clause 15(1) will insert in sub-section 82KH(1) definitions of "consumable supplies" and "exempt business".

"Consumable supplies" is being defined to mean property other than trading stock or choses in action. Its practical scope is limited by the fact that, in operative parts of the legislation, it is only expenditure otherwise deductible under section 51 ("revenue" expenditure) that is covered.

"Exempt business" is defined to mean a business the income (if any) from which would, but for sub-section 77(3), be exempt income. As explained in the introductory note, income from gold mining is exempt from tax by virtue of paragraph 23(o) of the Principal Act. However, where a taxpayer claims a deduction under section 77 in respect of a loss incurred in carrying on a gold mining business, sub-section 77(3) requires any profits generated from the business in the succeeding three years, up to the amount allowed as deductions, to be subject to tax. The definition of exempt business will ensure that the presence of sub-section (3) will not prevent a loss incurred in a gold mining business from being subject to the expenditure recoupment provisions.

Paragraph (b) of sub-clause 15(1) will insert in sub-section 82KH(1) definitions of "film" and "market research".

"Film" is being defined consistently with the definition in Division 10B to mean an aggregate of images, or of images and sounds, embodied in any material.

"Market research" is defined to mean -

(a)
the undertaking of research to ascertain the location, extent, value or other characteristics of the market, or the potential market, for goods or services, and
(b)
the provision of information, advice or assistance in connection with the marketing of particular goods or services or of goods or services generally.

Paragraphs (c) and (d) of sub-clause 15(1) will insert new paragraphs (g), (h), (j), (k), (m), (n), (o), (p), (q) and (r) in the definition of relevant expenditure in sub-section 82KH(1). By virtue of those paragraphs the items of expenditure identified in them are to be taken to be "relevant expenditure".

Paragraph (g) - A loss or outgoing incurred by a taxpayer in respect of the production, marketing or distribution of a film or the acquisition of a copyright subsisting in a film is, to the extent to which a deduction would otherwise be allowable under section 51, to be so taken. As explained in the notes on paragraph (f) of sub-clause 15(1) the acquisition of a copyright subsisting in a film is to be taken to include the acquisition of a licence under a film copyright or any interest in a licence or copyright.
Paragraph (h) - Expenditure incurred by a taxpayer in respect of a "unit of industrial property", being a unit that relates to a copyright subsisting in a film is to be relevant expenditure, to the extent to which the amount of that expenditure would, apart from sub-sections 124R(2) and (3), be taken into account in calculating the residual value of the unit in ascertaining whether a deduction would otherwise be allowable under section 124M or 124N.
The effect of paragraph (h) is that capital expenditure incurred by a taxpayer in producing a film or in purchasing a copyright subsisting in a film, a licence under a copyright subsisting in a film or an interest in such a copyright or licence and in respect of which a deduction would otherwise be allowable under Division 10B will qualify as relevant expenditure. In cases where expenditure in respect of a unit of industrial property is incurred to a person who is not dealing at arm's length with the taxpayer and, for the purposes of Division 10B, a deemed cost of the unit is ascertained in accordance with sub-section 124R(2) or 124R(3), new paragraph (h) looks to the capital expenditure actually incurred in respect of the unit rather than the deemed cost of the unit.
Paragraph (j) - A loss incurred by a taxpayer in a year of income in carrying on an "exempt business" in Australia, to the extent to which a deduction would otherwise be allowable under section 77, will be relevant expenditure.
Paragraph (k) - So too will a loss or outgoing incurred by a taxpayer in the purchase of "consumable supplies", to the extent to which a deduction would otherwise be allowable under section 51.
Paragraph (m) - Here, a loss or outgoing incurred by the taxpayer in respect of "market research", to the extent to which a deduction would otherwise be allowable under section 51, is to be relevant expenditure.
Paragraph (n) - Expenditure incurred by a taxpayer in the acquisition of a "unit of industrial property", being a licence under a copyright subsisting in computer software, to the extent to which the amount of that expenditure would, apart from sub-section 124R(3), be taken into account in calculating the residual value of the unit in ascertaining whether a deduction would otherwise be allowable under section 124M or 124N is to be relevant expenditure. As explained in the notes on paragraph (f) of sub-clause 15(1) the reference to a licence under a copyright subsisting in computer software includes a reference to an interest, whether at law or in equity, in a licence under a copyright subsisting in computer software. Where sub-section 124R(3) would otherwise apply to reduce the expenditure eligible for deduction under Division 10B to an "arm's length" amount, the total expenditure will continue to be treated as the amount of "relevant expenditure".
Paragraph (o) - Relevant expenditure will include a loss or outgoing or expenditure incurred by a taxpayer by way of commission for collecting his assessable income, to the extent to which a deduction would otherwise be allowable under section 51 or 64.
Paragraph (p) - A loss or outgoing incurred by a taxpayer in respect of the growing, care or supervision of trees on behalf of the taxpayer, to the extent to which a deduction would otherwise be allowable under section 51, will be relevant expenditure.
Paragraph (q) - A loss or outgoing incurred by a taxpayer for the purpose of increasing the value of shares held or beneficially owned by the taxpayer as trading stock, to the extent to which a deduction would otherwise be allowable under section 51, is to be relevant expenditure.
Paragraph (r) - In the same category will be a loss or outgoing incurred by a taxpayer in respect of the production by another person of a master sound recording or the procuration of the production by another person of a master sound recording, to the extent to which a deduction would otherwise be allowable under section 51.

Paragraph (e) of sub-clause 15(1) will insert in sub-section 82KH(1) a definition of the term "unit of industrial property" which is used in describing expenditure in respect of which a deduction would otherwise be allowable under Division 10B. As such, the definition adopts that contained in that Division.

Paragraph (f) of sub-clause 15(1) proposes the omission of sub-section 82KH(1AB) and the insertion of three new sub-sections in section 82KH - sub-sections (1AB), (1AC) and (1AD).

The existing sub-section (1AB) is a drafting measure that characterises references in sub-section 82KL(2) and section 80 of the Principal Act to a loss or outgoing incurred by a taxpayer as including a reference to the incurring of a bad debt by the taxpayer. The re-drafted sub-section (1AB) will extend the existing provision so that references in sub-section 82KL(2) and section 80 to a loss or outgoing incurred by a taxpayer will also include a reference to the incurring by a taxpayer of a loss for the purpose of section 77, i.e., to a loss incurred by the taxpayer in a year of income in carrying on an exempt business in Australia.

Sub-section 82KL(2) enables the Commissioner of Taxation to deny a deduction in a year of income for expenditure or a loss or outgoing incurred by a taxpayer where the Commissioner concludes that sub-section 82KL(1) might reasonably be expected to operate at a later time with respect to that expenditure or loss or outgoing. Sub-section 82KL(2) would operate, for example, where it is reasonable to expect that an additional benefit will be received by the taxpayer or an associate in a future year and the effect of taking the amount or value of the additional benefit into account would be that sub-section 82KL(1) would apply, at that future time, to deny a deduction in respect of that expenditure or loss or outgoing. The re-drafted sub-section (1AB) ensures that sub-section 82KL(2) applies with respect to a loss incurred in carrying on an exempt business.

As to the operation of the redrafted sub-section (1AB) with respect to section 80, it has been explained in the notes on clause 11 that the amount of any deduction allowable in respect of a loss incurred in a previous year is, by virtue of paragraphs (j) and (m) of sub-section 80(5), to be determined for the 1978-79 and subsequent years of income as if the expenditure recoupment provisions of Subdivision D were taken to be applicable throughout the year of income in which the loss was incurred. For this purpose, paragraph (m) requires that any deduction is to be determined as if those provisions were applicable in relation to "losses, outgoings or expenditures" incurred at any time. So that paragraph (m), as amended by clause 11, has the intended effect of denying deductions for losses generated under gold mining schemes entered into prior to 25 September 1978, the redrafted sub-section (1AB) operates so that the reference in paragraph (m) to losses being incurred includes a reference to a section 77 loss being incurred.

By paragraph (a) of proposed new sub-section (1AC) a reference to a copyright subsisting in a film is to be taken to include a reference to a licence under a copyright subsisting in a film and to an interest, whether at law or in equity, in respect of a copyright, or in respect of a licence under a copyright, subsisting in a film.

Paragraph (b) of proposed new sub-section (1AC) provides that a reference to a licence under a copyright subsisting in computer software is to be taken to include a reference to an interest, whether at law or in equity, in a licence under a copyright subsisting in computer software.

Proposed new sub-section (1AD) is a drafting measure to ensure that a reference in section 82KH or 82KL to a deduction being allowable or not allowable in respect of relevant expenditure to which paragraph (h) or (n) of the definition of relevant expenditure applies will be construed as a reference to a deduction being allowable or not being allowable under section 124M or 124N of Division 10B in respect of the "residual value" of a unit of industrial property where that residual value would be calculated by reference to that relevant expenditure. This is necessary because deductions under Division 10B are formally allowable in respect of the residual value of a "unit of industrial property" and not the expenditure incurred in acquiring that unit.

Paragraph (g) of sub-clause 15(1) will insert new sub-section (1FB) in section 82KH to extend the operation of sub-section 82KH(1F) as it applies to relevant expenditure in the form of a loss incurred in carrying on an exempt business.

By virtue of sub-section (1F) an amount of relevant expenditure incurred by a taxpayer is to be taken to be an amount of "eligible relevant expenditure" for the purposes of section 82KL if -

(a)
the expenditure was incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date; and
(b)
by reason of the operation of the tax avoidance agreement the taxpayer obtains, in relation to that relevant expenditure being incurred, a benefit or benefits additional to the benefit in respect of which the relevant expenditure was incurred and any other benefit that might reasonably be expected to result if the benefit in respect of which the relevant expenditure was incurred were obtained otherwise than by reason of a tax avoidance agreement.

Further, it is the value of these additional benefits added to the tax saving from the eligible relevant expenditure that determines whether section 82KL will apply to deny a deduction in respect of the expenditure.

Proposed new sub-section (1FB) will ensure that for the purposes of determining under sub-section (1F) whether an amount of relevant expenditure, being a loss incurred in carrying on an exempt business, is an amount of eligible relevant expenditure, any benefit obtained by a taxpayer or an associate (see proposed new sub-section 82KH(1R)) in relation to the incurring by the taxpayer of any loss or outgoing or expenditure that is taken into account in determining the amount of the loss incurred in carrying on the exempt business is to be taken as a benefit obtained by the taxpayer in relation to the incurring of the loss in carrying on the exempt business.

A further effect of new sub-section (1FB) will be that any benefit obtained by the taxpayer or an associate in relation to the incurring by the taxpayer of any loss or outgoing or expenditure that is taken into account in determining the amount of the loss incurred in carrying on the exempt business will (subject to the operation of sub-section (1G) explained below) be taken to be an "additional benefit" for the purposes of the application of section 82KL where that benefit is obtained as part of the tax avoidance agreement under which the loss in carrying on the exempt business was incurred.

Paragraphs (h) and (j) of sub-clause 15(1) will insert new paragraphs (g), (h), (j), (k), (m), (n), (o), (p), (q) and (r) in sub-section 82KH(1G) which identifies, for the purposes of sub-section 82KH(1F), the direct benefit in respect of which relevant expenditure is taken to have been incurred. The direct benefit identified by the new paragraphs are -

·
in a case where the expenditure was incurred in respect of the production, marketing or distribution of a film or the acquisition of a copyright subsisting in a film - the production, marketing or distribution of the film or the acquisition of the copyright by the taxpayer, as the case may be (paragraph (g));
·
in a case where the expenditure was incurred in respect of a unit of industrial property, being a unit that relates to a copyright subsisting in a film - the ownership by the taxpayer of the unit of industrial property (paragraph (h));
·
in a case where the expenditure is a loss incurred by the taxpayer in carrying on an exempt business - any benefit that is obtained by the taxpayer as a result of incurring a loss or outgoing or expenditure that is taken into account in calculating the loss from the exempt business and that would, in the opinion of the Commissioner, be obtained if the loss or outgoing or expenditure had been incurred as part of an agreement other than a tax avoidance agreement (paragraph (j));
·
in a case where the expenditure was incurred in the purchase of consumable supplies - the acquisition of those consumable supplies by the taxpayer (paragraph (k));
·
in a case where the expenditure was incurred in respect of market research - the undertaking of the research, or the provision of the information, advice or assistance, in respect of which the expenditure was incurred (paragraph (m));
·
in a case where the expenditure was incurred in respect of the acquisition of a unit of industrial property, being a licence under a copyright subsisting in computer software - the acquisition by the taxpayer of the unit of industrial property (paragraph (n));
·
in a case where the expenditure was incurred by way of commission for collecting assessable income - the collection on behalf of the taxpayer of his or her assessable income (paragraph (o));
·
in a case where the expenditure was incurred in respect of the growing, care or supervision of trees on behalf of the taxpayer - the growing, care or supervision of the trees on behalf of the taxpayer (paragraph (p));
·
in a case where the expenditure was incurred for the purpose of increasing the value of shares held as trading stock - the increase in the value of those shares (paragraph (q)); and
·
in a case where the expenditure was incurred in respect of the production of, or the procuration of the production of, a master sound recording - any amount payable to the taxpayer in respect of the master sound recording, being an amount that would be payable if the expenditure had been incurred as part of an agreement other than a tax avoidance agreement (paragraph (r)).

Paragraph (k) of sub-clause 15 (1) will insert 2 new sub-sections in section 82KH - sub-sections (1JC) and (1JD) which will modify the operation of sub-sections 82KH(1H) and (1J) respectively. Those latter sub-sections deal specifically with additional benefits in the forms respectively of acquisition of a creditor's rights under a loan for a consideration less than the amount of the loan and the forgiveness of a debt.

Sub-section 82KH(1H) applies where, as part of a tax avoidance agreement, a taxpayer has incurred an amount of relevant expenditure and, in relation to the incurring of that expenditure, the taxpayer or an associate acquires from another person the right to recover the amount of a debt owed to that other person. In those circumstances the taxpayer is to be deemed, for the purposes of sub-section (1F), to have obtained a benefit under the tax avoidance agreement in relation to that expenditure if, because of the tax avoidance agreement, the consideration (if any) paid or given by the taxpayer or an associate to acquire that right is less than the amount of the debt. The value of the benefit thus deemed to be obtained is the amount by which the debt exceeds any consideration given or paid.

Proposed new sub-section (1JC) will ensure that, where the relevant expenditure is a loss incurred in carrying on an exempt business, sub-section (1H) applies equally to any acquisition of a creditor's rights in relation to the incurring by the taxpayer of a loss or outgoing or expenditure that is taken into account in calculating the loss incurred in carrying on the exempt business.

Proposed new sub-section (1JD) will similarly modify the operation of sub-section 82KH(1J) which applies where, as a result of a tax avoidance agreement, an amount of relevant expenditure was incurred by a taxpayer and in relation to the incurrence a debt becomes or became owing by the taxpayer or an associate to another person, and where it is reasonable to expect that the taxpayer or associate will not be called upon to repay that debt. The purpose of sub-section (1J) is to ensure that where that reasonable expectation can be formed the taxpayer can, at that time, be taken to have obtained a benefit equal to the amount of the debt that will not be repaid.

By virtue of proposed new sub-section (1JD), sub-section (1J) will also apply, in the case of relevant expenditure being a loss incurred in carrying on an exempt business, to debts which became owing in relation to the incurring by the taxpayer of a loss or outgoing or expenditure that is taken into account in calculating the loss incurred in carrying on the exempt business.

Paragraphs (m) and (n) of sub-clause 15(1) will insert new paragraphs (g), (h), (j), (k), (m), (n), (o), (p), (q) and (r) in sub-section 82KH(1L) which operates in conjunction with sub-section 82KH(1K) within the framework of the expenditure recoupment provisions.

Sub-section (1K) operates to ensure that, where 2 or more amounts of the same class of relevant expenditure are incurred by a taxpayer under the same tax avoidance agreement, and in respect of the same benefit, those amounts are to be treated as one amount of relevant expenditure. Sub-section (1L) specifies, for the purposes of sub-section (1K), circumstances in which 2 or more amounts of relevant expenditure are to be treated as being incurred in respect of the same benefit.

The new paragraphs in sub-section 82KH(1L) specify that 2 or more amounts of relevant expenditure are to be treated as being incurred in respect of the same benefit in the following circumstances -

·
in a case where 2 or more amounts were incurred in respect of the production, marketing or distribution of a film or the acquisition of a copyright subsisting in a film - if those amounts were incurred in respect of the same film (paragraph (g));
·
in a case where 2 or more amounts were incurred in respect of a unit of industrial property, being a unit that relates to a copyright subsisting in a film - if those amounts were incurred in respect of the same film (paragraph (h));
·
in a case where 2 or more losses were incurred in carrying on an exempt business - if those losses were incurred in carrying on the same business (paragraph (j));
·
in a case where 2 or more amounts were incurred in the purchase of consumable supplies - if those amounts were incurred in the purchase of the same property (paragraph (k));
·
in a case where 2 or more amounts were incurred in respect of market research - if those amounts were incurred in respect of the same market research (paragraph (m));
·
in a case where 2 or more amounts were incurred in respect of the acquisition of a unit of industrial property, being a licence under a copyright subsisting in computer software - if those amounts were incurred in respect of the same unit of industrial property (paragraph (n));
·
in a case where 2 or more amounts were incurred by way of commission for collecting assessable income - if those amounts were incurred in respect of the same source of assessable income (paragraph (o));
·
in a case where 2 or more amounts were incurred in respect of the growing, care or supervision of trees on behalf of the taxpayer - if those amounts were incurred in respect of trees on the same parcel of land (paragraph (p));
·
in a case where 2 or more amounts were incurred for the purpose of increasing the value of shares held as trading stock - if those amounts were incurred in respect of the same shares (paragraph (q)); and
·
in a case where 2 or more amounts were incurred in respect of the production of, or the procuration of the production of, a master sound recording - if those amounts were payable to the same person (paragraph (r)).

Paragraph (o) of sub-clause 15(1) proposes the omission of sub-section 82KH(1P) and the insertion of 3 new sub-sections in section 82KH - sub-sections (1P), (1Q) and (1R).

The existing sub-section (1P) is designed to ensure that any benefit obtained by an associate of a taxpayer under a tax avoidance agreement in relation to relevant expenditure being incurred by the taxpayer under the agreement is treated as a benefit obtained by the taxpayer under the agreement in relation to that relevant expenditure being incurred. It also ensures that in the case of relevant expenditure being a bad debt, any benefit obtained by an associate under a tax avoidance agreement in relation to the making of the loan in respect of which the bad debt was incurred will also be treated as a benefit obtained by the taxpayer under that tax avoidance agreement in relation to that relevant expenditure being incurred. "Associate" is defined in sub-section 82KH(1) of the Principal Act and refers, broadly, to those persons who by reason of family or business connections might appropriately be regarded as one with the taxpayer. It specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate and a partnership.

The redrafted sub-section (1P) will re-enact the terms of the existing sub-section (1P) in relation to relevant expenditure other than a bad debt or a loss incurred in carrying on an exempt business.

Proposed new sub-section (1Q) will re-enact the terms of the existing sub-section (1P) in relation to relevant expenditure in the form of a bad debt.

Proposed new sub-section (1R) will ensure that in the case of relevant expenditure being a loss incurred in carrying on an exempt business, any benefit obtained by an associate under a tax avoidance agreement in relation to the incurring by the taxpayer under the agreement of the loss in carrying on the exempt business or of a loss or outgoing or expenditure that is taken into account in calculating the loss from the exempt business will be treated as a benefit obtained by the taxpayer under the agreement in relation to that relevant expenditure being incurred.

Sub-clauses (2) and (3) of clause 15 ensure that the extension of the expenditure recoupment provisions proposed by sub-clause (1) to counter the latest variants of recoupment schemes applies with effect from 24 September 1978.

By virtue of sub-clause (2) the extended provisions will apply in relation to a loss or outgoing or expenditure of the kind referred to in new paragraph (g), (h), (k), (m), (n), (o), (p), (q) or (r) of the definition of "relevant expenditure" in sub-section 82KH(1) if that loss or outgoing or expenditure was incurred after 24 September 1978.

By sub-clause (3) the extended provisions will apply to relevant expenditure in the form of a loss incurred in carrying on an exempt business if the loss was incurred in the year of income in which 25 September 1978 occurred or any subsequent year of income. A loss incurred in the year of income in which 25 September 1978 occurs will, however, be excluded from the operation of the expenditure recoupment provisions where any loss or outgoing taken into account in determining the amount of the loss was incurred prior to 25 September 1978.

By reason of the amendments made by sub-clauses 15(2) and (3) and of sub-section 82KH(1F), the expenditure recoupment provisions will apply to relevant expenditure of the kinds incurred under the latest schemes where that expenditure is incurred by a taxpayer after 24 September 1978 under a tax avoidance agreement entered into after that date.

By sub-clause (4) of clause 15, a taxpayer will, in specified circumstances, be given the right to extend the grounds of an objection which he has previously lodged against an assessment to include the ground that section 82KL does not apply to deem a deduction not to be allowable to the taxpayer.

The amendments proposed by sub-clause 15 (1) to counter the additional identified expenditure recoupment schemes apply generally to relevant expenditure incurred by a taxpayer after 24 September 1978. Consequently, once the amending Act receives the Royal Assent, section 82KL may operate to deny deductions claimed in respect of relevant expenditure incurred under these schemes in the 1978-79 or 1979-80 income years as well as in the current (1980-81) and subsequent years.

The enactment of the proposed amendments will provide a basis for denying a deduction sought as a result of participation in these latest identified recoupment schemes should the existing law be found to be defective for this purpose. However, by virtue of the operation of sections 185 and 190 of the Principal Act, which limit a taxpayer's grounds for contesting an assessment to those stated in a valid objection, it is possible that a taxpayer could be precluded from contesting the application of section 82KL to the particular deduction claimed.

To prevent this possibility, sub-clause 15(4) will give a taxpayer who has previously lodged a valid objection against the disallowance of a loss or outgoing of a kind now proposed to be brought within the scope of section 82KL, the right to apply to the Commissioner to amend the objection to include the ground that section 82KL does not apply to deny a deduction in respect of that loss or outgoing. An application for this purpose must be in respect of an objection lodged prior to the date on which the amending Act receives Royal Assent and must be lodged within 60 days of that date.

Clause 16: Subdivision E - Deductions for expenditure in respect of home insulation

This clause proposes the insertion in Division 3 of Part III of the Principal Act of a new Subdivision - Subdivision E - comprising new sections 82KM to 82KS. The new Subdivision contains measures to provide an income tax deduction for amounts paid by certain resident taxpayers in respect of expenditure on the thermal insulation of their homes.

Introductory note

Broadly stated, proposed Subdivision E will authorise concessional deductions in respect of amounts paid by a resident taxpayer for the thermal insulation of his or her first home.

A deduction will be available in respect of amounts paid by a resident taxpayer for the cost of insulating his or her home where the taxpayer or his or her spouse is the owner or long term lessee or licensee of the relevant property and the home is the sole or principal residence of the taxpayer in Australia (or the taxpayer intends to use the home as his or her sole or principal residence in Australia) and neither the taxpayer nor, in the case of married couples, the taxpayer or his or her spouse, has previously owned (or been the long term lessee or licensee of) another dwelling in Australia which was used as his or her home.

The new provisions will apply to amounts paid by a taxpayer for thermal insulation materials and for their installation in a new or second-hand dwelling that he or she acquired (and/or the taxpayer's spouse acquired) on or after 1 October 1980, otherwise than under a contract entered into before that date, or a dwelling the construction of which by the taxpayer (and/or the spouse of the taxpayer) commenced on or after that date.

Amounts expended by an eligible taxpayer for the insulation of extensions to a dwelling will qualify for the new deduction if the taxpayer is, or would have been, eligible for a deduction in respect of an amount paid for the insulation of the original dwelling.

Further details of the home insulation concession are provided in the following notes.

Section 82KM: Interpretation

Proposed sub-section 82KM(1) defines terms used in Subdivision E:

"dwelling" means, in effect, a unit of residential accommodation constituted by or contained in a building, or a part of a building, in Australia or such a unit of residential accommodation that is in the course of construction in Australia.
"install in" is defined as including affix to.
"stratum unit" means a unit on a unit plan registered under a law providing for the registration of unit titles or strata titles. The definition covers both vertical development (e.g., a flat or home unit) and horizontal development (e.g., a villa-home type of construction).
"taxpayer" means a taxpayer (other than a company) who is a resident of Australia. The effect of the definition is to restrict the allowance of the concession to natural persons who are residents of Australia.
"thermal insulation material", in relation to a dwelling, is defined as meaning any material or substance installed in a dwelling primarily and principally for the purpose of reducing the transfer of heat between the inside and outside of the dwelling. Paragraphs (a) and (b) of the definition operate to exclude materials or substances that have in whole or part a structural function or a decorative function and any materials or substances that are used in connection with such a material or substance.

Sub-sections 82KM(2) and (3) set out the rules that are to determine whether a person has a relevant interest in a dwelling, that is, whether the person is the owner or long term lessee or licensee of the property.

Sub-section (2) specifies the circumstances under which a person, or two or more persons jointly, are to be taken, for the purposes of Subdivision E, to acquire, hold or have held either "a prescribed interest" in land or in a stratum unit (paragraph (a)) or "a proprietary right" in respect of a flat or home unit under a sub-divided residence scheme (paragraph (b)).

Sub-paragraph (a)(i) specifies, in effect, that a person who acquires, holds or held an estate in fee simple in land or in a stratum unit, will be taken to acquire hold or to have held a prescribed interest in the land or unit. It also means that where 2 or more persons acquire, hold or held an interest in fee simple as joint tenants or tenants in common those persons are to be taken as acquiring, holding or having held a prescribed interest in that land or a stratum unit.

Sub-paragraph (a)(ii) refers to the situation where a person's interest in land or in a stratum unit is acquired or held, either solely or jointly with others, under a lease or licence. For the purposes of Subdivision E, a lease or licence will qualify as a prescribed interest in the land or stratum unit where the Commissioner of Taxation is satisfied that the lease or licence gives the person reasonable security of tenure for a period of not less than 10 years.

Sub-paragraph (a)(iii) ensures that a person who acquires, holds or held a sole or joint interest in land or in a stratum unit, as purchaser of an estate in fee simple under a contract that provides for payment of the purchase price, or part of the purchase price, to be made at a future time or by instalments, will be taken to acquire, hold or have held, as the case requires, a prescribed interest in the land or the stratum unit for the purposes of Subdivision E.

Sub-paragraph (a)(iv) is designed to take into account situations where a person acquires, holds or held a sole or joint interest in land or a stratum unit as a purchaser of a right to be granted a lease of that land or unit under a contract that provides for payment of the purchase price, or part of it, to be made at a future time or by instalments. A person entering into such a contract will be taken to acquire, hold or have held a prescribed interest in the relevant land or unit where the Commissioner is satisfied that the lease offers reasonable security of tenure for a period of not less than 10 years.

Paragraph (2)(b) refers to a person who acquires, holds or held sole or joint rights of occupancy in a flat or home unit through ownership of, or a contract to buy, shares in a company owning the building containing the flat or home unit (or, in the case where the building containing the dwelling is in the course of construction, will own the building when it is complete). In these circumstances a taxpayer is, for purposes of Subdivision E, to be taken as acquiring, holding or having held "a proprietary right" in the flat or home unit. Paragraph (b) ensures that a taxpayer who purchases shares in a home unit company so as to establish rights of occupancy in a flat or home unit will be able to satisfy one of the necessary conditions for obtaining a deduction under Subdivision E in respect of amounts that he or she pays for insulation of the flat or home unit.

Sub-section 82KM(3) defines what is meant by a "relevant interest" in a dwelling. A person is deemed to have such an interest (or in other words to be the "owner" of the dwelling) if, whether alone or with others, that person acquires or holds a prescribed interest in the land on which the dwelling is situated, a prescribed interest in a stratum unit in relation to the dwelling or, in the case of a flat or home unit, a proprietary right in respect of the dwelling.

Under sub-section 82KM(4) a reference in proposed Subdivision E, to an amount paid by a taxpayer in respect of thermal insulation material in relation to a dwelling is to include amounts paid by the taxpayer for the installation of the material in the dwelling.

Sub-section 82KM(5) requires a reference in Subdivision E to the spouse of the taxpayer to be taken for the purposes of the Subdivision as a reference to the person who is legally married to the taxpayer, but not if the person is living separately and apart from the taxpayer. It also extends to a person living with the taxpayer as the husband or wife of the taxpayer on a bona fide domestic basis although not legally married to the taxpayer.

Section 82KN: Payments to which Subdivision applies

Section 82KN sets out the general conditions under which an amount paid by a taxpayer in relation to the thermal insulation of his or her home, or the home of the taxpayer's spouse or both of them, will fall to be treated as deductible under the Subdivision.

Paragraph (a) of sub-section (1), when read in conjunction with paragraph (b), sets out the first of the conditions. This is that at the time the payment is made the insulation material was installed in the relevant dwelling or the taxpayer intended the material to be installed in the dwelling.

Paragraph (b) imposes the requirement that the taxpayer or his or her spouse must hold a "relevant interest" in the dwelling in which the insulation is installed (or intended to be installed) at the time when the payment is made. What is meant by a "relevant interest" in a dwelling has been explained in the notes on proposed sub-sections 82KM(2) and (3).

Under paragraph (1)(c), the new concession is to be available in respect of amounts paid for the insulation of a dwelling in two circumstances. The first is where the dwelling was constructed by the taxpayer or his or her spouse and the construction was commenced on or after 1 October 1980. The other is where the dwelling was first acquired by the taxpayer, or his or her spouse, on or after 1 October 1980 otherwise than under a contract entered into before that date.

Paragraph (1)(d) imposes the further condition for the concession that the relevant payment must be for the insulation of a dwelling that was, at the time the payment was made, used by the taxpayer as his or her sole or principal residence or intended to be used for that purpose. An amount paid for the insulation of a caravan, or holiday flat or cottage will not be an amount to which Subdivision E applies.

By new sub-section 82KN(2) a payment by a taxpayer for the thermal insulation of a dwelling is not to qualify for deduction if the payment is made under a contract that was entered into after the insulation was installed in the dwelling. This provision has the effect of excluding from the concession any part of the purchase price of a dwelling that is in respect of insulation that was installed in the dwelling by the vendor or a previous owner.

Sub-sections 82KN(3) and (4) in conjunction operate to restrict the application of Subdivision E to amounts paid by a taxpayer for the thermal insulation of a dwelling that is the first home of the taxpayer, or in the case of a couple, the first home of either of them. The concession will not apply to a payment in respect of the insulation of a dwelling if at any time before the payment was made the taxpayer, or his spouse at that earlier time, used as a sole or principal residence another dwelling in Australia in which either the taxpayer or his then spouse held a relevant interest.

Sub-section 82KN(5) is a safeguard against abuse of the availability of deductions for amounts paid by a taxpayer for insulation materials that have not been installed in a dwelling at the time of payment on the basis that the taxpayer intends to have the materials installed in the dwelling.

By sub-section (5), Subdivision E will not apply, and will be deemed never to have applied, to an amount paid by a taxpayer for thermal insulation material if the material is subsequently disposed of by the taxpayer or used by the taxpayer for a purpose other than that for which the deduction was allowed.

Sub-section 82KN(6) relates to the provision under sub-section 82KN(1) whereby Subdivision E may apply to payments made for insulation that the taxpayer intends to use in his sole or principal residence, e.g., where insulation is paid for while the dwelling is in the course of construction.

Sub-section (6) operates so that Subdivision E does not apply and is deemed never to have applied in respect of an amount paid by a taxpayer for thermal insulation materials, if at the time of payment, the dwelling was not used by the taxpayer as his or her sole or principal residence and, without the dwelling being so used, at any time after the payment any of the following events occur -

·
the taxpayer or his or her spouse sell or otherwise dispose of the dwelling;
·
the taxpayer or his or her spouse use the dwelling for any purpose other than as a sole or principal residence, or a related use; or
·
the taxpayer or the spouse of the taxpayer own another dwelling which the taxpayer and his or her spouse or either of them use as a sole or principal residence.

Section 82KO: Recoupment of expenditure

Section 82KO is designed so that where a taxpayer has been recouped, or is entitled to be recouped, in respect of an amount paid by the taxpayer for thermal insulation material, Subdivision E will not apply and will be deemed never to have applied to the amount so paid.

By sub-section (1), Subdivision E will not apply to an amount paid by a taxpayer for thermal insulation material where the taxpayer is, or becomes entitled to be, recouped from a Government or other source, unless the amount recouped forms part of the taxpayer's assessable income. This conforms with similar provisions contained elsewhere in the Principal Act.

Where the recoupment is received in a year of income subsequent to that for which the deduction is allowable, the Commissioner of Taxation is to be authorised to amend the taxpayer' s earlier assessment (see clause 23) .

Sub-section 82KO(2) is necessary so that sub-section (1) may operate in a case where a taxpayer is reimbursed in a single amount that relates partly to an amount paid by the taxpayer for thermal insulation material, and partly to another amount or amounts not subject to Subdivision E, and the amount in respect of which Subdivision E otherwise applies is not specified.

In these circumstances, the Commissioner is to be empowered, by sub-section (2), to determine the extent to which the total amount constitutes a reimbursement of the amount to which Subdivision E otherwise applies.

Sub-section 82KO(3) ensures that where a taxpayer sells or otherwise disposes of a dwelling no part of the sale price that the taxpayer receives for the dwelling is to be treated as a recoupment for purposes of section 82KO. Similarly, any insurance recovery in respect of damage to a dwelling will not be treated for the purposes of section 82KO as a recoupment.

Section 82KP: Payment to be allowable deduction

Section 82KP is the operative section which authorises, subject to section 82KQ, a deduction in the year of expenditure for amounts paid by a taxpayer in respect of eligible home insulation costs.

Section 82KQ: Deduction reduced in certain circumstances

Section 82KQ will apply where a taxpayer pays an amount for the insulation of his or her dwelling and only part of that dwelling is used by the taxpayer as his or her sole or principal residence. An example of where this section would apply is where part of the dwelling is used as a shop.

In such a case the Commissioner of Taxation will be required to allow a deduction based on his determination of how much of the total amount paid by a taxpayer during a year of income for thermal insulation is related to the use of the dwelling as the private residence of the taxpayer.

Section 82KR: Non-arm's length transactions

Section 82KR contains anti-avoidance provisions designed to counter any attempted exploitation of the new deduction through inflation of the amount paid by the taxpayer for the purchase or installation of thermal insulation material. Its provisions closely follow other provisions in the Principal Act, e.g., those contained in section 75B (expenditure on conserving or conveying water).

The section is to apply, broadly, where, in relation to an amount paid for the purchase or installation of thermal insulation material, the Commissioner is satisfied that the parties were not dealing with each other at arm's length and the amount sought to be deducted exceeds the amount that would have been paid had the parties dealt with each other on an arm's length basis. In these circumstances, the section operates to deem the arm's length amount to be the amount paid by the taxpayer for the relevant purpose.

Section 82KS: Variation of Contracts

A person is not to be entitled to the deduction for home insulation costs if he or she acquired the relevant dwelling under a contract entered into before 1 October 1980. Section 82KS is designed to safeguard against re-arrangement of contracts to avoid that limitation.

The section is modelled on similar provisions elsewhere in the Principal Act and, shortly stated, prevents a deduction where there is a re-negotiation on or after 1 October 1980 of a contract entered into before that date, where the re-arrangement is to obtain for the taxpayer a deduction under Subdivision E.

The safeguard will operate where the Commissioner is satisfied that a taxpayer entered into a contract of arrangement for the acquisition of a relevant interest in a dwelling (referred to as the "original dwelling") before 1 October 1980 and, on or after that date, in an attempt to qualify for a deduction of an amount paid or expected to be paid for thermal insulation material in respect of that dwelling, the taxpayer entered into another contract (whether with the same or another person) for the acquisition of the original dwelling or another dwelling intended by the taxpayer to be in lieu of the original dwelling. In these circumstances, any relevant interest that the taxpayer acquires shall be taken to have been acquired under a contract entered into before 1 October 1980.

Clause 17: Present entitlement arising from reimbursement agreement

Introductory note

It is proposed by clause 17 to strengthen the operation of section 100A, which was inserted in the Principal Act in 1979 to counter certain trust stripping arrangements that were designed to enable trading profits and other income derived by trusts to escape tax completely. The amendments now proposed are designed to overcome variants of the arrangements against which the section is directed and which were foreshadowed in a ministerial statement on 5 March 1980.

Under the income tax law, income of a trust estate in respect of which a beneficiary is "presently entitled" is taxable in the hands of the beneficiary (section 97) or, in the case of a beneficiary who is under a legal disability, in the hands of the trustee as agent for the beneficiary (section 98). The trustee of the trust estate is directly liable to tax only on the balance of the trust income (section 99 or 99A), broadly, on so much of the income of the trust estate to which no beneficiary is presently entitled. For these purposes, where the trustee has a discretion to pay or apply income for the benefit of one or more specified beneficiaries and the trustee exercises the discretion in favour of a particular beneficiary, that beneficiary is taken to be presently entitled to the amount paid to or applied on his or her behalf (section 101).

The avoidance arrangements that gave rise to section 100A turned on the operation of section 97 and 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 did not pay tax on the income for one reason or another. The arrangements were such that the bulk of the trust income was effectively returned by the introduced beneficiary to the "real" beneficiary in a non-taxable form, e.g., by the receipt of a loan that was never intended to be repaid or by a capital settlement of funds.

To counter these arrangements, section 100A provides that income to which a beneficiary is nominally made presently entitled under such arrangements (referred to in the section as a "reimbursement agreement") 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, under section 99A.

The amendments proposed by this Bill are to counter variations of those earlier arrangements that have been devised to exploit the exclusion from the operation of section 100A 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 further schemes seek to exploit that exclusion through arrangements whereby income of the head trust is distributed, either directly or through interposed trusts, to a beneficiary in the capacity of trustee of another trust estate in circumstances where the beneficiary-trustee does not need to redistribute the income to avoid any liability to tax. One way in which this has been sought to be achieved is by introducing as the "nominal" beneficiary a trustee of a trust estate which has available tax-deductible losses to offset against the income diverted to it from the head trust.

Yet other schemes "create" current year deductions for the beneficiary-trustee to offset against the income. One of the schemes used for this purpose involves the operating trust making a distribution of the income on which it is seeking to avoid tax (say $100,000) to a specially established unit trust. A third trust controlled by the scheme promoter, which claims to be a trader in shares and securities, acquires a special class of units in the unit trust for $85,000. The units entitle the third trust to a once-and-for-all distribution of $100,000. The distribution of $100,000 via the first and second trustees frees those trustees from tax. The $85,000 subscribed by the third trustee for the special units is used to "reimburse" the people who would otherwise have expected to receive distributions as beneficiaries of the first trust, but this reimbursement is in a capital form, e.g., through a "collapsible loan" - a loan that is never intended to be repaid. The once-and-for-all distribution to the third trustee renders the special units held in the second trust valueless and it is a part of the scheme's design that a tax deductible loss on security trading is thus created for the third trustee equal to the $85,000 paid for those units.

The design is that by parting with a promoter's fee of $15,000 - the difference between the $85,000 subscribed by the third trust for the special units and the $100,000 distribution made on those units - the first trust and its intended beneficiaries avoid tax on income of $100,000.

The promoter, through his trust, makes a net gain of $15,000 and, while the $100,000 distribution constitutes assessable income of that trust, a deduction of $85,000 is claimed by it in respect of the "trading loss" on the units acquired under the scheme.

To counter these further tax avoidance devices, it is proposed by this Bill that the exclusion from the operation of section 100A 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 trustee, as income to which a beneficiary of that trust estate is in turn presently entitled.

The effect of the revised beneficiary-trustee exclusion will be to ensure 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 for income tax purposes as not being presently entitled to the relevant trust income. Where a beneficiary of a trust estate is deemed not to be presently entitled to any income of the trust estate by virtue of the revised operation of section 100A, the trustee of that trust estate will be subject to tax on that income under section 99A at the maximum personal rate (60 per cent for 1980-81).

The broad operation of section 100A as proposed to be amended by the Bill will be as follows:

·
Where a beneficiary of a trust estate is presently entitled to any income of the trust estate (otherwise than in the capacity of a trustee of another trust estate) and the present entitlement arose out of a reimbursement agreement - the beneficiary will be deemed not to be presently entitled to that income and the trustee of the trust estate will be taxed on the amount of trust net income concerned under section 99A.
·
Where a beneficiary of a trust estate is presently entitled to income of a trust estate in the capacity of a trustee of another trust estate and the present entitlement arose out of a reimbursement agreement - the beneficiary-trustee will be deemed not to be presently entitled to so much of that income as is not passed on as income to which a beneficiary of the second trust estate is in turn presently entitled and the trustee of the first-mentioned trust estate will be subject to tax under section 99A.

The effect of the proposed amendments in the case of the three-trust chain previously outlined will be to continue to exclude the distribution of $100,000 passing between the first and second trusts from the operation of section 100A, because a further beneficiary (i.e., the third trustee) is presently entitled to an equivalent amount of income. The distribution by the second to the third trustee will, however, become subject to section 100A if there is any part of the income passing to the third trust to which no beneficiary in that third trust is presently entitled. Thus, if no beneficiary of the third trust is presently entitled to any of the income, section 100A as amended will treat the $100,000 passing between the second and third trusts as income of the second trust to which no beneficiary is presently entitled. The second trustee would be liable for tax on that amount at the maximum rate of personal tax.

If, on the other hand, a person as a nominal beneficiary of the third trust were to be made presently entitled to $15,000 of income of the trust, the second trustee would be taxed on the balance of $85,000 only. The amended section 100A would, however, then operate also to deem the nominal beneficiary of the third trust not to be presently entitled to the remaining $15,000 covered by the arrangement, with the result that the third trustee would be taxed on that remaining amount at the maximum rate of personal income tax.

Further amendments proposed by the Bill are designed to ensure that deductions are not available for relevant losses or outgoings incurred under reimbursement arrangements.

Notes on each of the amendments proposed by clause 17 follow.

Paragraphs (a) and (b) of sub-clause (1) will amend sub-section 100A(3) to terminate the present unqualified exclusion from the operation of that section of income to which a beneficiary in the capacity of a trustee of another trust estate is presently entitled or is deemed by section 101 to be presently entitled. The termination will not apply to income of the trust estate that was paid to or applied for the benefit of a beneficiary-trustee before 6 March 1980.

Paragraph (c) will insert new sub-sections (3A) and (3B) in section 100A to prescribe the limited basis for the beneficiary-trustee exclusion that is to apply from that date.

Proposed sub-section (3A) is to apply where sub-section (1) of section 100A operates to deem a beneficiary in the capacity of a trustee of another trust estate not to be presently entitled to income of a trust estate by virtue of that present entitlement having arisen out of a reimbursement agreement. By proposed sub-section (3A), sub-section (1) will be taken not to apply to so much of that income as is passed on by the trustee as income to which a beneficiary of that other trust estate is in turn presently entitled. To the extent that sub-section (3A) does not apply to override the operation of sub-section (1), that income will be subject to tax in the hands of the trustee under section 99A as income of the trust estate to which no beneficiary is presently entitled.

Proposed new sub-section (3B) applies similarly to exclude from the operation of sub-section 100A(2), income of a trust estate that is paid to, or applied for the benefit of, a beneficiary in the capacity of a trustee of another trust estate to the extent that that income is in turn passed on by the trustee as income to which a beneficiary of that other trust estate is presently entitled.

As noted earlier, the design of proposed new sub-sections (3A) and (3B) is to apply the revised operation of section 100A to the last nominal beneficiary to whom sub-sections (1) or (2) would otherwise apply. Those sub-sections apply with respect to the present entitlements of beneficiaries who are not under a legal disability. Proposed sub-section (3C) ensures, therefore, that for the purpose of reaching the last nominal beneficiary, the exclusion rules embodied in sub-sections (3A) and (3B) apply with respect to income that is passed on by a trustee as income to which a beneficiary who is not under any legal disability is presently entitled.

Paragraph (d) of sub-clause (1) will insert new sub-sections (6A) and (6B) in section 100A so that deductions for losses or outgoings incurred under reimbursement arrangements will not be available to be written off against other income of introduced beneficiaries.

By proposed new sub-section (6A) a loss or outgoing incurred after 5 March 1980 by a beneficiary to whom income is diverted under a reimbursement agreement will not be deductible for income tax purposes where the loss or outgoing was incurred as part of or in connection with the reimbursement agreement.

Proposed new sub-section (6B) ensures that where, by the operation of sub-section (6A), a deduction is not to be allowable in respect of a loss or outgoing incurred in the acquisition of trading stock, the cost price of the trading stock for the purposes of Subdivision B of Division 2 of Part III of the Principal Act (i.e., the trading stock provisions of the Principal Act) will be taken to be nil.

By sub-clause (2), the amendments effected by sub-clause (1) will, subject to the exclusion of income paid to or applied for the benefit of a beneficiary before 6 March 1980, apply with respect to assessments for the 1979-80 and subsequent years of income.

Clause 18: Assessable income diverted under certain tax avoidance schemes

Introductory note

The amendments proposed by clause 18 will insert a new Division - Division 9C - in Part III of the Principal Act. The new Division is designed to counter tax avoidance schemes which seek to exploit the tax-exempt status of various organisations, associations, funds and other bodies, by diverting taxable income to them from individuals and companies who would otherwise bear tax on that income.

Although the details of the schemes vary, the general theme running through them is for an exempt body to acquire property from which income arises that would, but for the body's tax-exempt status, be subject to tax. The exempt bodies involved derive little benefit because they are required, in effect, to reimburse, directly or indirectly, the person from whom the income is diverted, by providing consideration in a tax-free form that is equal to most of the diverted income and which greatly exceeds the consideration that could be expected to be paid by a person not exempt from tax.

A greatly simplified example concerns a person with a right to receive income of, say, $100,000 upon which he would be liable to pay tax of some $50,000, who assigns that right to an exempt body. The latter pays a capital sum of $98,000 for the right, thus making a profit of $2,000 under the arrangement. The individual hopes to save $48,000, being the tax of $50,000 less the net $2,000 retained by the exempt body.

The thrust of the new Division is, broadly, to expose an exempt body to tax at a rate equal to the maximum personal tax rate (currently 60 per cent), on income diverted to it under a tax avoidance agreement which involves the exempt body in providing consideration - for the property giving rise to the income - which substantially exceeds what might reasonably be expected to have been provided if the body were to be taxed on the income at public company rates of tax (currently 46 per cent).

The Division will apply to income arising under tax avoidance agreements entered into after 24 June 1980, the rate of tax being specified in the complementary Income Tax (Diverted Income) Bill 1981.

A broad outline of the structure of the proposed new Division 9C is given below in order to assist understanding of the detailed explanation of each section that is given subsequently.

·
Section 121F contains definitions of terms, and other drafting aids.
·
Section 121G contains operative provisions which identify the tax avoidance agreements and amounts of diverted income covered.
·
Section 121H formally imposes the liability to tax on diverted income at the rate declared by Parliament.
·
Section 121J specifies that the ascertainment of the amount of diverted income is an assessment, thus bringing the Division within usual objection and other machinery provisions of the Principal Act.
·
Section 121K is a technical provision which will ensure that any limit on the amount of Australian tax applicable under a double taxation agreement will not be affected by the proposed new Division.
·
Section 121L will in effect ensure that exempting provisions in any other Commonwealth law do not override the proposed new Division.

Sub-clause (1) of clause 18 will insert new Division 9C after Division 9B of Part III of the Principal Act. Notes on proposed provisions of the new Division follow. Complementary provisions contained in clauses 21, 22 and 23 are explained in notes on the respective clauses.

Section 121F: Interpretation

Sub-section (1) defines various terms used in the new Division. Each term is to have the given meaning, unless the contrary intention appears:

·
"agreement" is defined, as in other anti-avoidance provisions, to mean any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.
·
"consideration" includes a benefit of any kind. Examples of such benefits are the making of a "collapsible" loan, the release of a debt and the purchase of shares or other property for a price in excess of its true value. The definition is relevant for the purposes of the tests in new section 121G as to whether excessive consideration is given for property under a tax avoidance agreement.
·
"diverted income" and "diverted trust income" mean all amounts that are included under the Division in the diverted income of a taxpayer (who is not a trustee of a trust estate) and in the diverted trust income of a trust estate, as the case may be. They are, in effect, amounts of income from property acquired under tax avoidance agreements that would, but for the new Division, be exempt from tax in the hands of the exempt bodies which had acquired the property.
·
"friendly society dispensary" means such a dispensary to which Division 9A of the Principal Act applies. This definition is a technical measure inserted for the purposes of the definition of "public company rate" to make it clear that references to that rate cannot be taken to mean the lower rate of tax payable by a friendly society dispensary.
·
"income" is defined as including all amounts that, but for the "relevant exempting provisions" (also defined), would be assessable income.
·
"property" includes a chose in action, any estate, interest, right or power, whether at law or in equity, in or over property, and any right to receive income.
·
"public company rate" means the rate of tax payable on the taxable income of a company, other than a private company or a friendly society dispensary. At present, that rate is 46 per cent. The rate is used in testing whether consideration given by an exempt body for property acquired under a tax avoidance agreement is excessive by comparison with the consideration that might have been expected to have been given if income derived from the property were taxable at the public company rate.
·
"relevant exempting provision" means those provisions in the Principal Act which exempt the income, or certain income, of various authorities, institutions, organisations, associations, societies and funds, namely paragraphs (d), (e), (ea), (eb), (ec), (f), (g), (h), (i), (j), (jaa), (ja), (jb) and (x) of section 23 and sections 23F and 112A, as well as any provision in another Act which provides that a particular person or body or the income of a particular person or body is not subject to taxation under any law of the Commonwealth. It is income that would otherwise be exempt from tax under these provisions that may be subjected to tax under proposed Division 9C.
·
"right to receive income" means not only a right of a person to have income that will or may be derived (from property or otherwise) paid to the person, but also a right to have the income applied or accumulated for the benefit of, that person. Such rights are included in the definition of property for the purposes of Division 9C - see notes on the definition of that term.
·
"tax avoidance agreement" means an agreement (also defined) that was entered into after 24 June 1980 (the date on which this legislation was foreshadowed) and was entered into or carried out for a purpose of securing for any person the elimination of, or a reduction in, what would otherwise have been that person's liability to income tax in respect of a year of income.
·
"taxpayer" is defined specifically as not including a partnership.

Sub-section (2) of section 121F will ensure that, if an agreement is entered into or carried out for a purpose of reducing tax, and that purpose is only incidental to the purposes for which the parties entered into or carried out that agreement, then that agreement will not be treated as a tax avoidance agreement for the purposes of the Division.

By sub-section (3), an agreement is to be taken to have been entered into or carried out for a particular purpose if any of the parties to the agreement entered into it, or carried it out, for that purpose.

Sub-section (4) will make it clear that a reference in the new Division to a person will be taken as including a reference to a person (including a company) in the capacity of a trustee.

By sub-section (5), a reference to income that is derived from property is to be taken, for the purposes of Division 9C, as including a reference not only to income derived from the property, but also to income derived from the disposal of that property, or any part of or any interest in that property.

Section 121G: Diverted income and diverted trust income

This section contains the operative provisions which establish whether income derived by an exempt body from property acquired under a tax avoidance agreement is to be diverted income and thus come within the scope of proposed Division 9C. If it does, the exempt body or trustee, as the taxpayer referred to in the Division, will be liable to tax on the amount of income diverted to it under the agreement.

Whether or not income will come within the scope of the Division, will depend on a series of tests which are common to each of the situations covered in proposed sub-sections (1) to (6). Sub-sections (1) to (3) cover cases where the exempt body is the taxpayer, not being a taxpayer in the capacity of a trustee, while sub-sections (4) to (6) cover cases where the exempt person is a taxpayer in the capacity of a trustee.

Simply stated, these common requirements are that -

·
the body has acquired property under a tax avoidance agreement or by reason of an act, transaction or circumstance which is part of, connected with, or a result of, a tax avoidance agreement;
·
the body derives income from the property which, but for the body's exempt status, would be included in its assessable income;
·
the income would not, but for the new Division, attract income tax; and
·
the consideration that the Commissioner of Taxation is satisfied was provided by the body for the acquisition of the property is substantially in excess of what it might reasonably be expected to provide if it were liable to tax at the public company rate of tax on the income arising from the property.

Sub-section (7), which is explained later, includes similar tests and operates in cases where the trustee of a trust estate in which an exempt body has acquired a beneficial interest, and in the income of which the exempt body has a vested and indefeasible interest, would but for Division 9C, be effectively exempted from tax under sub-section 98(3) of the Principal Act.

Sub-sections (1) to (3) of section 121G set out the circumstances in which an amount will be included in the diverted income of a taxpayer (an exempt body), that is not a taxpayer in the capacity of a trustee.

Sub-section (1) deals with the situation where the taxpayer acquires property, other than property which is an interest in a partnership or a beneficial interest in a trust estate. Sub-section (2) deals with the situation where the taxpayer acquires property which is an interest in a partnership, while sub-section (3) deals with the situation where the taxpayer acquires property which is a beneficial interest in a trust estate.

As detailed in paragraphs (a) to (d) of each sub-section, sub-sections (1), (2) or (3) will operate to include an amount in the diverted income of a taxpayer where -

·
the taxpayer has acquired the property under a tax avoidance agreement (see notes on the definition of that term) or by reason of an act, transaction or circumstance occurring as part of, in connection with or as a result of such an agreement (paragraph (a));
·
income is derived from the property (see sub-section (1)), or as a result of the ownership of property being an interest in a partnership or trust estate (sub-sections (2) and (3)), and an amount would, but for the operation of the relevant exempting provisions (see notes on the definition of that term), be included in the taxpayer's assessable income of a year of income (paragraph (b));
·
the amount would not otherwise be so included in the taxpayer's assessable income (paragraph (c)); and
·
so much of the amount or value of the consideration (as defined) provided by the taxpayer under or in connection with the agreement as the Commissioner is satisfied was provided in respect of the acquisition of the property, substantially exceeds what might reasonably be expected to have been provided if the taxpayer were liable to pay tax on the income derived from the property at the public company rate of tax applicable for the financial year in which the property was acquired (paragraph (d)).

Paragraph (b) in each of sub-sections (1) to (3) is the same in substance, although for technical reasons they vary slightly. Sub-section (2) applies to acquired property being an interest in a partnership. Income arising from a partnership is included in the assessable income of the partner under Division 5, hence the reference to that Division in paragraph (b) of sub-section (2). Similarly, sub-section (3) applies to acquired property being a beneficial interest in a trust estate, so paragraph (b) of that sub-section refers to Division 6, which relates to trust income.

Sub-sections (4) to (6) set out the circumstances in which an amount will be included in the diverted trust income of a trust estate (an exempt body) where the taxpayer is in the capacity of trustee of the trust estate. As mentioned earlier, the tests and the pattern of the provisions are essentially the same as those applicable under sub-sections (1) to (3), where the taxpayer is not a trustee.

Sub-section (4) deals with the situation where the trustee acquires property, other than property comprising an interest in a partnership or a beneficial interest in another trust estate. Sub-sections (5) and (6) respectively deal with those situations where the property is an interest in a partnership, or is a beneficial interest in another trust estate.

Paragraphs (a), (b), (c) and (e) of each of sub-sections (4) to (6) correspond with their counterpart paragraphs (a), (b), (c) and (d) in sub-sections (1) to (3).

Paragraph (d) is identical in each of sub-sections (4) to (6) and is included to meet the special circumstances of the trustee of a provident, benefit, superannuation or retirement fund to which section 121D of the Principal Act applies. Where section 121D applies, the investment income of a superannuation fund which would be exempt under sections 23(ja) or 23F of the Principal Act, but for the failure of the fund to comply with the "30/20" investment rule contained in section 121C of that Act, is taxed at a rate equal to the public company rate, currently 46 per cent. Paragraph (d) has the effect, where the taxpayer is the trustee of such a superannuation fund, of excluding from income otherwise liable to tax under proposed Division 9C, so much of that income as is taken into account in calculating the investment income of the fund under section 121D.

Sub-section (7) deals with the particular situation where, broadly, an exempt body acquires property comprising a beneficial interest in a trust estate under a tax avoidance agreement, and sub-section 95A(2) of the Principal Act applies to deem the exempt body to be presently entitled to income of the trust estate, because it has an indefeasible vested interest in that income, but sub-section 98(3) of the Principal Act effectively exempts the income.

In these circumstances, the diverted income of the trust estate will, under Division 9C, include the income on which the trustee was not liable to tax under sub-section 98(2), provided that the tests set out in paragraphs (a) to (c) of the sub-section are met.

Paragraphs (a) to (c) correspond in substance to comparable paragraphs of sub-sections (1) to (6) of proposed section 121G. The effect will be that where those paragraphs apply, the relevant amount of income referred to in paragraph (b) will be included in diverted trust income liable to tax under Division 9C.

Sub-sections (8) to (10) contain rules concerning deductions. The general principle is that no deductions are to be allowable in calculating diverted income liable to tax under proposed Division 9C in respect of losses or outgoings incurred under or in connection with a tax avoidance agreement. The only exception is in sub-section (10), which will authorise a deduction, primarily in cases where the tax avoidance effect of the arrangement is countered by sub-section 36A(8), being inserted by clause 5 of the Bill.

Of the operative sub-sections (1) to (7) of section 121G explained earlier, sub-sections (1) and (4) automatically achieve the result that losses and outgoings incurred in deriving income diverted under a tax avoidance agreement are not deductible, because those sub-sections will have the effect of treating the diverted income, that is, the amount before any deduction, as the amount subject to tax.

Sub-sections (2), (3), (5) and (6) of section 121G refer in effect to an exempt body's share of net income arising from a partnership or a trust estate, that is, assessable income less allowable deductions. It is therefore necessary to include provisions to deny a deduction in calculating the net income in circumstances where diverted income arises under a tax avoidance agreement. Sub-section (8) is designed to do this, but only in calculating the share of partnership or trust income of the exempt body, not that of other partners or beneficiaries.

Sub-section (8) specifies that for the purposes of applying operative sub-sections (2), (3), (5) and (6) of section 121G in relation to a taxpayer deriving diverted income under a tax avoidance agreement, no deduction will, in defined circumstances, be allowed for losses and outgoings incurred under or in connection with the agreement in calculating the net income of the relevant partnership or trust estate. These circumstances are those where -

·
a deduction is allowable, in calculating the net income of the partnership or trust estate, in respect of losses or outgoings incurred under the tax avoidance agreement (paragraph (a));
·
if no deduction were so allowable and no relevant exempting provisions were applicable, an amount would be included in assessable income of the taxpayer by reason that the taxpayer owned an interest in the partnership or a beneficial interest in the trust estate or (to cover cases where the income is, under the tax avoidance arrangement, passed through more than one partnership or trust) where the taxpayer owned an interest or beneficial interest in any other partnership or trust estate (paragraph (b)); and
·
if the deduction were so allowed and no relevant exempting provision were applicable, no amount would be included in the assessable income of the taxpayer by reason that the taxpayer owned an interest in a partnership or a beneficial interest in a trust estate referred to in paragraph (b) (sub-paragraph (i) of paragraph (c)), or the amount of assessable income so included would be less than that which would be included if no deduction were allowable and no relevant exempting provision were applicable (sub-paragraph (ii) of paragraph (c)).

Sub-section (9) of section 121G has the same function of denying deductions for losses or outgoings incurred under or in connection with a tax avoidance agreement as sub-section (8), but it applies specifically to cases covered under operative sub-section (7) - that is, to a body deriving a share of the net income of a trust estate which would otherwise be exempt under sub-section 98(3).

Sub-section (10) will have the effect of allowing a deduction, in calculating the net income of a partnership for the purpose of applying Division 9C, for trading stock deemed under sections 36 and 36A of the Principal Act to have been purchased at market value. The exclusion of these deemed outgoings from the outgoings in respect of which a deduction will be denied under sub-sections (8) and (9) achieves this result. A particular example of the application of sub-section (10) is that of a case where an exempt body is involved in an arrangement to which the amendments proposed by clause 5 apply.

Sub-section (11) concerns one of the factors to be taken into account for the purposes of sub-sections (1) to (7) in arriving at the amount of consideration that might reasonably be expected to have been provided by a taxpayer in acquiring property. In determining that consideration, it is to be assumed that the income arising from the property is taxable at the public company rate (currently 46 per cent).

The purpose of sub-section (11) is to preclude any argument that where the income from the property comprises dividends, the tax should, because the rebate on inter-corporate dividends effectively frees them from tax, be taken as nil. The section will achieve this by providing that the possibility that the taxpayer would be entitled to a rebate in respect of the income, e.g., a rebate under section 46 is to be disregarded.

Sub-section (12) of section 121G is to the effect that in determining for the purposes of the section whether an amount would be assessable income (apart from the general exemption available to an exempt body), section 128D of the Principal Act is to be disregarded.

Section 128D relates to dividend and interest withholding tax and is to the broad effect that interest and dividends that are subject to withholding tax are not to be included in assessable income. Dividends or interest derived by a non-resident exempt body would, but for the relevant exempting provisions, be subject to withholding tax and accordingly not included in assessable income, and (because notional inclusion in assessable income is a requirement for an amount of income to be "diverted income") would not be included in diverted income.

The result of sub-section (12) will be that interest or dividends derived by non-residents may fall within Division 9C and be exposed to tax accordingly, if derived as part of a tax avoidance agreement to which the Division applies.

Where interest or dividends are taxed under Division 9C, the amendment proposed by clause 21 of this Bill will ensure that they are not also subject to withholding tax.

Sub-section (13) is intended to prevent avoidance of tax arising under the proposed new Division by the use of a previously established partnership or trust, rather than one set up specially for the purposes of a tax avoidance agreement. It will have the effect that where the taxpayer acquired an interest in a partnership or trust estate prior to the tax avoidance agreement being entered into, and, broadly, the taxpayer's share of income from the partnership or trust estate is increased under the tax avoidance agreement, the property so acquired by the taxpayer before the tax avoidance agreement was entered into will be taken to have been acquired by the taxpayer under the agreement, and any consideration provided by the taxpayer in respect of the increase in its share of the partnership or trust income will be taken to be consideration provided in respect of the acquisition of the property.

The purpose of sub-section (14) is to provide a safeguard against attempts that might be made to circumvent the provisions of Division 9C by an exempt body providing consideration to some person other than the person from whom property is acquired - such as to an associate of that person.

Accordingly, for purposes of the application of section 121G in relation to the acquisition of property by a person under a tax avoidance agreement, the Commissioner of Taxation may act on the basis that consideration provided by an exempt body under or in connection with a tax avoidance agreement was provided by the body in respect of the acquisition of the property from a person, even though the consideration has not formally been provided to that person.

Section 121H: Assessment of diverted income and diverted trust income

Sub-section (1) will apply in the case of a taxpayer not being a taxpayer in a trustee capacity. It is to the effect that the taxpayer is to be assessed and liable to pay tax, at the rate declared by Parliament for the purpose, on the diverted income of the taxpayer of a year of income.

Sub-section (2) will apply where the taxpayer is a taxpayer in the capacity of a trustee of a trust estate. In these cases the trustee is to be assessed and liable to pay tax, at the declared rate, on the diverted trust income of the trust estate of the year of income.

In either case, the rate of tax will be equal to that payable by a trustee under section 99A of the Principal Act, which is equivalent to the maximum rate of personal tax (60 per cent for 1980-81), under proposals in the accompanying Income Tax (Diverted Income) Bill 1981.

The effect of sub-section (3) will be to overcome a restriction imposed by section 121DB of the Principal Act, which is that the income of a provident, benefit, superannuation or retirement fund may be subjected to tax only under Divisions 9B and 11A of Part III of the Principal Act. Accordingly, proposed Division 9C may be applied in assessing the trustee of a superannuation fund on diverted trust income.

Section 121J: Ascertainment of diverted income or diverted trust income deemed to be an assessment

This section will deem the ascertainment of the amount of diverted income or diverted trust income and of the tax payable thereon to be an assessment for all purposes of the Principal Act. This will enable the general provisions of the Act which deal with the making of assessments to operate, including rights of objection and reference to a Board of Review or appeal to a court.

Section 121K: Application of International Agreements Act

This section will deem an amount that is included in diverted income or diverted trust income of a taxpayer to be included in assessable income of the taxpayer for the purposes of sub-section 3(6) and sections 15 and 16 of the Income Tax (International Agreements) Act 1953.

This is relevant to provisions in Australia's double taxation agreements with other countries that require that the Australian tax on designated income of a resident of that country be limited in amount. The sections of the Agreements Act mentioned operate,where that is necessary,to provide a rebate to reduce the level of Australian tax to that required by the agreement. The effect of section 121K will be to allow this mechanism to apply in any case where the income of an exempt body made taxable by Division 9C is income to which an agreement limit applies.

Section 121L: Division applies notwithstanding exemption under other laws

By this section, the proposed Division 9C is to have effect notwithstanding anything contained in any other law of the Commonwealth. The effect will be that exempting provisions in any Commonwealth law other than the Principal Act - which are included in the term "relevant exempting provision", as defined in sub-section 121F(1) will not over-ride Division 9C. The insertion into the Principal Act of the new Division itself overrides any "relevant exempting provision" in the Principal Act.

Sub-clause (2) of clause 18 will have the effect that the amendment made by sub-clause (1) of that clause, namely the insertion of Division 9C, will apply to assessments in respect of income of the year of income in which 24 June 1980 occurred.

A complementary amendment proposed by clause 23 to section 170 of the Principal Act will have the effect of allowing amendments of assessments to be made at any time to give effect to the provisions of Division 9C.

Clause 19: Division not applicable where deduction allowable in accordance with section 57AJ

Clause 19 proposes to insert into the Principal Act a new section - section 122NA - in consequence of the insertion of section 57AJ in the Principal Act by Clause 8.

Section 122N of the Principal Act is to the effect that expenditure of a capital nature incurred by a taxpayer in the course of prescribed mining operations shall not be deductible other than under Division 10 of Part III of the Principal Act. Such expenditure is then written off over a period as designated in the Division. New section 122NA will vary the effect of section 122N and exclude from deductibility under Division 10 any expenditure in respect of a unit of property for which a deduction has been allowed, or is allowable, to the taxpayer under new section 57AJ.

Clause 20: Division not applicable where deduction allowable in accordance with section 57AJ

This clause mirrors clause 19 in relation to capital expenditure incurred on fuel storage facilities by a petroleum mining company. It inserts new section 124ANA into the Principal Act to the effect that a deduction will be allowable under section 57AJ for relevant expenditure on fuel storage facilities, rather than under Division 10AA.

Clause 21: Liability to withholding tax

Sub-clause (1) will amend sub-section 128B(3) of the Principal Act, which relates to exemptions from withholding tax, so as to include a new paragraph (j) in that sub-section. The effect will be that where income is taxed under Division 9C, withholding tax will not also be payable on that income.

By sub-clause (2) the amendment will first apply to assessments in respect of income of the year of income in which 24 June 1980 occurred (that being the date after which the new Division has effect).

Clause 22: Life insurance premiums etc.

This clause will amend sub-section 159R(8) of the Principal Act, which relates to the allowance of a rebate in respect of payments to superannuation funds. The effect of the amendment will be to ensure that payments made by a taxpayer to a fund the income of which would, but for the new Division 9C be exempt from tax, and which would otherwise be treated as rebatable, will continue to be so treated even though income of the fund may be included in diverted income under Division 9C.

Clause 23: Amendment of assessments

This clause will amend section 170 of the Principal Act which governs the power of the Commissioner of Taxation to amend income tax assessments. Sub-section 170(10) provides that nothing in the section is to prevent the amendment of an assessment at any time for the purpose of giving effect to specified provisions of the Act.

Clause 23 as a matter of drafting convenience and to incorporate the new "forward referencing" style, omits existing sub-section 170(10) and inserts a new and expanded sub-section. As amended, sub-section 170(10) will enable the Commissioner to continue to amend an assessment at any time to give effect to those provisions of the Act referred to in the previous sub-section. At the same time the new sub-section (10) will empower the Commissioner to correspondingly amend an assessment to give effect to the anti-avoidance measures proposed by clause 5 with respect to section 36A schemes and clause 18 with respect to schemes involving the exploitation of a body's exempt status for income tax purposes.

The revised sub-section 170(10) will also enable an amendment of an assessment to reduce, e.g., by reason of proposed sub-section 82KN(5), a deduction previously allowed for home insulation expenditure. A further effect will be to enable the amendment of an assessment to disallow a deduction previously allowed in respect of electricity connection costs where the electricity is not used for business purposes within 12 months of the connection (proposed sub-section 70A(6) to be inserted by clause 9). Also covered will be an amendment to ensure that a deduction under the special mining provisions of the Act is not allowed in addition to a deduction under section 57AJ for expenditure on fuel storage facilities.

Clause 24: Formal amendments

This clause proposes that the Principal Act be amended as set out in the Schedule to the Amending Act. These amendments involve changes in drafting style to the Income Tax Assessment Act. These amendments, which do not affect the operation of the Principal Act, will result in the adoption, in references to other provisions of the Principal Act, of a "forward referencing" style.

Clause 25: Arrangements to avoid the operation of clauses 11 and 12

Clause 25, which will not amend the Principal Act, contains safeguarding provisions designed to ensure that the amendments proposed by clauses 11 and 12 are not frustrated by arrangements designed to convert proscribed tax avoidance losses into other losses or outgoings that, formally, have a different character. Although the amendments proposed by clauses 11 and 12 apply with respect both to carry-forward losses generated under section 36A schemes (clause 5) and the further expenditure recoupment schemes of tax avoidance (clause 15), the safeguards are of practical effect only with respect to losses resulting from participation in section 36A schemes.

One example of the arrangements that might be employed in the 1980-81 year of income to frustrate the ban on the carry forward of losses resulting from participation in section 36A schemes prior to the date of effect of the remedial measures proposed by clauses 11 and 12 would involve an amount of income, equal to the tax avoidance loss, being paid by an associate, before the end of the 1980-81 income year, to the individual or partnership that had created the tax avoidance loss. At that point the individual or partnership would, in 1980-81, have matched the tax avoidance loss against the diverted or manufactured income, the object also having been to give the income payment the character of a deductible expense in the hands of the associated entity. That expense, not being formally a loss of the proscribed kind, could then be sought to be applied against income of the associate. In other words, the arrangement would be designed so as to formally transfer to the associated entity the tax benefit that would otherwise have been denied by the operation of the "no carry-forward loss" provisions being inserted by clauses 11 and 12.

Sub-clause (1) of clause 25 is directed against the possible use of this kind of method of circumventing the amendments proposed by clauses 11 and 12 and will ensure that amounts incurred under arrangements of this type do not qualify for deduction under any provision of the income tax law.

For sub-clause (1) to apply, an amount must be included in the assessable income of a recipient taxpayer of the 1980-81 income year (paragraph (a)), and must in whole or in part represent an otherwise allowable deduction to another taxpayer - referred to as an "associated taxpayer" (paragraphs (b) and (c)). A key test (contained in paragraph (f)) is that the amount, or a part of it, was incurred by the associated taxpayer to the recipient taxpayer for a purpose of wholly or partly preventing the operation of clause 11 or 12 of the Bill in relation to the taxpayer, or, where the recipient taxpayer is a partnership, a partner in the partnership, i.e., of frustrating the intention to deny deductions for the carry-forward of the particular tax avoidance losses to which clauses 11 and 12 are applicable.

Paragraphs (d) and (e) of sub-clause (1) contain tests that further define the scope of the sub-clause. Under paragraph (d) it must be the case that, if the amount had not been included in assessable income of the recipient taxpayer, that taxpayer would be deemed to have incurred a loss for the year. Paragraph (e) imposes the contrasting test that if both the amount were not so included, and the various anti-avoidance provisions identified in proposed sub-section 80(6) had been in effect prior to their generally effective operative date, this loss would not have been deemed to be incurred, or would have been smaller in amount. In other words, the paragraphs together make it necessary that the case be one where but for the arrangement sub-section 80(6) would have been applicable.

By reason of sub-clause (4) the loss referred to in paragraphs (d) and (e) is, if the recipient taxpayer is a partnership, a partnership loss for the year, and in other cases, a carry-forward loss under section 80 or section 80AA.

Where all the tests of paragraphs (a) to (f) of sub-clause (1) are satisfied, the sub-clause will operate so that a deduction is not allowable to the associated taxpayer for so much of the relevant expenditure, paid under the arrangement designed to prevent the operation of clauses 11 or 12, as is paid with that purpose in mind.

Sub-clause (2) is directed at a related method of circumventing the operation of clauses 11 and 12 that is made possible by the ability of a taxpayer to value his or her trading stock at either cost, replacement cost or market value.

But for sub-clause (2), a taxpayer who would otherwise have a loss that would be subject to the operation of clause 11 or 12 could value trading stock at the highest value possible under the income tax law with the object of increasing his or her trading profit in 1980-81 by an amount sufficient to absorb the carry-forward loss. The effect of this arrangement would be to substitute the corresponding reduction in the taxpayer's 1981-82 trading profit for the 1980-81 loss that would otherwise have been subject to the operation of clause 11 or 12.

By virtue of sub-clause (2), the tests for which match those of sub-clause (1), where a taxpayer values his or her trading stock under arrangements of this type with a purpose of preventing the operation of clause 11 or 12, the value of that trading stock will at base be taken to be the lowest value at which the trading stock could be taken into account for income tax purposes (paragraph (e)). A higher value will, however, be adopted where the taxpayer satisfies the Commissioner of Taxation that that higher value might reasonably be expected to have been adopted if the trading stock had not been valued with a purpose of preventing the operation of clause 11 or 12.

Sub-clause (3) is a drafting measure under which a reference in sub-clause (2) to the valuation of trading stock by a taxpayer is a reference to the making of an election under section 31 of the Principal Act as to which of the previously mentioned bases of valuation is to be applied in relation to that trading stock. An election as to the basis of valuation of trading stock on hand at the end of a year of income is available under section 31 in respect of trading stock other than livestock. In the case of livestock, section 33 of the Act contains controls on variations in the basis of valuation of such stock.

Sub-clause (4) is a measure that will ensure that the safeguarding provisions operate in circumstances where arrangements of the kind described in sub-clause (1) and (2) are entered into by a partnership. It reflects the fact that tax avoidance losses of the kind to which proposed sub-section 80(6) is to apply are commonly sought to be created through a partnership of taxpayers.

By virtue of section 90 of the Principal Act a partnership loss is calculated as if the partnership were a taxpayer. A partnership loss is not itself treated as a loss for the purposes of section 80 or 80AA of the Principal Act. Rather, each partner in the partnership is entitled to a deduction under section 92 of the Act in respect of his share of the loss incurred by the partnership. That deduction may form the basis for a carry-forward loss for the partner.

Against this background, sub-clause (4) enables the object of sub-clauses (1) and (2) to be achieved by specifying that a reference in sub-clauses (1) or (2) to a loss incurred is both a reference to a loss for the purposes of section 80 or 80AA of the Principal Act and to a partnership loss for the purposes of section 92.

Sub-clause (5) will make clear the power of the Commissioner to amend assessments for the purposes of giving effect to the safeguarding provisions of sub-clauses (1) and (2). By virtue of sub-clause (5) the Commissioner will be authorised to amend an assessment to give effect to those provisions within 3 years after the date on which the tax became due and payable under that assessment, should facts emerge to justify such a course.

PART III - AMENDMENTS OF THE INCOME TAX ASSESSMENT AMENDMENT ACT (NO.6) 1980

Clause 26: Principal Act

This clause provides for the Income Tax Assessment Amendment Act (No.6) 1980 to be referred to in Part III of the amending Act as the "Principal Act".

Clause 27: Application of amendments made by sections 11 and 12

By this clause it is proposed to amend the Income Tax Assessment Amendment Act (No.6) 1980 so that, with effect from 1 January 1976, tourist buses will not be excluded from the investment allowance because of the specific exclusion from the allowance of plant for use in amusement or recreation.

The Income Tax Assessment Amendment Act (No. 6) 1980 amended the provisions of Subdivision B of Division 3 of Part III of the Principal Act to remove, with effect from 1 October 1980, the specific exclusion of plant for use in amusement or recreation.

By clause 27 it is proposed to amend the application provisions of the Income Tax Assessment Amendment Act (No. 6) 1980 so that amendments effected by that Act to remove the amusement or recreation exclusion are, insofar as they apply to tourist buses, to be treated as having had effect from 1 January 1976 rather than 1 October 1980.

The following detailed notes refer only to those investment allowance provisions in respect of which it is necessary, by virtue of clause 27, to relate their operation specifically to the 1 January 1976 commencement date for tourist buses. It should be recognised, however, that other existing conditions of eligibility for the allowance that are independent of any commencement date will apply equally to tourist buses.

Thus, to qualify for the investment allowance, a tourist bus must meet the general tests of being new and for use by the taxpayer wholly and exclusively in Australia and solely for the purpose of producing assessable income. Further, eligibility will be subject to the general exclusion of cars and other light vehicles so that buses designed to carry fewer than nine passengers will continue to be excluded from the allowance. The specific exclusion of plant for use in producing assessable income in the form of rental income by leasing or hiring out property will mean that buses of any size hired out on a "drive-yourself" basis will be similarly excluded. Existing safeguards such as those against the disposal of relevant property within 12 months or use of property for non-qualifying purposes will also be applicable to tourist buses.

Sub-clause (1) of clause 27 will amend section 13 of the Principal Act which enacted commencement and transitional provisions associated with the general removal of the amusement or recreation exclusion effected by sections 11 and 12 of that Act.

Paragraph (a) of sub-clause (1) will amend sub-section 13 to exclude from the operation of the existing commencement and transitional provisions plant to which proposed new sub-section 13(2) is to apply.

Paragraph (b) proposes the insertion of new sub-section 13(2) in the Principal Act to effect the commencement and transitional arrangements associated with the inclusion of tourist buses within the scope of the investment allowance with effect from 1 January 1976.

Paragraphs (a) and (b) of sub-section 13(2) identify plant which is to qualify under the new arrangements as road vehicles designed to carry more than eight passengers and that were previously excluded from the scope of the investment allowance by reason only of the specific exclusion, contained in paragraph 82AF(2)(f) of the Income Tax Assessment Act 1936, of plant for use in connection with amusement or recreation.

The remaining paragraphs of sub-clause 27(1) propose the necessary commencement and transitional arrangements associated with newly eligible plant identified in paragraphs (a) and (b), i.e., tourist buses.

As with plant generally, a leasing company which leases out a tourist bus is to be entitled to forgo the right to all, or part, of the investment allowance in favour of the lessee-user. For this purpose section 82AD of the Income Tax Assessment Act enables the benefit of the investment allowance to be passed on to a lessee where a declaration to that effect is lodged, lodgement generally being required by the eighth day after the end of the month in which the agreement was entered into. As the investment allowance is now to be available with respect to tourist buses from 1 January 1976 paragraphs (c) and (d) of sub-clause (1) ensure that a declaration in respect of a lease entered into prior to 1 July 1981 can be validly lodged by 8 July 1981, or such later date as the Commissioner determines.

Paragraph (e) of sub-clause (1) will ensure that the investment allowance is available in respect of tourist buses with effect from 1 January 1976.

The effect of paragraph (e) will be that expenditure incurred on or after 1 January 1976 on the acquisition of a tourist bus under a contract entered into on or after that date will qualify for the investment allowance where the remaining requirements of the investment allowance provisions are satisfied. Similarly expenditure incurred on or after that date in respect of a bus which the taxpayer commenced to construct after that date will qualify.

Broadly, for eligible tourist buses ordered or leased by 30 June 1978, or which the taxpayer commenced to construct by that date, an investment allowance of 40 per cent of the cost will be available provided that the bus was brought into use, or was ready for use and held in reserve, by 30 June 1979.

For eligible tourist buses ordered, etc., before 30 June 1978 and which were first used (or ready for use and held in reserve) after 30 June 1979, or for buses first used after 30 June 1978 an investment allowance at the current 20 per cent rate will be available.

Paragraph (f) of sub-clause (1) will introduce a transitional measure to ensure that a person who as at 27 November 1980 (the date of announcement of the intention to extend eligibility for the investment allowances to tourist buses as from 1 January 1976) had a tourist bus on lease under arrangements that would not satisfy the requirements of the investment allowance provisions - either because the lease is for a term less than the four year required minimum or because the lease is not with a qualifying leasing company - is given the opportunity to satisfy those requirements.

For this purpose such a lessee may come to arrangements with the lessor to enter into an extended lease agreement, or alternatively to purchase the leased property, by 30 June 1981 or such later date as the Commissioner permits.

Where a previously leased bus is acquired by a taxpayer under arrangements of this type the rate at which the investment allowance is to be available (i.e., 40 per cent or 20 per cent) is to be determined as if the bus had been acquired on the date on which the lease agreement was first entered into.

Sub-clause (2) will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before the enabling legislation becomes law to allow an investment allowance deduction in relation to eligible tourist buses.

INCOME TAX (DIVERTED INCOME) BILL 1981

This Bill will formally impose the tax payable on income in respect of which a taxpayer is to be assessed and liable to pay tax in accordance with new Division 9C of Part III of the Income Tax Assessment Act 1936, proposed to be inserted by the accompanying Income Tax Laws Amendment Bill 1981.

The rate declared by the Income Tax (Diverted Income) Bill 1981 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), which is equivalent to the maximum rate of personal tax.

Notes on the clauses of the Bill follow.

Clause 1: Short title

This clause provides for the new Act to be cited as the Income Tax (Diverted Income) Act 1981.

Clause 2: Commencement

By this clause, it is proposed that the new Act, like the related amendments to the Assessment Act contained in the Income Tax Laws Amendment Bill 1981, will come into effect on the day on which it receives the Royal Assent. These provisions are to apply to diverted income derived from property acquired under a tax avoidance agreement after 24 June 1980, the date on which it was announced that the amendments would be made.

Clause 3: Interpretation

Under this clause, the term "Assessment Act" will mean, for the purposes of the Income Tax (Diverted Income) Act 1981, the Income Tax Assessment Act 1936.

Clause 4: Incorporation

By this clause, the Assessment Act is to be incorporated and read as one with this Act.

Clause 5: Imposition of tax

This clause formally imposes income tax, to the extent that it is payable in accordance with new Division 9C, introduced into Part III of the Assessment Act by the Income Tax Laws Amendment Bill 1981, for the 1979-80 financial year (the year in which the new Division 9C first has effect) and subsequent financial years.

Clause 6: Rate of tax

This clause declares that the rate of tax to be imposed by the Bill in respect of a financial year is to be that payable in respect of that financial year by a trustee on the net income of a trust estate in pursuance of section 99A of the Assessment Act. The rate of tax payable by such a trustee is declared - by Part IVA of the Income Tax (Rates) Act 1976 in respect of the 1979-80 financial year and by Part IVB of that Act in respect of the 1980-81 and subsequent financial years - to be a rate which is equal to the maximum personal rate of tax. This is 61.07 per cent for 1979-80 and 60 per cent for 1980-81 and subsequent financial years.


View full documentView full documentBack to top