Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)MAIN FEATURES
The main features of this Bill are as follows:
Share Buy-backs (Clauses 15, 17 and 29)
The Bill will give effect to the proposal announced on 31 October 1989 to amend the Income Tax Assessment Act 1936 to deal with changes to the companies legislation that will permit companies to buy back their own shares. New arrangements will provide for the tax treatment of transactions when companies buy-back their own shares and the vendor-shareholders sell shares back to the companies.
The proposed amendments will apply where a company buys a share in itself from a shareholder. If the share is listed on the stock exchange and the purchase is made in the ordinary course of business of that stock exchange, the buy-back will be an on-market purchase. All other buy-backs will be treated as off-market purchases. The price paid by the company will be the amount or total of the amounts received by the shareholder, the market value of any property a shareholder received or the total sum of property and cash if the shareholder is entitled to receive both.
In the case of the shareholder, where the buy-back is an off- market purchase, the price paid by the company less the sum of the paid up value of the share and any part of the price paid that is drawn by the company against its share premium account will be treated as a dividend paid by the company to the shareholder. The dividend will be a frankable dividend for the purposes of the imputation system and a shareholder that is a company may be entitled to the intercorporate dividend rebate.
Where the buy-back is an on-market purchase the tax consequences for the shareholder will be different. No part of the price paid will be a dividend and the treatment of the amount received by the shareholder for the share will fall for consideration under the income tax or capital gains tax provisions. This will also be the treatment for that part of the price paid in an off-market purchase that is not a dividend - the paid up value and any amount drawn by the company against the share premium account.
For the company that buys-back shares the amendments proposed by this Bill will treat the relevant transactions as, in effect, not having occurred. The effect of this will be that a buy-back will not be taken into consideration in determining whether any amount is assessable or deductible and there will be no capital gain or capital loss arising to the company. In this respect the transaction will be tax- neutral.
The Bill also proposes an amendment to the imputation system so far as the company is concerned when the company makes an on-market purchase. Notwithstanding that for the shareholder no part of the price paid in an on-market purchase is taken to be a dividend, the company will for franking account purposes, be taken to have paid a dividend equal to the amount that would have been a dividend if the buy-back had been an off-market purchase. A franking debit will arise equal to the price paid in an on-market purchase less the sum of the paid up value of the share and any amounts drawn by the company against the share premium account.
The amendment to the imputation system will apply from the day companies are permitted to make on-market purchases. The other amendments will apply to buy-backs that occur on or after 1 November 1989.
Australian-owned non-resident companies (Clauses 13, 14 and 29)
Under the existing legislation, Australian-owned non-resident companies are excluded from the definition of "foreign controller" and hence from the scope of the thin capitalisation controls. This exemption is to be removed with effect from 1 July 1990.
Special depreciation on trading ships (Clause 10)
The Bill will also amend the special accelerated depreciation concession for eligible Australian trading ships by extending the effective termination date from 30 June 1992 to 30 June 1997. Eligible ships that are now delivered to a taxpayer, and registered under the Shipping Registration Act 1981 before 1 July 1997 will qualify for depreciation on a prime cost basis at a rate of 20% over five years.
Superannuation : Requirements for actuarial certifications (Clauses 24, 25, 26, 27, 28, 30 and 33)
This Bill will give effect to the proposals announced on 14 February 1990 to ease the operation of the provisions of the Income Tax Assessment Act which require an actuary to certify the amount of particular deductions or exemptions that may be claimed by a complying superannuation fund.
The Bill will reduce the need for complying superannuation funds to obtain actuarial certifications when claiming deductions for the cost of death and disability cover for members of the fund. In particular, a fund will not need to obtain a certificate from an actuary where the death and disability insurance components of the premium paid are separately identified. Further, in relation to "endowment" and "whole of life" policies (to be defined), a deduction equal to 10% and 30%, respectively, of the premium paid, will be available also without the need for a certificate from an actuary.
The Bill also proposes amendments which will require actuaries to value superannuation fund assets, in determining the exemption for income relating to current pension liabilities, based on the expected earnings on those assets rather than the preceding year's earnings.
In addition, the Bill will remove the obligation on superannuation funds to provide actuarial certificates with their returns of income.
The new provisions will have effect in relation to assessments in respect of income of the year of income in which 1 July 1988 occurred and all subsequent years. However, if a complying superannuation fund has lodged a return of income before the relevant amendments commence, the proposed amendments will not apply unless the trustee of the fund makes an appropriate election.
Exemptions from quotation of Tax File Numbers - investments (Clauses 19, 20)
The use of tax file numbers in connection with investments is to commence from 1 July 1991 with a phase in period from 1 July 1990 for investments in existence at that time. Persons who are investors will be able to quote their tax file number to the investment body after 30 June 1990. Where a person fails to quote a tax file number in respect of relevant investments in existence on 1 July 1991 the investment body will be required to withhold tax at the top personal marginal rate (plus Medicare levy) from any income arising from the investment on or after that date.
Certain investors are to be exempt from these requirements. Entities not required to lodge income tax returns and pensioners seeking exemption from the quotation requirements in relation to certain investments are required to provide a written declaration to obtain exemption. The Bill will allow the Commissioner of Taxation to approve the manner in which the necessary information to claim an exemption from quoting a tax file number is provided to the investment body so that in appropriate circumstances it will not be necessary for the declaration to be in written form.
Notification of Instalments of provisional tax (Clauses 22)
Offset of Provisional Tax Credit (Clause 23 and 32)
The Bill will implement the two Budget proposals announced on 15 August 1989 to alter the operation of the quarterly instalment system of paying provisional tax.
First, with effect for provisional tax payable in the 1989-90 and subsequent income years, the Bill will raise the threshold for general exemption from the system from $5,000 to $8,000. As a result, a taxpayer will not be required to pay quarterly instalments of provisional tax in respect of a year of income where his or her provisional tax in respect of the preceding year is $8,000 or less.
Secondly, where income tax payable for an income year is less than the provisional tax credit available in respect of that year, the excess provisional tax credit will not be offset against any quarterly instalment of provisional tax in respect of the following income year which has been notified but is not yet due for payment.
Gifts (Subclause 2(2), clauses 29 and 31)
The Bill will authorise deductions for gifts of the value of $2 or more made to the National Foundation for Australian Women Limited where the gifts are made on or after 5 February 1990 (the date the company was incorporated). The Bill also contains transitional arrangements that allow gifts made to the unincorporated body known as the National Foundation for Australian Women on or after 10 November 1989 and before 5 February 1990 to also be deductible.
Deductions will also be authorised for gifts to Landcare Australia Limited made on or after 1 April 1990.
In addition, gifts to The Foundation for Development Cooperation Ltd will be an allowable deduction where they are made on or after 12 March 1990.
Altering basis of calculating instalments of provisional tax for 1990-91 (Clause 34)
Under the system for paying provisional tax by instalments, the instalments for a year of income other than the final instalment are calculated having regard to certain provisional tax amounts. The instalments may be calculated in the relevant circumstances on the basis of either:
- (a)
- the provisional tax payable in respect of the instalment year following an application to vary by the taxpayer;
- (b)
- the provisional tax notified as payable in respect of the instalment year following the issue of the previous year's assessment; or
- (c)
- the provisional tax payable in respect of the year of income preceding the instalment year.
The final instalment is the amount, if any, required to make the sum of the instalments equal to the amount the taxpayer would be liable to pay as provisional tax for that year (subject, of course, to any variation) if the taxpayer were not required to pay by instalments (that is, the equivalent of the lump sum provisional tax amount).
A Bill, the Income Tax Assessment Amendment Bill 1989, was introduced in the Parliament in the 1989 Budget sittings but lapsed on the dissolution of the Parliament prior to the elections. It proposed a method for calculating provisional tax specifically for the 1989-90 income year in line with the practice applied in past years. The Bill provided for 1989-90 provisional tax to be calculated on the basis of 1988-89 taxable income being uplifted by 10%, with the rates of tax, Medicare levy and income thresholds for Medicare levy for 1989-90 applying and with rebates and credits in general being allowed at their 1988-89 levels subject to certain adjustments. Because the Bill lapsed, provisional tax for 1989-90 was calculated on the basis of the standing provisions in the existing law where this was more beneficial to taxpayers.
As a consequence, unless the income tax law is changed, some taxpayers liable to pay provisional tax for the 1990-91 year by instalments may have smaller instalments, apart from the final instalment, for 1990-91 than the Government intended when introducing the Income Tax Assessment Amendment Bill 1989. This would be the result of the provisional tax for 1989-90 being less than it otherwise would have been.
This Bill proposes that the amount of a taxpayer's instalments, other than the final instalment, for 1990-91 - where it is necessary to have regard to the 1989-90 provisional tax liability in calculating those amounts - be determined by reference to what the taxpayer's provisional tax liability for that year would have been had the Income Tax Assessment Amendment Bill 1989 become law (that is, a notional provisional tax liability). Of course, where the taxpayer had varied the 1989-90 provisional tax liability, that varied amount would continue to be used in calculating the instalments, as necessary.
Amortisation of remote area housing fringe benefits (Clauses 6, 7 and 8)
Under the existing amortisation provisions, the taxable value of certain fringe benefits providing housing assistance to employees working in remote areas may be spread over a minimum period of five years and a maximum of seven years.
To be eligible for amortisation the fringe benefit must be provided by the employer to an employee working in a remote area and consist of:
- •
- a discount on the purchase of a home or of land on which to build a house;
- •
- a reimbursement of the cost of buying land and/or building a home; or
- •
- an option fee paid to the employee entitling the employer to have first choice in purchasing the employee's house.
The benefit provided by the employer must also be subject to a contractual obligation that restricts the employee's right to dispose of the relevant property for a period of at least five years.
The Bill will increase, in certain circumstances, the maximum period over which the taxable value of a fringe benefit (which is eligible to be amortised under the existing amortisation provisions) may be amortised from seven years to fifteen years.
The new fifteen year maximum amortisation period is to apply to employers who, prior to 31 August 1988 (the date of introduction of the Act inserting the original amortisation rules into the Fringe Benefits Tax Assessment Act), had provided a fringe benefit under a remote area home ownership scheme. Also, the scheme must have provided for the benefit to the employee to be subject to a restriction on the employee's right to dispose of the property to which the benefit relates for a period of at least seven years.
Further, the new fifteen year amortisation period will only apply to fringe benefits provided to an employee, where the obligation restricting the employee's right to dispose of the property to which the benefit relates is entered into no later than 6 months after the commencement of this Bill.
Exempting from sales tax, goods for use by ACT departments and authorities (Clauses 36, 37 and 38)
By the A.C.T. Self Government (Consequential Provisions) Act 1988 the Governor-General was empowered to make regulations, no later than 31 December 1989, modifying the operation - but not the text - of Commonwealth Acts where amendment of those Acts was necessary as a consequence of the establishment of self-government in the ACT. The purpose of that regulation- making power was to allow the operation of those Acts to be changed temporarily until the Acts themselves could be amended.
The ACT Self-Government (Consequential Provisions) Regulations, which were made under that regulation-making power, modify the Sales Tax (Exemptions and Classifications) Act 1935 so that the exemption from sales tax available under that Act for goods for official use by departments and certain authorities of the Commonwealth, the States and the Northern Territory is available for ACT departments and authorities on the same basis. This Bill proposes the amendment of the text of the Sales Tax (Exemptions and Classifications) Act to reproduce the exemption given by those Regulations.
A more detailed explanation of the provisions of the Bill is contained in the following notes.