Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of this Bill are as follows:
The Bill proposes the abolition with effect from 10 September 1984 (the date of announcement of the proposal) of the rule under which life assurance companies and two categories of superannuation funds are required to hold at least 30 per cent of their assets in public securities including at least 20 per cent in Commonwealth securities to enable them to qualify for special income tax concessions. This rule has become known as the 30/20 rule.
In relation to superannuation funds the 30/20 rule is a requirement to be met by those funds in order for their investment income to qualify for exemption from income tax by virtue of either paragraph 23(ja) or section 23F of the Income Tax Assessment Act. Broadly, paragraph 23(ja) provides for exemption of the income of provident, benefit, superannuation and retirement funds established for the benefit of non-employees, while section 23F exempts the income of employee funds. The Bill will remove this requirement for exemption in respect of both types of fund.
The 30/20 rule has three applications in relation to the calculation of tax payable by life assurance companies. First, life assurance companies that satisfy the 30/20 rule are exempt from income tax on investment income attributable to superannuation and certain other eligible policies. Second, the inter-corporate dividend rebate that would otherwise be allowable in respect of assessable dividends received by a life assurance company may be modified in certain circumstances where the company does not comply with the 30/20 rule.
The third application relates to a special deduction based on a life assurance company's calculated liabilities (broadly, a specified percentage of an actuarial valuation of the company's liabilities, with special rules applying where an actuarial valuation is not made). The basic deduction is 1 per cent of an amount calculated by multiplying the total of the calculated liabilities by the ratio which the value of the assets producing assessable income bears to the value of the total assets of the company. However, the basic deduction is increased on a sliding scale for over-compliance with the 30/20 rule and reduced on a sliding scale (to no less than 0.75 per cent) for under-compliance.
The amendments proposed by this Bill will therefore have the following effects in relation to life assurance companies:
- tax exemption in respect of investment income attributable to superannuation and other eligible policies will apply without the need to observe the 30/20 rule;
- the modification of the inter-corporate dividend rebate in respect of assessable dividends received by a life assurance company not observing the 30/20 rule will no longer apply; and
- the deduction allowable on the basis of a life assurance company's calculated liabilities will be 1 per cent of the relevant amount of the liabilities, irrespective of the level of investment in public or Commonwealth securities.
For the purposes of the calculated liabilities deduction, transitional rules will apply in respect of the year of income of a life assurance company in which 11 September 1984 occurred. By allowing a deduction that is a composite of the old and new amounts these rules will ensure that the abolition of the 30/20 rule does not result in the retrospective withdrawal of an increased deduction where a company, at 10 September 1984, had public and Commonwealth securities in excess of the amount necessary to obtain the basic deduction. The other amendments will apply for the whole of the income year in which 11 September 1984 occurred (as well as in subsequent years) irrespective of whether the 30/20 rule was complied with during the first part of the year.
Existing provisions of the Income Tax Assessment Act operate to deny a deduction (or rebate) where certain specified expenditure is incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date under which the taxpayer (or an associate) receives a compensatory benefit the value of which, together with the tax saving sought in respect of the expenditure, effectively recoups the taxpayer for the expenditure so that no real loss or outgoing is incurred.
Amendments proposed by this Bill will extend those existing provisions to counter further tax avoidance schemes of the expenditure recoupment type. With the further schemes effectively recouped expenditure is formally incurred -
- in respect of a unit of industrial property to which special deduction provisions of the Assessment Act apply; and
- by way of a loss or outgoing to which the general deduction provision of the Act applies.
The proposed amendments will apply to relevant expenditure incurred after 24 September 1978 under a tax avoidance agreement entered into after that date; that being the date on which the former Treasurer announced legislative action against such schemes and said that any future legislation dealing with variants of the schemes would be effective from that date. However, the amendments will not apply in relation to deductions obtained under schemes entered into after 27 May 1981, the date of effect of the general anti-avoidance provisions of Part IVA of the Assessment Act.
An existing provision of the Assessment Act that precludes the carry-forward of losses generated under "expenditure recoupment" tax avoidance schemes entered into on or before 24 September 1978 will also be amended to reflect the measures proposed in this Bill.
As an element in the package of measures to integrate Christmas Island with mainland Australia, the Bill will amend the Income Tax Assessment Act to phase in personal income tax on the Island from the commencement of the 1985-86 income year, and to introduce full Medicare levy and company tax there with effect from the same date.
The present income tax law extends to the Territories of Christmas Island, Norfolk Island and Cocos (Keeling) Islands, and has effect as if they were part of Australia and their residents were residents of Australia. However, under Division 1A of Part III of the Assessment Act, an individual genuinely resident in one of those Territories - called "a prescribed Territory"' - is exempt from income tax on income derived from sources in any one of the Territories or from sources otherwise outside mainland Australia. Such income is also exempt from tax when derived by a Territory company (a company incorporated in one of the Territories and, broadly, wholly owned and controlled by Territory residents), and by a Territory trust (a trust established in one of the Territories and having only Territory residents as beneficiaries). For these purposes, the three Territories are effectively treated as though they were one Territory separate and distinct from mainland Australia. The practical effect of the present provisions is to subject individuals, companies and trusts genuinely resident in any one of the Territories to tax only on income derived from mainland sources.
The Bill will amend Division 1A to exclude Christmas Island from its scope, thus leaving only Norfolk Island and Cocos (Keeling) Islands as prescribed Territories for purposes of that Division. In other words, Christmas Island will in future be regarded as part of mainland Australia for all purposes of the income tax law, including the operation of Division 1A.
By this measure, Christmas Island residents will no longer qualify for exemption from tax on income from sources in any one of the three Territories or from sources outside Australia. However, such income will be subject to the personal income tax (but not Medicare or company tax) phasing arrangements that are discussed below and are to apply for the first three income years, and to full mainland personal income tax only from commencement of the 1988-89 income year. Income derived from mainland sources by all Island residents will continue to be subject to full Australian income tax.
As part of these new arrangements, the Bill also proposes measures that, subject to the phasing arrangements mentioned above, will -
- include, with effect from 1 July 1985, Christmas Island in Zone A of the income tax law so that Island resident individuals will be eligible for the special zone rebate;
- ensure that Christmas Island and ex-Australian source long service leave payments and superannuation, termination of employment and kindred payments made to Christmas Island residents on or after 1 July 1985 on retirement from or termination of employment -
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- to the extent that such payments relate to periods of service or superannuation fund membership after that date - will be broadly subject to existing mainland taxing laws for payments of that nature;
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- to the extent that such payments relate to relevant periods or membership before that date - will remain exempt from tax.
The personal income tax phasing arrangements that are to apply to Christmas Island residents will be given effect by a special rebate of tax which is also proposed by this Bill. This rebate will ensure that, for 1985-86, 1986-87 and 1987- 88 years of income, Christmas Island residents will only be liable for 25 per cent, 50 per cent and 75 per cent respectively of the personal income tax (not including the Medicare levy) that would otherwise be payable on income which was previously exempt from tax. In practical terms, income tax liability during the phasing years will be determined, in the usual way on total taxable income with the allowance of rebates to which the taxpayer is entitled. The tax liability so determined to the extent that it relates to previously exempt income, will then be reduced by the special rebate to the appropriate percentage for the particular phasing year. In cases where a Christmas Island resident derives both mainland source income and previously exempt income, the latter will be treated as the final component of taxable income attracting tax at the higher marginal rates. This approach will provide the greatest benefit to Island resident taxpayers.
The removal of Christmas Island from the scope of Division 1A of the Income Tax Assessment Act will also have consequential effects for Norfolk Island and Cocos (Keeling) Islands residents. For example, such residents will in future be liable to Australian tax on income derived from sources in Christmas Island (but subject to the phasing arrangements mentioned earlier) in the same way as they are now liable to tax on income derived from sources on the mainland. The amendments proposed by this Bill will not, however, affect the exemptions presently available to residents of Norfolk Island and Cocos (Keeling) Islands in respect of income from sources in either of those Territories or from sources outside mainland Australia.
The Bill will also amend the secrecy provisions of the Income Tax Assessment Act to authorise the Commissioner of Taxation to make available to the Australian Statistician, for the purposes of the Census and Statistics Act 1905, certain information in respect of business taxpayers. The information includes relevant information that is presently permitted to be supplied in respect of taxpayers who are employers for purposes of the pay-as-you-earn provisions of the income tax law, as well as information that the Statistician requires for or in connection with the conduct of periodic industry surveys and the compilation of the Australian national accounts.
Amendments proposed by the Bill will provide that decisions by the Commissioner of Taxation on the remission of "culpability penalties" imposed for breaches of the pay-as- you-earn (PAYE) provisions of the income tax law (that is, statutory additional tax penalties imposed as a flat percentage of, for example, amounts deducted by an employer from employees' wages but not remitted to the Commissioner by the due date) are subject to objection and appeal rights. This will correct an oversight in the Taxation Laws Amendment Act 1984 which introduced the PAYE statutory additional tax penalties.
The amendments will also maintain the principle that objection and appeal rights do not extend to remission decisions in relation to the 20% per annum late payment penalties imposed for breaches of either the PAYE or the prescribed payments provisions of the law.
The Bill will correct a drafting error in one of the provisions of the income tax law which gave effect to the 1984-85 Budget proposal to recognise de facto marriages for purposes of the dependent spouse rebate.
At the time those amendments were made, it was also intended that, amongst other things, a daughter-housekeeper rebate would not be allowable for any period that a taxpayer contributed to the maintenance of a spouse (whether legal or de facto). However, the provision concerned - sub-section 159J(5D) of the Income Tax Assessment Act - was drafted in such a way that it effectively precludes a partial daughter- housekeeper rebate claim not only for the period of an income year during which a taxpayer contributes to the maintenance of a spouse, but also for any other period of the year.
The measure to correct this error is to operate with effect from 1 July 1984 which is the operative date of the provision it amends.
The Bill will also exclude payments of social security family income supplement from the definition of separate net income for purposes of the dependant rebate provisions of the income tax law.
Family income supplement is an income-tested allowance payable to low income families with children. It is exempt from income tax in the hands of the recipient. With effect from May 1984, the supplement has been payable to the recipient of family allowances - generally the mother - rather than to the primary breadwinner. As the law now stands, the supplement is not excluded from the separate net income test for purposes of the dependant rebates and this situation would result in a reduction in the amount of the rebate that might otherwise be allowable to a taxpayer for a dependent spouse to whom a family income supplement is paid.
The amendment proposed in the Bill will ensure this outcome is avoided and will be effective from the date family income supplement first became payable to the recipient of family allowances, that is 1 May 1984.
The Bill will include those prescribed payments and pay-as- you-earn penalties that are subject to objection and appeal rights in the categories of taxes in respect of which interest is payable by the Commissioner of Taxation where refunds are made following a successful objection or appeal.
The Schedule to the Bill proposes a number of formal amendments of the Income Tax Assessment Act. Most of these amendments reflect changes in Departmental and Ministerial titles arising out of the changes in the machinery of Government. Others are of a minor drafting nature.
Another amendment to be made by the Schedule will repeal a section relating to the rights of Commonwealth and State public servants appointed to taxation Boards of Review. The section now being repealed has been made redundant by subsequent legislation that now provides those rights.
A more detailed explanation of the provisions of the Bill is contained in the notes that follow.