Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)NOTES ON CLAUSES
TAXATION LAWS AMENDMENT BILL (NO. 4) 1987
This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No. 4) 1987.
Under subclause 2(1), the amending Act, except as provided in subclause 2(2), is to come into operation on the day on which it receives the Royal Assent. But for this clause, the amending Act would, by virtue of subsection 5(IA) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.
Subclause 2(2) will ensure that the amendments proposed by Parts IV and V to the Occupational Superannuation Standards Act 1987 and the Taxation Administration Act 1953 will come into operation immediately after the commencement of the former Act.
PART II - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936
This clause facilitates references to the Income Tax Assessment Act 1936 which, in Part II, is referred to as the "Principal Act".
This clause will amend section 6 of the Principal Act, which contains definitions which apply throughout the Act unless a contrary intention appears from the context, to insert definitions of "proclaimed superannuation standards day" and "superannuation fund". The former will be defined as the day fixed by Proclamation for the purposes of section 5 of the Occupational Superannuation Standards Act 1987 (Standards Act).
Section 5 of the Standards Act contains savings provisions to ensure that those superannuation funds wishing to obtain exemption from income tax comply with the existing supervisory requirements in the Principal Act pending their relocation in regulations under the Standards Act on a date to be proclaimed.
In addition, a superannuation fund for the purposes of the Principal Act will be defined to include a superannuation fund within the meaning of the Standards Act, or a fund to which section 23FC applies. This is a drafting device designed to ensure that the provisions of the Principal Act apply to funds which receive a notice from the Insurance and Superannuation Commissioner.
Clause 5: Effect of issue, revocation etc. of notices under the Occupational Superannuation Standards Act 1987
This clause will insert new section 6E in Part I of the Principal Act. Section 6E will define a notice given by the Insurance and Superannuation Commissioner to the trustees of a superannuation fund or approved deposit fund under the relevant provisions of the Standards Act indicating whether a fund has met the necessary requirements to obtain exemption from income tax. As the Insurance and Superannuation Commissioner is authorised to vary or revoke a notice in the light of information not previously considered, the section makes it clear that an income tax assessment issued on the basis of the earlier notice can be appropriately amended.
Clause 6: Income Tax Secrecy Provisions
This clause will make a technical amendment to section 16 (the secrecy provisions) of the Principal Act by substituting a new paragraph for existing paragraph 16(4)(hc). This provision was inserted into the Principal Act in 1986 to enable the Commissioner of Taxation to communicate certain information on superannuation and other related funds to the Secretary to the Department of the Treasury or any new authority established to supervise such funds. This provision has facilitated the communication of information to the interim authority (Occupational Superannuation Commissioner : Interim Group) established in July 1986 to perform preliminary functions connected with the new operational standards for funds but is now redundant with the establishment of the Office of the Insurance and Superannuation Commissioner.
New paragraph 16(4)(hc) will enable the Commissioner of Taxation to communicate information on the affairs of superannuation funds and approved deposit funds that is obtained under provisions of the Principal Act, to the Insurance and Superannuation Commissioner for the purposes of the administration of the Occupational Superannuation Standards Act 1987.
Paragraph 23(ja) of the Principal Act provides exemption from income tax for the income of a provident benefit, superannuation or retirement fund established for the benefit of self-employed persons, where the number of members of the fund is not less than 20 at any time and (broadly) the rules of the fund are approved by the Commissioner of Taxation as meeting guidelines published by him.
As a consequence of the establishment of the Insurance and Superannuation Commissioner to take over the functions of supervising superannuation funds in non-tax assessment related matters, the present categories of superannuation funds are to be replaced by categories that reflect the status of the funds according to their eligibility for the issue of certificates under the Occupational Superannuation Standards Act 1987 (the Standards Act).
Clause 7 of the Bill will omit paragraph 23(ja) of the Principal Act. A fund to which this paragraph has applied will now fall for exemption under new section 23FC (discussed below) if it has been given a notice under section 12 or 13 of the Standards Act. If such a fund fails to obtain such a notice, it will now be assessable under the new section 121CC or 121DAB according to whether it has failed only the "relevant investment standards" for the purposes of section 121CC or other standards imposed under the Standards Act. These funds are now also to be subject to tax on any non-arm's length income received - see notes to section 23FC.
Clause 8 proposes the repeal of sections of the Principal Act which provide for exemption from tax on the income of certain superannuation funds and approved deposit funds.
Section 23F of the Principal Act provides for the exemption of income (other than certain non-arm's length income) of 'traditional' employer sponsored funds established for the benefit of employees and their dependants. Section 23FB of the Principal Act provides for the exemption of income (other than certain non-arm's length income) of other funds which meet certain rules (significantly, including a prohibition, generally, on the payment of benefits before age 55). The income of these funds, after the repeal by this clause of sections 23F and 23FB, will be exempt, subject to the requirements of new section 23FC (see below). The non-arm's length income of these funds will now be subject to tax under new sections 121BA or section 121D depending on whether the fund has meet the "relevant investment standards" discussed in the notes to new section 121CC (see notes to clause 26).
Section 23FA of the Principal Act, which is also repealed by this clause, provides exemption from tax on income of approved deposit funds. That exemption is now to be provided under new section 23FA (see notes to that section below) and new provisions to assess certain non-arm's length income are to be inserted in new section 121DAAA (see notes to clause 29).
Where a superannuation fund (including those previously exempt from tax under paragraph 23(ja), section 23F or 23FB) has been given a notice under section 12 or 13 of the Occupational Superannuation Standards Act 1987 (the Standards Act) the income of the fund (except for certain dividends and other non-arm's length income - see subsections 2 e.s.) will be exempt from tax under new subsection 23FC(1). Broadly speaking, to obtain such a certificate, a fund will have to comply with operational standards imposed by the Standards Act, including those transferred from the income tax law. As noted above, the operation of the relevant provisions in the Principal Act which impose requirements on funds as a condition for obtaining tax concessions will be saved by the Standards Act pending their relocation in regulations made under that Act at some future date.
The effect of subsections (2) to (5) is to reflect the provisions in present sections 23F and 23FB which make assessable non-arm's length income received by funds to which those sections relate. Because funds which were formerly funds to which paragraph 23(ja) has applied have not previously been subject to non-arm's length income assessment provisions, subsections (2) to (5) will apply only to arm's length income of such funds received after the date of introduction of this Bill.
Subsection 23FC(6) will enable the Commissioner of Taxation to determine the extent of non-arm's length income of superannuation funds derived through any interposed partnership or trust.
Subsection 23FC(7) facilitates reference in the section to funds which had, prior to the amendments made by this Bill, met the requirements of paragraph 23(ja) of the Principal Act.
Section 23FD : Exemption of income of certain approved deposit funds
Under the present section 23FA (which is repealed by this clause), approved deposit funds which meet certain requirements are exempt from tax on their investment income. These requirements relate mainly to the need for the relevant fund to be established and maintained by an approved trustee to receive on deposit amounts of eligible termination payments, to deal with those amounts in accordance with specified rules and to repay the amounts with accumulated earnings at the request of the depositor.
Section 23FD will ensure that approved deposit funds, the subject of a notice of approval from the Insurance and Superannuation Commissioner, will also be exempt from tax if they do not derive excessive non-arm's length income. To obtain such a notice, approved deposit funds will be required to comply with both the new operational standards previously foreshadowed by the Treasurer and those requirements contained in the existing income tax law. These requirements will be embodied in Regulations made under the Standards Act when the operative provisions of that Act are proclaimed.
The exemption under subsection (1) will not extend to income to which proposed subsections (2) to (5) apply. These provisions are intended to act as a safeguard against abuse of the exempt status of approved deposit funds through private company investments or other non-arm's length dealings.
Under subsection 23FD(2), a private company dividend paid after 12 January 1987 to an approved deposit fund to which subsection (1) applies will not qualify for exemption under subsection (1) unless the Commissioner is of the opinion that it would be reasonable to exempt the dividend having regard to certain matters set out in paragraphs (a) to (f) of the subsection. These matters, which are directed at establishing whether the circumstances surrounding the payment of the dividends constitute exploitation of the fund's exempt status, are:
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- the paid-up value of the fund's shares in the company (paragraph (a));
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- this could be relevant, for example, when related to the paid-up value of other shares in the company and the dividends paid on the different shares;
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- the cost to the fund of those shares (paragraph (b)) ;
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- it would be relevant, for example, to compare this cost with the value of the shares at the time of purchase;
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- a comparison of the rate of the dividend paid on those shares with the rate of the dividend (if any) paid on other shares issued by the company (paragraphs (c) and (d));
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- whether, and in what circumstances, shares in the company were issued to the fund in satisfaction of a dividend (paragraph (e)); and
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- any other relevant matters (paragraph (f)).
Proposed subsection 23FD (3) augments subsection (2) by ensuring that subsection (2) applies where income derived after 12 January 1987 by the fund is indirectly derived from a private company dividend. This could happen, for example, where a trust or partnership is interposed between the private company paying the dividend and the approved deposit fund. By subsection (3) the income will be deemed to have been a dividend paid by the company to the fund after that date.
Under subsection (4) of proposed section 23FD, income (other than private company dividends) derived after 12 January 1987 by an approved deposit fund from any transaction will not be exempt from tax under subsection (1) if the parties were not dealing at arm's length and the income from the transaction is greater than it would have been if they were. This requires a consideration of not only the relationship between the parties generally, but also the circumstances and terms of the particular dealing. Where the dealing was not at arm's length, the subsection would apply if, having regard to the nature of the transaction, the income derived by the fund exceeds what would have been derived if the transaction had been entered into on a normal commercial basis between parties who were independent of each other.
New subsection (5) has effect for the purposes of the operation of subsections (3) and (4). Paragraph (a) allows subsection (4) to be applied on the basis of the conclusions to be drawn from a series of transactions. This prevents the law being thwarted by arranging that no one transaction in a series met the test of the subsection even though the series taken as a whole did. Paragraph (b) allows the Commissioner to decide the time at which certain income is to be deemed to be derived by a fund to which the section applies for the purposes of subsections (3) and (4). Assessable income derived by a fund as a share of the net income of a partnership or trust estate (subparagraph (b)(i)) or income that was not derived at any identifiable time during a year of income (subparagraph (b)(ii)) is deemed to have been derived at such time, or at such times and in such proportions, as the Commissioner considers reasonable having regard to the matters referred to in subparagraphs (iii) and (iv).
Subparagraph (b)(iii) ensures that income derived by an approved deposit fund after 12 January 1987 as the fund's share of the net income of a partnership or trust estate (which income would ordinarily be treated as derived when the partnership or trust accounts were taken at the end of the year of income), is outside the scope of subsections (3) and (4). By subparagraph (b)(iv), the Commissioner is to take into account any other relevant matters in any of the cases specified in subparagraphs (i) and (ii).
Income made taxable by subsections 23FD(2), (3) and (4) will be subject to assessment under section 121DAAA, which is proposed to be inserted in the Principal Act by clause 29 of this Bill (see the notes on that clause).
Clauses 9 to 11: Inclusion in Assessable Income of Certain Benefits from Superannuation Funds
Clauses 9 to 11 of this Bill will amend sections 26AF and 26AFA of the Principal Act and also insert new section 26AFB. The purpose of existing section 26AF is to make fully assessable any benefit which a taxpayer receives from an existing or former paragraph 23(ja) or section 23FB superannuation fund otherwise than in accordance with approved terms and conditions applicable to the fund at the time when the benefit is received. Moreover, because the section is expressed to include a benefit from a former paragraph 23(ja) or section 23FB fund, it is sufficient if the benefit is paid from a fund which, although not currently exempt, was previously exempt under the foregoing provisions and the benefit is attributable to the assets of such a fund. Section 26AF is thus an anti-avoidance provision designed to prevent abuses of the concessions available to certain approved funds.
Similarly, section 26AFA requires excessive and unauthorised benefits paid to certain taxpayers from an existing or former section 23F fund to be fully taxed in the hands of the recipient unless the Commissioner of Taxation is satisfied that this would be unreasonable in the circumstances. The Commissioner has indicated that this discretion would be exercised where there are no tax avoidance implications and where the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer.
Notes on the individual provisions of these clauses follow.
Clause 9: Assessable income to include value of benefits received from or in connection with former paragraph 23(ja) funds or former section 23FB funds
This clause will make a consequential amendment to section 26AF of the Principal Act to ensure that the section continues to apply to excessive or unauthorised benefits received by a relevant taxpayer from a former paragraph 23(ja) or section 23FB fund notwithstanding the repeal of these provisions with effect from 1 July 1986, section 26AF will also apply to funds which obtain exemption under new section 26FC of the Principal Act which may formerly have qualified for exemption under paragraph 23(ja) or section 23FB. In relation to benefits received from these funds, the amended section will apply only until the date of proclamation of Regulations under the Occupational Superannuation Standards Act 1987 embodying the requirements applicable to funds under the existing income tax law. New section 26AFB is to be the operative provision for such benefits after that date.
Clause 10: Assessable income to include value of certain benefits received from or in connection with former section 23F funds
This clause will amend section 26AFA of the Principal Act to achieve the same result in relation to excessive or unauthorised benefits received from a section 23F fund as is obtained by the foregoing amendment to section 26AF in respect of benefits paid by funds specified in that section.
Clause 11: Assessable income to include value of benefits received from or in connection with funds that have obtained tax benefits under section 23FC
Clause 11 will insert new section 26AFB in Division 2 of Part III of the Principal Act in order to continue the policy embodied in existing sections 26AF and 26AFA designed to prevent abuse of concessions available to approved funds by payment of excessive or unauthorised benefits, following establishment of the new supervisory arrangements. The new section will ensure that where a taxpayer receives any such benefits from a fund approved by the Insurance and Superannuation Commissioner (or a fund which was formerly approved by the Insurance and Superannuation Commissioner) then the benefits will be subject to tax unless the Commissioner of Taxation is satisfied that this would be unreasonable. As noted above, this section will apply to benefits received from those funds which have at any time obtained tax exemption under section 23FC after Regulations have been made under the Standards Act embodying requirements relating to the level and nature of benefits paid.
New section 26AFB will assume the discretion currently available under section 26AFA in order to ensure that taxpayers are treated appropriately such as where loss of tax exemption by a fund may be regarded as a sufficient penalty for a breach of the relevant standards. However, the new section will not specify the taxpayers which will be liable to tax on relevant benefits since that could afford scope for avoidance of the provisions and any unintended impact of the provisions will be avoided by virtue of the discretion available to the Commissioner.
Section 27A of the Principal Act contains the definitions and interpretative provisions of Subdivision AA of Division 2 of Part III of the Principal Act which establishes a legislative framework for the taxation of superannuation, termination of employment and kindred lump sum payments. This clause will amend section 27A to make minor consequential changes to two of the definitions contained in the section.
An "eligible termination payment" is defined for the purposes of Subdivision AA to exclude an excessive or unauthorised superannuation benefit which is subject to tax under sections 26AF or 26AFA. The definition is being extended so as to exclude similar benefits taxed under new section 26AFB. The definition of "superannuation fund" in section 27A will also be varied to take account of the repeal of paragraph 23(ja), section 23F and section 23FB funds with effect from 1 July 1986.
Clause 13: Assessable income to include certain annuities and superannuation pensions
Section 27H of the Principal Act generally sets out the basis for taxing annuities and superannuation pensions. This clause will amend the definition of "annuity" in subsection 27H(4) to effectively exclude from the scope of section 27H certain financial arrangements taking the form of annuities which are designed to achieve substantial tax deferral advantages. By the amendments to be effected by clause 39 of the Bill, those arrangements are to be specifically designated to be qualifying securities for the purposes of Division 16E of Part III of the Principal Act, thus making clear that the yield derived from those arrangements falls subject to the accruals basis of assessment under that Division. Accordingly, the definition is being amended to exclude an annuity that is a qualifying security for the purposes of Division 16E.
Genuine annuities, such as those issued to individuals by life assurance companies and registered organisations will not be affected by the amendment.
Clause 14: Notional income where assessable income includes consideration receivable on disposal, loss or destruction of depreciated property
This clause will make a consequential amendment of section 59AB of the Principal Act as a result of the introduction of the proposed new income averaging arrangements for artists, composers, inventors, performers, production associates, sportspersons and writers (see notes to clause 38).
Section 59AB applies where a taxpayer has disposed of, lost or destroyed certain assets in respect of which depreciation has been allowed and, as a consequence, the taxpayer's business ceases. If, as a result, a balancing charge is required to be included in the assessable income of the taxpayer, section 59AB allows the taxpayer to pay tax on a notional amount rather than on the normal, and higher, taxable income. Ordinarily, the notional amount is the amount of the taxable income minus two-thirds of the balancing charge (Ed Note 'change' in original text) or, where the balancing charge exceeds the taxable income, one-third of the balancing charge.
Subsection 59AB(7) deals with a case where the taxpayer is also entitled to have a notional income determined under section 86 - by reason of receiving a leasehold premium - or under the present section 158D - by reason of receiving abnormal income as an author or inventor. The proposed replacement of the present tax arrangements for abnormal income of authors and inventors with new averaging arrangements, which do not require the determination of a notional income, will result in the reference in subsection 59AB(7) to section 158D becoming obsolete. Clause 14 will delete that reference.
Clause 15: Gifts, pensions, etc.
This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or of certain property other than money - made to the funds, authorities and institutions that are listed in the provisions.
The amendment proposed by paragraph (a) of clause 15 will insert new subparagraphs 78(1)(a)(xc) and 78(1)(a)(xci) in the Principal Act. Subparagraph (xc) will authorise deductions for gifts to the Ninth Australian Division Memorial of Participation (Alamein) Fund. Similarly, subparagraph (xci) will authorise deductions for gifts to the Korean and South East Asian and Vietnam War Memorials Anzac Square Trust Fund.
By new subsection 78(6AH), being inserted in the Principal Act by paragraph (b) of clause 15, gifts to the Ninth Australian Division Memorial of Participation (Alamein) Fund and the Korean and South East Asian and Vietnam War Memorials Anzac Square Trust Fund will be deductible if made on or after 15 June 1987 and on or before 30 June 1989. Clause 65 of the Bill authorises the Commissioner to amend an assessment made before the Bill becomes law to allow a deduction for a gift made to either of the two funds.
Clause 16: Transfer of loss within company group
Clause 16 proposes to amend section 80G of the Principal Act which allows groups of Australian companies with 100% common ownership to offset a loss, incurred in terms of section 80 of the Principal Act by a resident company within the group, against the taxable incomes of other resident companies in the group.
A loss deduction is transferable only where there is 100% common ownership, between the company which incurs the loss and the company to which the right to an allowable deduction for the loss is to be transferred, during the income year in which the loss is incurred, the year in which it is to be allowable as a deduction to the transferee company and in any intervening year.
Under subsection 80G(1) the common ownership test must be satisfied during the whole of a relevant year of income. If either or both of the companies was not or were not in existence for part of a year, it must be satisfied during that part of the year in which both companies were in existence. For these purposes, subsection 80G(5) treats a company as being in existence if it has been incorporated.
The combined effect of subsections 80G(1) and (5) is that a company which is incorporated during a year of income is only taken to be in a group relationship with another company or companies for the year of income if from the time of incorporation it is wholly owned for the remainder of that year of income by the other company or companies. Therefore, a company that is incorporated during a year of income and is subsequently acquired by another company during that year of income or a later year of income, cannot satisfy the common ownership test in respect of the new parent company for the year in which the acquisition takes place - notwithstanding that the newly incorporated company may not have operated between incorporation and the date of the acquisition.
The amendments of section 80G proposed by clause 16 of the Bill will enable the common ownership test for a year of income to be satisfied between companies where all the shares in a company that has never operated (commonly referred to as a "shelf company") are acquired by another company or other companies during the year of income and held for the remainder of the year of income. Similar amendments are proposed in relation to the common ownership test for companies applying for transfers of excess foreign tax credits (clause 42) or of net capital losses (clause 44), and the rollover of an asset between companies for capital gains tax purposes (clause 45).
By paragraph (a) of clause 16, subsection 80G(5) is to be made subject to proposed new subsection 80G(5A). Paragraph (b) proposes to insert new subsection 80G(5A) which will, in effect, deem a company that was dormant, within the meaning of Part VI of the Companies Act 1981, before acquisition by another company not to have been in existence prior to the time when it was acquired.
New subsection (5A) will apply where -
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- at a time (referred to as the "acquisition time") in the year of income commencing on 1 July 1986 or in a subsequent year of income, all the shares in a company (a "shelf company") are acquired by one or more companies (paragraph (a)) ; and
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- the shelf company was dormant within the meaning of Part VI of the Companies Act 1981 in the period (referred to as the "dormant period") between the time it was incorporated and the acquisition time (paragraph (b)).
Where these requirements are satisfied proposed subsection 80G(5A) will allow the shelf company not to be taken, for the purposes of subsection 80G(1), to have been in existence during the dormant period. Accordingly, the operation of existing subsection 80G(5) will be modified so that, for the purposes of subsection 80G(1), the test to establish a group relationship between the shelf company and another company must be satisfied only in relation to the period after the acquisition of the shelf company.
Section 266A of the Companies Act 1981 sets out a number of tests that must be satisfied if a company is to be taken to have been dormant throughout a particular period. The tests include that the company did not:
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- receive or become entitled to any income or incur or become liable for any expenditure;
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- purchase, sell or supply any goods or other property, or any services or enter into any agreement or pass any resolution in relation to the purchase, sale or supply of goods or other property or services;
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- issue, sell, purchase or make available any securities or enter into any agreement or pass any resolution in relation to such matter;
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- issue a prospectus or statement, or enter into any agreement or pass any resolution in connection with issue, sale, purchase or making available of any securities.
A company is not to be taken to have been other than dormant throughout a period by reason only that, during the period, the company:
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- issued shares to a person who was a subscriber to the memorandum of the company;
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- held shares in another company that was dormant throughout the period;
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- received or became entitled to income by way of a payment of a charge imposed by the company in connection with the performance by the company of an obligation imposed by the Companies Act 1981; or
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- incurred or became liable to any necessary expense in connection with the doing of any act or thing mentioned in paragraph (a) or (b), or in connection with the performance of an obligation imposed on the company, or an officer of the company, by the Companies Act 1981.
The amendments proposed to section 80G will also modify the application of section 82KZF of the Principal Act which allows a company to transfer to one or more other companies in a company group all or part of any excess of rental property loan interest for a year of income, that otherwise would be deemed to be incurred by the company in the succeeding year of income (the negative gearing provisions). By subsection 82KZF(2), the tests contained in section 80G which determine whether a company is a group company in relation to another company must be satisfied for section 82KZF to operate.
Consequently, section 82KZF will also apply to permit transfer of any excess property loan interest in accordance with that section to or from a shelf company introduced into a company group in a year of income.
However, by clause 21 of the Bill section 82KZD of the Principal Act is proposed to be amended so that the limitation on deductions for interest on borrowings used to acquire rental property investments will be abolished with effect from the commencement of the 1987-88 year of income. Accordingly, the application of the amendments of section 80G, as they modify the operation of section 82KZF, will be effective only for the 1986-87 year of income.
Section 82AAA of the Principal Act contains the definitions and interpretative provisions of Subdivision AA of Division 3 of Part III of the Principal Act which specifies the requirements for deductibility of contributions by employers to superannuation funds established to provide benefits to employees and their dependants. A dependant is defined for purposes of Subdivision AA as including a spouse and any children. This clause will amend section 82AAA to vary the definition of dependant to include a de facto spouse in line with the definition of dependant in the Standards Act. This change will enable deductions to be allowable for employer contributions to a fund established to provide superannuation benefits to the de facto spouse of a member in the event of a member's death.
Section 82AAS of the Principal Act contains the definitions and interpretative provisions of Subdivision AB of Division 3 of Part III of the Principal Act which provides an annual deduction of up to $1,500 for contributions to certain approved superannuation funds (designated as qualifying superannuation funds for the purposes of Subdivision AB) by self-employed persons or employees not entitled to superannuation benefits funded by their employers. The section will be amended by clause 13 of Taxation Laws Amendment Bill (No.3) 1987, which was introduced into Parliament on 23 September 1987, to maintain eligibility for the deduction for contributions to qualifying superannuation funds in circumstances where the contributor is also the recipient of employer-provided superannuation benefits pursuant to certain industrial awards.
Paragraph (a) of clause 18 will vary the definitions of "dependant" and "eligible superannuation fund" for the purposes of Subdivision AB. The change to the definition of dependant will ensure that it includes a de facto spouse in line with the definition of dependant in the Standards Act.
"Eligible superannuation fund" is a term used for the purposes of the proposed amendment to section 82AAS by clause 13 of Taxation Laws Amendment Bill (No.3) 1987 (see above) and specifies the funds to which contributions can be made by employers and prime contractors pursuant to certain industrial awards. The new definition of this term will reflect the fact that after proclamation of the operative provisions of the Standards Act, private superannuation funds will no longer be exempt under paragraph 23(ja), section 23F or section 23FB of the Principal Act. This situation will also mean that "eligible superannuation fund" may be used to describe the kind of funds to which personal superannuation contributions must be made in order to qualify for deductions under section 82AAT. Thus paragraph (b) of clause 18 omits the definition of "qualifying superannuation fund" from subsection 82AAS(1).
Clause 19: Deductions for superannuation contributions by eligible persons
Clause 19 will make certain consequential amendments to section 82AAT of the Principal Act which allows deductions for contributions to certain approved superannuation funds by contributors who are not entitled to superannuation benefits funded by an employer or any other person. In particular, paragraph (a) of clause 19 will enable such contributions to be made to a fund which is exempt under section 23FC (see also clause 18). Paragraph (b) will delete subsection 82AAT(3) which is no longer necessary as section 121CC of the Principal Act will not apply to funds exempt under section 23FC.
Clause 20: Deduction in respect of new plant installed on or after 1 January 1976
This clause will amend section 82AB of the Principal Act to extend by six months the date by which eligible property must be first used, or installed ready for use, to qualify for the investment allowance. Section 82AB authorises a deduction of up to 18% of capital expenditure incurred in the acquisition or construction of eligible property (subsection 82AB(1)) or an eligible Australian ship (subsection 82AB(1A)) that was acquired under a contract entered into before 1 July 1985, or which the taxpayer commenced to construct before that date, if it was first used, or installed ready for use, before 1 July 1987.
Clause 20 will amend paragraphs 82AB(1)(d) and 82AB(1A)(d) to extend that latter date by six months to 1 January 1988.
Clause 21: Limitation on deductions for rental property loan interest
This clause inserts subsection (1A) in section 82KZD to terminate, with effect from the commencement of the 1987-88 year of income, the operation of Subdivision G of Division 3 of Part III of the Principal Act. The Subdivision limits the deduction allowable in a year of income for interest on borrowings used to acquire rental property investments after 17 July 1985. The interest deduction is limited to an amount equal to the net rental property income from those investments. Section 82KZD applies that deduction limitation in respect of all such interest, whether actually incurred in a year of income or deemed by section 82KZE to have been incurred in that year following the disallowance of a deduction in the previous year under section 82KZD. Subsection 82KZD(1A) will ensure that the limitation on deductions will not apply in respect of interest incurred or deemed to have been incurred in the 1987-88 or any later year of income. As a result of this amendment the Subdivision will also not apply to currency exchange losses deemed by section 82ZA to be interest incurred in the 1987-88 or a later year of income. Furthermore, because section 82KZD will not operate to disallow deductions for interest incurred in the 1987-88 or a later year of income, subsections 160ZA (1) to (3), which permit the set off of such excess interest against capital gains from the disposal of rental property investments, will have no application in respect of interest incurred in the 1987-88 or a later year of income.
This clause will make a consequential amendment to section 102M of the Principal Act which contains the definitions and interpretative provisions of Division 6C of Part III of the Principal Act. Division 6C establishes a legislative framework for the taxation of the income of certain public trading trusts as if they were companies. However, some entities which may qualify as trading trusts for the purposes of the Division, including exempt superannuation funds and approved deposit funds, are specifically excluded from the ambit of Division 6C. This is achieved by specifying the relevant funds in paragraph (b) of the definition of "exempt entity" in section 102M.
The proposed amendment will delete the existing references in paragraph (b) to funds to which paragraph 23(ja) or sections 23F, 23FA or 23FB applies since these provisions will be repealed with effect from 1 July 1986. References will be substituted to those funds which will be exempt under sections 23FC or 23FD of the Principal Act as a result of obtaining a notice of approval from the Insurance and Superannuation Commissioner.
This clause will make a consequential amendment to section 110 of the Principal Act which contains the definitions and interpretative provisions of Division 8 of Part III of the Principal Act. Division 8 establishes a legislative basis for the taxation of income derived by life assurance companies other than income which is attributable to a life insurance policy vested in the trustee of an exempt superannuation fund. To take account of the proposed new supervisory arrangements being established by the Standards Act, this amendment will vary the definition of exempt superannuation fund for the purposes of Division 8 to confine it to those funds the income of which is exempt from tax under paragraph 23(jaa) (i.e., Government, semi-government and statutory funds) and funds which will be exempt under section 23FC of the Principal Act as a result of obtaining a notice of approval from the Insurance and Superannuation Commissioner.
Clause 24 will make consequential amendments to section 121B of the Principal Act which contains the definitions and interpretative provisions of Division 9B of Part III of the Principal Act. Division 9B provides a legislative basis for the taxation of the income of certain superannuation funds and approved deposit funds (designated as ineligible approved deposit funds for the purposes of Division 9B) that do not meet the requirements for exemption under the existing income tax law.
Paragraph (a) facilitates a wider meaning to the definition of 'losses and outgoings' - so that it might apply also to approved deposit funds (ineligible or otherwise) - by omitting the word superannuation from the reference to 'superannuation funds' in that definition.
Paragraph (b) inserts new definitions of "ineligible approved deposit fund" and "investment income" for the purposes of the Division. These definitions are explained below:
- "ineligible approved deposit fund" is basically a fund which has not obtained a notice of approval from the Insurance and Superannuation Commissioner but, in most cases, is still an approved deposit fund for the purposes of the Standards Act. That is, the fund is an indefinitely continuing one which is maintained by an approved trustee for approved purposes and in accordance with approved rules. In circumstances where part of the year of income of the fund occurred before 1 July 1986, the second condition above is replaced by the following requirements:
- •
- the fund was an approved deposit fund for the purposes of Subdivision AA of Division 2 of the Principal Act and on 30 June 1986 was maintained by an approved trustee as defined in that Subdivision; and
- •
- the fund was an approved deposit fund for the purposes of the Standards Act in respect of that part of the year of income which occurred on or after 1 July 1986.
- "investment income" of certain taxable superannuation funds is defined as being what would be the taxable income of an ordinary resident taxpayer not including contributions to the fund, concessional deductions or deductions for benefits paid and, in the case of a fund to which new section 121CC (as discussed in notes to clause 26) applies, any ineligible income of the fund.
Paragraph (c) inserts the following new definitions:
- "approved deposit fund" which means not only funds which have received certificates from the Insurance and Superannuation Commissioner (see notes to section 23FD) but also any "ineligible approved deposit fund" (see paragraph (b) above).
- "ineligible income" adopts the meaning given to that term in new section 121BA (see below) for the purposes of new section 121CC (also see below).
- "ineligible superannuation fund" requires, for its meaning, that it is a fund to which all of the following conditions relate:
- (a)
- section 23FC does not apply to the fund in relation to the year of income;
- (b)
- where the fund's year of income crossed 1 July 1986, it met the definition of superannuation fund in section 121B before that date and the definition of "superannuation fund" in the Occupational Superannuation Standards Act 1987 (the Standards Act) thereafter;
- (c)
- where paragraph (b) does not apply, the fund met the definition of superannuation in the Standards Act at all times during the year of income.
Clause 25: Ineligible income of section 121CC funds
This clause will insert new section 121BA in Division 9B of Part III of the Principal Act. Section 121BA defines "ineligible income" derived by a section 121CC fund as certain private company dividends and other excessive non-arm's length income. Broadly, a section 121CC fund will be a superannuation fund which has failed to comply with certain 'relevant investment standards' or, where relevant, the rules prescribed under section 121C (repealed by this Bill). Where a fund has failed the standards or rules but has also been the recipient of excessive private company dividends or other non-arm's length income, that income is to be regarded as 'ineligible income' and the higher rate of tax applicable to such income (see notes to clause 58) will apply.
Clause 26: Repeal of certain sections and insertion of new sections
Clause 26 both repeals certain sections of Division 9B of the Principal Act and inserts two new sections in that Division (which contains the assessment provisions relating to superannuation funds and approved deposit funds). Briefly, the repealed sections are:
- •
- Section 121C - which placed a limitation on the exemption of income of funds to which sections 23F or 23FB of the Principal Act (repealed by this Bill) applied where the investments of such funds failed to meet certain investment requirements (the "in-house assets" rules). Similar investment requirements are now to be found in the Occupational Superannuation Standards Act 1987 (the Standards Act).
- •
- Section 121CA - which provided for the assessment of the non-arm's length income of funds to which section 23F of the Principal Act applied. That section is also to be repealed by this Bill.
- •
- Section 121CB - which provided for the assessment of the non-arm's length income of funds to which section 23FB of the Principal Act applied. That section is also to be repealed by this Bill.
- •
- Section 121CC - which provided for the assessment of funds to which section 121C (see above) applied. That section is to be repealed by this Bill. However, see further notes to the new section 121CC.
The effect of those repealed sections is carried forward into the two new sections 121CC and 121D.
Section 121CC : Assessment of investment income of certain ineligible superannuation funds
Subsection 121CC(1) provides for the taxation of the investment income and any ineligible income derived by a fund which:
- •
- fails to meet the in-house investment requirement as specified in Regulations under the Standards Act and for that reason does not obtain a notice of approval from the Insurance and Superannuation Commissioner pursuant to section 12 or 13 of that Act;
- •
- is a superannuation fund for the purposes of the Standards Act; and
- •
- complies with all of the other operational standards imposed under the Standards Act in relation to funds.
By virtue of the new definition of investment income in section 121B and the application of new subsections 121CC(2) and 121CC(3), the ineligible income (that is, excessive non-arm's length income) derived by a fund to which section 121CC applies will be subject to tax at a certain rate (currently the top marginal rate) while the balance of the fund's assessable income as defined is taxed at the rate (currently 24%) specified for that income.
Subsection 121CC(4) will enable the in-house investment requirement to be clearly identified from other investment standards embodied in regulations to the Standards Act.
The operation of existing section 121CC will be saved by paragraphs 5(2)(d) and 5(2)(e) of the Standards Act pending its relocation in Regulations under that Act on a date designated as the "proclaimed superannuation standards day". During this interim period subsection 121CC(1) provides that the conditions which a fund has to meet in order to be treated as a section 121CC fund will vary depending on whether the proclaimed superannuation standards day ended during or after the year of income of the fund. In essence, this means that in relation to that part of the year of income which occurs before the proclaimed superannuation standards day (including where it is the whole of the year of income of the fund) the Commissioner has to be satisfied that existing section 121CC would have applied to the fund if it had continued in force after enactment of this Bill.
Section 121D : Assessment of private company dividend income and non-arm's length income of superannuation funds to which section 23FC applies
Section 121D provides for the taxation at a specified rate of certain private company dividends and other excessive non-arm's length income derived by a fund which has received a notice of approval from the Insurance and Superannuation Commissioner and whose income would otherwise be exempt from tax under section 23FC of the Principal Act.
Clause 27: Assessment of income of other superannuation funds
This clause will amend section 121DA of the Principal Act which provides for the taxation at a specified rate of income of a fund which is essentially an accumulating trust fund and would not qualify as a superannuation fund for the purposes of the Occupational Superannuation Standards Act 1987. Paragraph (a) of the clause makes certain minor consequential changes to section 121DA to take account of the repeal of sections 121CA and 121CB and the inclusion of new section 121D. Paragraph (b) takes account of the new definition of "investment income" in section 121B.
Clause 28: Assessment of income of ineligible approved deposit funds
This clause will make a minor consequential amendment to section 121DAA of the Principal Act, which provides for the taxation at a specified rate of the income of an "ineligible approved deposit fund" as defined for the purposes of Division 9B, to take account of the change to the definition of ineligible approved deposit fund in section 121B proposed by this Bill.
Clause 29: Assessment of private company dividend income and non-arm's length income of approved deposit funds to which section 23FD applies
This clause will insert new section 121DAAA in Division 9B of Part III of the Principal Act. Section 121DAAA provides for the taxation at a specified rate of certain private company dividends and other excessive non-arm's length income derived by an approved deposit fund which has received a notice of approval from the Insurance and Superannuation Commissioner and whose income would otherwise be exempt from tax under section 23FD of the Principal Act.
Clause 30: Repeal of section 121DAB and substitution of new section
Section 121DAB of the Principal Act provides for the assessment of the income of a superannuation fund which fails to meet the requirements of any of the exemption sections of that Act, not being a fund to which (now to be repealed) sections 121CA, 121CB or 121CC applies. That section is to be repealed and replaced by the following section.
Section 121 DAB : Assessment of income of certain other ineligible superannuation funds
Section 121DAB provides for the taxation at a specified rate of the investment income of a fund which:
- •
- is a superannuation fund for the purposes of the Standards Act;
- •
- fails to meet one or more of the operational standards imposed under the Standards Act and for that reason does not obtain a notice of approval from the Insurance and Superannuation Commissioner; and
- •
- is not a fund to which section 121CC of the Principal Act applies.
Where part of the year of income of the fund occurs before 1 July 1986, the fund will be required to meet the requirements of existing paragraph 121DAB(a) in lieu of requirements (a) and (b) above.
Clause 31: Income of superannuation funds and approved deposit funds to be taxed exclusively under this Division
This clause will make a minor technical amendment to section 121DB of the Principal Act so that, unless Division 11A of the Principal Act applies, the income of all approved deposit funds - not just "ineligible" ones - will be assessed under Division 9B.
Clause 32: Repeal of section 121DC and substitution of new section
Clause 32 will repeal existing section 121DC in Division 9B of Part III of the Principal Act and substitute the following new section.
Section 121DC : Taxable income
Section 121DC deems the amount on which the trustee of a superannuation fund or approved deposit fund is assessable and liable to pay tax under the relevant provisions of Division 9B to be the taxable income of the fund. It is intended to remove any doubt and to facilitate reference in other provisions of taxation legislation, such as the Rating Acts, to amounts on which funds are liable to tax under Division 9B.
Clause 33: Rebates and provisional tax
This clause will make a technical drafting amendment to section 121DD of the Principal Act to take account of the fact that the income of an approved deposit fund (other than an ineligible fund) may be subject to tax under Division 9B.
This clause will amend section 121F of the Principal Act to vary the references to certain exempt superannuation funds and approved deposit funds as a result of the establishment of the new supervisory arrangements for funds under the Standards Act.
Self explanatory (see notes on clause 34).
Clause 36: Deductions in respect of qualifying expenditure
This clause will amend section 124ZH of the Principal Act, which establishes the primary entitlement to deductions under Division 10D of Part III of the Principal Act, to reduce the rate of the allowable deduction.
Under Division 10D, deductions are allowable for capital expenditure on the construction of new buildings (including extensions, alterations or improvements to buildings) which are used for producing assessable income. The person who first owns the building, incurs the construction costs and uses the building for income producing purposes will generally be eligible for the deduction. Where ownership of a building changes hands, entitlement to deductions will generally pass, from the person previously entitled, to the new owner. In certain circumstances, a lessee who incurs the construction costs (an "eligible lessee") will be entitled to the deductions rather than the owner.
Under section 124ZH the present rate of the deduction is 4% per annum over 25 years and applies to buildings the construction of which commenced after 21 August 1984. For buildings commenced on or before that date, but after 19 July 1982, the construction cost is deductible at 2 1/2% over 40 years. The amendments proposed by this clause will reduce the rate of the deduction available under Division 10D, to 2 1/2% over 40 years, for capital expenditure on the construction of a building (or an extension etc) where construction commences after 15 September 1987. The 4% rate will still be available, however, for buildings which commence to be constructed after 15 September 1987 where there is a qualifying previous commitment, in relation to that construction, that is entered into on or before that date.
Paragraph (a) of this clause will amend subsection 124ZH(1). Subsection 124ZH(1) provides a deduction, at the appropriate rate that is prescribed in the subsection, equal to the full cost of the construction of a building provided that the building is used during the whole of the year of income for the purpose of producing assessable income. The amendment will insert new subparagraphs (c)(i) and (ii) which will apply the following rates in respect of the building (including an extension etc):
- •
- where the building commenced to be constructed after 21 August 1984 and on or before 15 September 1987 - 4% of the construction cost;
- •
- where the building commenced to be constructed after 15 September 1987 under a "qualifying previous commitment" (a term which is defined in proposed new subsection 124ZH(4) - see notes below) - 4% of the construction cost;
- •
- where the building commenced to be constructed after 19 July 1982 and on or before 21 August 1984 or commenced to be constructed after 15 September 1987 otherwise than under a "qualifying previous commitment" - 2 1/2% of the construction cost.
Paragraph (b) of this clause will amend subsection 124ZH(2) which provides a deduction, at the appropriate rate that is prescribed in the subsection, where a building is only used for part of a year for the purpose of producing assessable income. The amount of the deduction will bear the same proportion to the full construction cost that the number of days in the year that the building is used for income producing purposes bears to the total number of days in the year. The amendment will insert new subparagraphs (c)(i) and (ii) which will apply the same rates as are proposed for subsection 124ZH(1) (see notes above).
Paragraph (c) of this clause will amend subsection 124ZH(3), which limits the period over which a deduction under the section may be taken. The effect of the amendment will be:
- •
- where the 4% rate applies - deductions will not be available in respect of the construction cost after a period of 25 years; and
- •
- where the 2 1/2% rate applies - the deductions will not be allowable after a period of 40 years.
Paragraph (d) of clause 36 will insert subsection 124ZH(4) which sets out the circumstances in which a building is to be taken to have been constructed under a "qualifying previous commitment" and, as a consequence, eligible for the 4% rate of deduction notwithstanding that construction commenced after 15 September 1987. Essentially, one of two tests must be met in order for the qualifying previous commitment to arise.
The first test, as set out in new paragraph 124ZH(4)(a), is that the construction must have been undertaken pursuant to a contract that was entered into on or before 15 September 1987. In circumstances where the construction was undertaken pursuant to more than one contract, which frequently occurs, it will only be necessary for one of those contracts to be entered into on or before that date. However, each of those contracts must cover work that is an integral part of the overall improvement project planned at the time the first contract was entered into.
The second test, set out in paragraph 124ZH(4)(b), applies where the taxpayer raised borrowings in order to finance the capital expenditure on the construction. Three conditions must be satisfied in order for this test to be satisfied. First, the borrowings must have been raised and used for the financing of the relevant construction (subparagraph 124ZH(4)(b)(i)). Second, all such borrowings must have been raised pursuant to a contract or contracts entered into on or before 15 September 1987 (sub-subparagraph 124ZH(4)(b)(ii)(A)). For this condition to be satisfied, it is necessary for the borrowings to be raised either for the specific purpose of financing the particular construction, or for a number of purposes one of which was for financing the construction (sub-subparagraph 124ZH(4)(b)(ii)(B)). For example, the rollover or extension of an existing borrowing, which may have been raised for the purpose of financing prospective and unspecified construction work, would not be eligible. Third, each person who borrowed money to finance the construction must be a "qualifying investor" in relation to the construction - see the notes on new subsection 124ZH(5) below - (subparagraph 124ZH(4)(b)(iii)). This condition must be met by all the persons who borrow to finance the construction, in order for any of those persons to obtain the 4% rate of deduction.
Proposed new subsection 124ZH(5), in turn, specifies the conditions which must be satisfied for a person to be a qualifying investor for the purposes of new subsection 124ZH(4). These are:
- •
- in the case of the construction of a building (but not an extension, alteration or improvement to a building), a taxpayer will be a qualifying investor if:
- • .
- on 15 September 1987 the taxpayer was the owner or lessee of the land on which the building was constructed (subparagraph (a)(i)); or
- • .
- the taxpayer became the owner or lessee of that land under a contract entered into on or before 15 September 1987 (subparagraph (a)(ii));
- •
- in the case of the construction of an extension, alteration or improvement to a building or to a part of a building, a taxpayer will be a qualifying investor if:
- • .
- on 15 September 1987 the taxpayer was the owner or lessee of the building, or that part of the building, to which the construction related (subparagraph (b)(i)); or
- • .
- the taxpayer became the owner or lessee of the building, or that part of the building, pursuant to a contract entered into on or before 15 September 1987 (subparagraph (b)(ii)).
Clause 37: Capital gains and abnormal income to be disregarded
This clause will amend section 149A of Division 16 of the Principal Act. Division 16 sets out the system of income averaging for primary producers. Section 149A presently excludes from the calculation of the assessable and taxable income of a primary producer, for income averaging purposes, any amount of a net capital gain that is included in a taxpayer's assessable income by virtue of section 160ZO of the Principal Act.
The exclusion applies because capital gains are subject to their own special averaging arrangements and to have them taken into account for primary producers' averaging purposes would provide a taxpayer with a double averaging benefit in respect of the gain. With the introduction of the new income averaging arrangements for sportspersons and authors (see notes on clause 38) a similar exclusion is necessary for any amounts of abnormal income to which those arrangements will apply.
The effect of the amendment made by this clause will be to:
- •
- continue to exclude any net capital gain from a primary producer's taxable and assessable income (new paragraph 149A(1)(a) and subparagraph (b)(1)); and
- •
- to exclude from a primary producer's taxable income the amount of any abnormal income to which the new income averaging arrangements for authors, sportspersons etc will apply.
Clause 38: Division 16A - Abnormal Income of Artists Composers, Inventors, Performers, Production Associates, Sportspersons and Writers
This clause will repeal the existing Division 16A of Part III of the Principal Act and substitute a new Division 16A having wider application.
The existing Division 16A provides a concessional basis of taxation for abnormal income of inventors and authors (which term includes artists, composers and writers) by enabling the taxpayer to request the determination of a notional income upon which the rate of tax payable by the taxpayer will be calculated in lieu of the normal taxable income. This regime will be replaced, with effect from 1 July 1986 (subject to certain transitional arrangements described below), by an income averaging scheme (also described below). The new income averaging scheme will also apply to abnormal income received by performers, production associates and sportspersons.
The new taxing arrangements for abnormal income amounts will operate in the same fashion as for capital gains amounts, with which they will be aggregated. The taxpayers liability under this scheme will be calculated by applying to the aggregated amount the average rate of tax which one fifth of that amount would have borne as the 'top slice' of the taxpayer's taxable income.
A taxpayer's total taxable income is, therefore, divided into:
- •
- abnormal income, which is the subject of the new averaging arrangements; and
- •
- other income.
The first step in the new scheme is to calculate a taxpayer's abnormal income, which is the excess of the taxable income from the relevant activities prescribed in new Division 16A (the "eligible taxable income") over the average of such income in the previous 4 years.
Where there is no abnormal income, i.e., eligible taxable income is equal to or less than the average eligible taxable income of the previous four years, tax at ordinary rates will be payable.
In separately calculating eligible taxable income from other taxable income, deductions for expenses incurred in earning income will be allocated according to whether they are attributable to the earning of eligible or other income.
A taxpayer will qualify under the scheme if he or she has an eligible taxable income in excess of $2,500 in the 1986-87 year of income or any earlier year. Once that qualifying event has occurred, the taxpayer will remain eligible for the scheme even though his or her eligible taxable income may not, in subsequent years, exceed that amount.
Special provisions will apply in calculating the abnormal income of an eligible person in the first three years of application of the scheme (i.e., 1986-87, 1987-88 and 1988-89) and these will differ according to whether or not the taxpayer was a resident for tax purposes in the year preceding the year in which the qualifying event occurred. Taxpayers who were residents in that preceding year will, effectively, be treated as having had 2 years of NIL eligible taxable income prior to the year in which the qualifying event occurred. A resident person newly qualifying as an eligible person in the 1986-87 year or any subsequent year will, therefore, receive the benefit of an abnormal income amount in the first year.
For this class of taxpayer in respect of whom the qualifying event occurred prior to 1986-87, the proposed new arrangements will take into account, in calculating the average eligible taxable income of the taxpayer, any eligible taxable income derived in those years prior to 1986-87.
On the other hand, for taxpayers who were not residents for tax purposes in the year preceding the year of qualifying, the averaging arrangements will treat the actual eligible taxable income received by the taxpayer in that qualifying year as the average eligible taxable income for the first two years that those arrangements apply to the taxpayer. Accordingly, such a person will not have an abnormal income in the first year.
For the 1986-87 income year only, taxpayers eligible for the existing authors and investors scheme will have the option of being taxed under that scheme or the new scheme.
Specific notes on the individual sections of the proposed new Division 16A of Part III of the Principal Act are contained in the following notes.
New section 158B contains definitions of terms which have general use in new Division 16A as well as an interpretative provision relevant to the definition of "associate". Each defined term is to have the given meaning unless the contrary intention appears. Subsection 158B(1) contains the definitions, which are explained as follows:
- "arrangement" is defined in the same way as in other anti-avoidance provisions of the income tax law and will mean any formal or informal agreement, arrangement or understanding, whether or not enforceable by legal proceedings, and will include any express or implied arrangements (paragraph (a)). The term will also apply to any scheme, plan, proposed action, course of action or course of conduct, whether unilateral or otherwise (paragraph (b)).
- "artist" is defined as meaning the author of an artistic work. By referring to an "author of an artistic work" the definition is intended to pick up the meaning of those terms as they are used in the Copyright Act 1968. An artist is one of the class of "eligible person" (see notes below) to which the provisions of the new Division 16A will apply.
- "associate" is defined to have the same meaning as that term has in section 26AAB of the Principal Act. The definition in section 26AAB specifies who is an associate in relation to a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately he regarded as being associated with a particular person.
- "composer" is defined as the author of a musical work. Accordingly, it adopts the meaning that "author of a musical work" has when it is used for the purposes of the Copyright Act 1968. A composer is one of the class of "eligible person" for the purposes of the new Division 16A.
- "eligible person" defines the class of person to whom the new income averaging provisions of the proposed Division 16A will apply. These classes of eligible person are -
- (a)
- an artist;
- (b)
- a composer;
- (c)
- an inventor;
- (d)
- a performer;
- (e)
- a production associate;
- (f)
- a sportsperson;
- (g)
- a writer.
Each of these terms is separately defined in subsection 158B(1). The eligibility of these classes of persons for the purposes of the new Division 16A is, however, subject to specific qualification under proposed sections 158F and 158G (see notes to those sections below).
- "inventor" is defined as the inventor of an invention. This, therefore, makes the definition compatible with the use of such terms in the Patents Act 1952. An inventor is one of the class of "eligible person" for the purposes of the new Division 16A.
- "performer" for the purposes of Division 16A is defined exhaustively by reference to the activities which a performer (commonly referred to in the entertainment industry as a performing artist) undertakes as part of his or her profession. These are activities which involve the exercise by a person of intellectual, artistic, musical, physical or other personal skills in the presence of an audience. Specifically, these activities are :
- (i)
- music;
- (ii)
- a play;
- (iii)
- dance;
- (iv)
- an entertainment;
- (v)
- an address;
- (vi)
- a display;
- (vii)
- a promotional activity;
- (viii)
- an exhibition.
- Although this listing would encompass most activities within the public entertainment field it is recognised that there might be activities of a similar kind which could fall outside the categories listed. Subparagraph (a)(ix) of this definition therefore provides that such similar activities may qualify.
- The second limb to the definition of "performer" covers those activities within the performing arts field which are not always carried on in the presence of an audience. These activities are those in the performance or appearance of the person in or on a film, tape or disc or in a television or radio broadcast.
- "production associate" is intended to bring within the ambit of "eligible person" for the purposes of the new Division 16A those people who have an associated artistic input into any of the activities mentioned in the definition of "performer" (see above). The classes of services provided by these persons - which are comprehensively prescribed in the definition of "recognised associated services" (see below) - are categorised as being of an artistic nature rather than of a technical nature.
- "recognised associated services" which is central to the meaning of "production associate" (see above), is defined by reference to a list of associated artistic contributors to activities mentioned in the definition of "performer" (see above). Persons performing the following functions comprise that list (paragraph (a) of the definition):
- (i)
- an art director;
- (ii)
- a choreographer;
- (iii)
- a costume designer;
- (iv)
- a director;
- (v)
- a director of photography;
- (vi)
- a film editor;
- (vii)
- a lighting designer;
- (viii)
- a musical director;
- (ix)
- a producer;
- (x)
- a production designer;
- (xi)
- a set designer.
Paragraph (b) of the definition enables a person to qualify as an "eligible person" if he or she makes an artistic contribution, similar to the contribution made by any of the persons listed in paragraph (a), to any of the activities mentioned in the definition of "performer", but which might otherwise fall outside the ambit of Division 16A by not falling within the list of functions mentioned in paragraph (a). Paragraph (b) requires an artistic contribution (for example, by designing and applying elaborate makeup) and not merely a technical one (for example, by operation of camera or sound equipment).
- "sport" is the central concept to the provision of a system of averaging for sportspersons. It is defined by reference to the activities by which a sportsperson competes and, by competing, takes a different role in the activities from those whose role is ancillary to the competitor - these persons are excluded either directly (in proposed section 158F - see below) or because their role does not involve them primarily in the exercise of physical prowess, physical strength or physical stamina.
- Sport, for the purposes of the proposed Division 16A, is so much of a sporting activity as satisfies certain specified conditions. By referring to 'so much' of the activities, the definition excludes activities which are carried out as a preliminary to the competitive part of the sport, for example, by strappers or grooms in the preparation of horses for racing. It is not intended, however, to exclude jockeys (who are clearly competitors) from having their income from track-work riding being treated as eligible assessable income (see below).
The conditions which must be met for an activity to meet the definition of "sport" are specified in paragraph (a) to be that:
- •
- human beings compete by riding, or by exercising other skills in relation to animals (subparagraph (a)(i)) - for example, as a jockey, rodeo rider, etc;
- •
- human beings compete by driving, piloting or crewing motor vehicles, boats, aircraft or other modes of transport (subparagraph (a)(ii)) - this would cover, in addition to such obvious activities as driving racing cars or rally driving, skateboarding and BMX bicycle competitions;
- •
- human beings compete with, or overcome, natural obstacles or natural forces (subparagraph (a)(iii)) - mountain climbing would fit this description.
- •
- human beings are the sole competitors (subparagraph (a)(iv)) - for example, football, tennis, cricket, golf, athletics, etc;
Paragraph (b) requires that the persons competing in sport must do so primarily by the use of physical prowess, physical strength or physical stamina. The paragraph expressly exempts from this qualification:
- (i)
- a navigator in a car rally race;
- (ii)
- a coxswain in rowing;
- (iii)
- any competitor whose role is of a similar nature.
Under section 158F (see below) certain activities which might otherwise be taken to be activities which are part of a "sport" are specifically excluded.
- "sportsperson", which is another category of "eligible person" (see above) for the purposes of new Division 16A, is a person who competes in a sport in any of the ways identified in the definition of "sport".
- "taxpayer" is confined to a natural person other than a trustee.
- "writer" is the last of the definitions linked to terms in the Copyright Act 1968 and means the author of a literary or dramatic work. A writer is an "eligible person" (see above).
Subsection 158B(2) is an interpretative provision that ensures that the definition of "associate" in subsection 158B(1) includes a de facto spouse. This ensures that de facto spouses are treated no differently to legal spouses in determining whether an arrangement (see above) exists for the purposes of the ineligibility provisions (section 158G) or the anti-exploitation provisions (subsection 158H(2)) of the new Division 16A.
Section 158C : Joint authors and joint inventors
New section 158C, which is identical to existing section 158E, is an interpretative provision that ensures that a reference in new Division 16A to an author or inventor includes a case where 2 or more persons collaborate in the authorship of a literary, dramatic, musical or artistic work or are joint inventors of an invention.
Section 158D : "Year of income" includes a pre-commencement year of income
Section 158D is necessary for the operation of new Division 16A in the 1986-87 year of income and the income years up to the 1989-90 year of income. The calculation of the average eligible taxable income of a taxpayer of a year of income (the current year) takes into account the eligible taxable incomes of (up to) the 4 income years preceding the current income year. Therefore, in the 1986-87 to 1989-90 years of income, the calculation may need to have regard to eligible taxable incomes derived in years prior to the commencement of the new Division 16A, that is, in the 1985-86 and earlier years. Section 158D provides that a year of income that commenced before the year of commencement may be taken into account. Under subclause 48(4) of this Bill, new Division 16A applies to assessments in respect of income of the year of income tax commenced on 1 July 1986.
Section 158E : Qualifying resident taxpayer
By virtue of new sections 158K and 158L (see below) only a "qualifying resident taxpayer" can have an abnormal income which is subject to the special averaging arrangements under the new Division 16A. New section 158E will provide that a taxpayer can be a qualifying resident taxpayer in relation to a year of income if, and only if, the taxpayer is a resident of Australia at any time during the year.
Section 158F : Activities that do not result in taxpayers being treated as eligible persons
The purpose of proposed section 158F is to put beyond doubt that certain activities will not result in a person qualifying as an eligible person on the basis of being a "sportsperson" (see above for an extensive discussion of this term in the notes to new section 158B). The non-qualifying activities specified in the section are:
- (a)
- coaching or training competitors in sport;
- (b)
- umpiring or refereeing sport;
- (c)
- administering sport;
- (d)
- being a member of the pit crew in motor sport;
- (e)
- being a theatrical or sports entrepreneur;
- (f)
- owning or training animals.
By virtue of this section, it is made clear that the income derived from the above activities will not be eligible assessable income for the purposes of the proposed new Division 16A and, hence, will not be included in any amount of abnormal income to which the averaging arrangements of the Division will apply.
Section 158G : Artists, composers, inventors and writers rendering services to others not to be treated as eligible persons unless engaged to produce specified works etc
Section 158G will exclude from the averaging arrangements under the new Division 16A those persons who are no more than employees but whose activities give rise to the technical production of artistic works, literary works, dramatic works or musical works or inventions. As indicated in the notes to the definitions of "artist", "composer" and "writer", there is a link between those definitions and the Copyright Act 1968. There is a similar link between the definition of "inventor" and the Patents Act 1952. Persons such as journalists, architectural draftspersons, graphic artists are among a class of persons who produce the abovementioned works as an ordinary part of their employment. It is not intended that this class of person should, simply as a result of their ordinary employment tasks, qualify to have the income arising from the carrying out of those tasks taken into account for the purposes of the new Division 16A.
An artist, composer, inventor or writer who arranges for the rendering of services to another person will not qualify as an "eligible person" - and will not be eligible for income averaging under Division 16A - unless two tests are satisfied.
First, the arrangement must have been entered into solely for the taxpayer to undertake the completion of one or more specified artistic works, literary works, dramatic works or musical works or the invention of one or more specified inventions (paragraph 158G(e)). Second, the taxpayer must not have been, nor reasonably be expected to be, rendering such services to the other person or an associate of the person under successive arrangements of a kind that result in substantial continuity of the rendering of such services by the taxpayer (paragraph 158G(f)).
Section 158H : Eligible assessable income
New section 158H, will identify the income of a taxpayer that is to be regarded as "eligible assessable income". Eligible assessable income is that part of a taxpayer's total assessable income that is derived from the taxpayer's activities as an eligible person (i.e. author, sportsperson etc - see notes to new section 158B). Calculating eligible assessable income is a necessary step in calculating eligible taxable income (see new section 158J) which, in turn, is an element in the calculation of the abnormal income to which Division 16A will apply.
Section 158H will establish 4 classes of assessable income (gross income minus exempt income) which will comprise eligible assessable income.
The first class (paragraph (1)(a)) is assessable income derived in relation to services rendered by the taxpayer to the extent to which the assessable income is derived as a reward in respect of the taxpayer's activities as an eligible person. The underlined words make it clear that where a taxpayer is entitled to remuneration both for activities which make him or her an eligible person and for other unrelated activities, only the assessable income received from the former activities will qualify as "eligible assessable income".
For example, a taxpayer may receive remuneration as a player - coach of a football team. Activities as a football player are activities as a competitor in a sporting activity to which subparagraph (a)(i) of the definition of "sport" in section 158B refers and, as such, the taxpayer will satisfy the "sportsperson" category of "eligible person" (see notes on section 158B for discussion of the terms "sport", "sportsperson" and "eligible person"). On the other hand, the activity of coaching competitors in sport is expressly excluded (section 158F - see above) from activities which result in a person being treated as an "eligible person". In the case of player-coach, therefore, it is necessary to determine the extent to which the remuneration is attributable to the person's playing activities (the "eligible assessable income") and the extent to which it is attributable to the coaching activities (which will not be income that is taken into account for Division 16A purposes). Safeguarding provisions (in subsection 158H(2) - see below) will enable the Commissioner of Taxation to apportion amounts of assessable income between the eligible and ineligible components, when there is doubt as to the extent of the eligible component.
It is irrelevant for the purposes of paragraph (a) whether or not the assessable income is derived by way of consideration for the taxpayer entering into an arrangement for the rendering of services. This means that both employees (e.g. most footballers) and independent persons (e.g. tournament professional golfers and tennis players) may have the income derived from those activities qualify as eligible assessable income under paragraph 158H(1)(a).
Paragraph (b), strictly speaking, does not constitute a separate class of income from the classes mentioned elsewhere in subsection 158H(1), but is intended to put beyond doubt that prizes given in respect of a taxpayer s activities as an eligible person will qualify as eligible assessable income.
Paragraph (c) will include assessable income derived by a taxpayer that is attributable to the taxpayers activities or former activities as an eligible person although the income does not derive directly from those activities. Four specific services are mentioned in paragraph (c):
- (i)
- endorsing or promoting goods or services;
- (ii)
- appearing or participating in an advertisement;
- (iii)
- appearing or participating in an interview;
- (iv)
- services rendered by the taxpayer as a commentator.
Subparagraph (c)(v) also includes assessable income derived by an eligible person or a former eligible person from rendering any services of a kind similar to those in subparagraphs (i) to (iv).
It is important to note that a person need not be an active artist, sportsperson, performer, etc to have income of the kind mentioned in paragraph (c) qualify as eligible assessable income, provided that the person had once qualified as an "eligible person" of the relevant kinds (see above) and provided that there is sufficient nexus between those activities, or former activities, and the services being rendered by the taxpayer. It should also be noted that, to a large extent, former sportspersons (as an example) may cross over into the "performer" category of "eligible person" when they become radio or television commentators or appear or participate in television or radio advertisements or interviews (see discussion above under section 158B of the terms "performer" and "eligible person").
Paragraph 158H(1)(d) includes as eligible assessable income, the kinds of income which are peculiarly derived by "artists", "composers", "inventors" and "writers" (see notes under section 158B for the meaning of these terms). Most of these kinds of assessable income are already included in abnormal income under the present Division 16A (subsection 158C(2)) with one important exception. The present Division 16A excludes from the definition of "recurrent earnings" remuneration for the employment of, or for services rendered by, the taxpayer. The new Division 16A will allow the income derived by artist, composers, inventors and writers from employment or services rendered by them (subject to the special exclusion provisions of section 158G discussed above) to qualify as eligible assessable income.
The kinds of assessable income specifically mentioned in paragraph 158H(1)(d) are :
- (i)
- consideration for the assignment of intellectual property rights in any literary, dramatic, musical or artistic work or invention (as the case may be) produced by the taxpayer;
- (ii)
- advances on account of royalties in respect of such a copyright or patent;
- (iii)
- prizes in respect of such a work or invention. This complements the inclusion under paragraph (1)(b) of prizes in respect of activities rather than works.
- (iv)
- any other amount received by the taxpayer in respect of, or in respect of the intellectual property in, any literary, dramatic, musical or artistic work or invention (as the case may be) produced by the taxpayer.
Subsection 158H(2) is a special provision to prevent the exploitation of the concessional tax treatment afforded under Division 16A to eligible assessable income through the entering into of arrangements for the receipt of eligible assessable income and other assessable income where the arrangements have the effect of inflating the eligible assessable income in the 1986-87 and subsequent years of income. Subsection (2) also has a transitional application discussed below.
As an example of the ordinary application of subsection (2) the bar manager of a football club may also be a player in the club's team and an arrangement might be entered into purporting to pay him a much higher remuneration as a player to increase his eligible assessable income and to decrease his remuneration as bar manager by an amount corresponding to the inflation in his playing remuneration. Another example would be where the owner of a theatre enters into an arrangement whereby she appears as a performer in an activity in the theatre. The rent otherwise chargeable for the use of the theatre may, under the arrangement, be reduced by an amount equivalent to an increase in her remuneration as a performer.
Subsection (2) also has a transitional effect in that persons may retrospectively enter into agreements in relation to assessable income derived during income years prior to 1 July 1986 (the effective date of the new averaging arrangements) to understate the amount of income which would have qualified as "eligible assessable income" in those earlier years. The purpose of such arrangements would be to lower the average eligible taxable income of the taxpayer (see notes to section 158K below) for the 1986-87 and subsequent years and thereby increase the abnormal income amount (see notes to section 158L below) in those years which is subject to the special averaging arrangements under the new Division 16A. In such cases, the Commissioner may increase the small component - in this case the component of eligible assessable income - by the amount he considers that that component was understated so that the amount could be included in the large component of other assessable income.
Subsection 158H(2) will allow the Commissioner to reduce or increase the amount of the eligible assessable income to the level which, in his opinion, reflects the amount which is attributable to the activities which gave rise to eligible assessable income. The subsection will not, however, give rise to any increase or decrease in the taxable income of the taxpayer because the reduction or increase in eligible assessable income is offset against a corresponding increase or decrease in the other assessable income of the taxpayer.
Subsection (3) excludes 3 types of assessable income from the calculation of eligible assessable income. These are:
- •
- an amount which is included in the class of lump sum payments which are eligible termination payment within the meaning of Subdivision AA of Division 2 of the Principal Act (paragraph (a)). Lump sum payments on termination of employment or from a superannuation fund are included in this class;
- •
- an amount received by a person in respect of his or her unused annual leave entitlements (assessed under section 26AC of the Principal Act) or in respect of his or her unused long service leave entitlements (which are assessed under section 26AD of that Act) - paragraph (b);
- •
- the amount of any net capital gain (within the meaning of Part IIIA of the Principal Act) included in the person's taxable income - paragraph (c).
The types of assessable income which fall within the first two paragraphs are subject to their own concessional taxing arrangements and, therefore, are not appropriate to be included in the arrangements under proposed Division 16A. The exclusion of capital gains amounts is to ensure that, although abnormal income amounts and capital gains amounts are aggregated in applying a rate of tax to them, a capital gain should be dealt with primarily under the capital gains tax provisions (Part IIIA) and not under the new Division 16A.
Section 158J : Eligible taxable income
New section 158J will identify the income of a taxpayer that is to be regarded as "eligible taxable income". Eligible taxable income is an element in the calculation of the abnormal income to which new Division 16A will apply.
Under income tax law, taxable income is assessable income minus any allowable deductions. Eligible taxable income, as identified in new section 158J, is the taxpayer's assessable income, derived from activities related to the taxpayer's status as an eligible person (i.e. the "eligible assessable income" identified by new section 158H) minus any allowable deductions that are attributable to that assessable income (and not to other "ineligible" taxable income). Three classes of deductions are allowable:
- •
- deductions that relate exclusively to the taxpayer's eligible assessable income (paragraph (a)). These are deductions that are incurred exclusively in relation to any of the income identified in new section 158H and would include, for example, the cost of sporting equipment used by a sportsperson;
- •
- such proportion of any other deductions which, although not exclusively related to the incurring of the taxpayer's eligible assessable income, are in the Commissioner's opinion, appropriately related to that income. For example, a taxpayer may use a motor vehicle partly in carrying on activities as a sportsperson and the remainder of its use in carrying out business activities of an ordinary kind. The motor vehicle expenses would be apportioned between these different uses, for example, on the basis of kilometres travelled in those different uses. This class of deductions does not include "apportionable deductions".
- "Apportionable deductions" (defined in subsection 6(1) of the Principal Act) are a class of deductions which are provided under the Principal Act without their having any connection with the production of any assessable income. Deductions for donations made to certain organisations (allowable under subsection 78(1) of the Principal Act) are an example of this class. Under a formula contained in paragraph 158J(c). Apportionable deductions are deducted from the eligible taxable income of an eligible person according to the proportion that the eligible taxable income otherwise ascertainable bears to the aggregate of the taxable income of the taxpayer and the apportionable deductions.
Section 158K : Average eligible taxable income
New section 158K will identify a taxpayer's average eligible taxable income (AETI), which is one of the components of the calculation of abnormal income. Abnormal income is defined in new section 158L as the excess (if any) of eligible taxable income of the year of income over the AETI of that year.
Ordinarily, AETI in a year of income will be one-quarter of the sum of the eligible taxable incomes for the preceding 4 years. Special rules will apply, however, for calculating the AETI where any of those 4 years is one of the first 4 years in respect of which the taxpayer was a qualifying resident taxpayer for the purposes of section 158E (see above) and had an eligible taxable income exceeding $2,500.
Subsection 158K(1) is an interpretative provision which establishes the meaning of the "first year of income", which is relevant to calculating the AETI of a taxpayer. The first year of income will be the year in which the taxpayer:
- •
- first became a qualifying resident taxpayer (i.e., the taxpayer was resident in Australia at any time during the year of income - see section 158C); and
- •
- had eligible taxable income in excess of $2,500.
The AETI of a taxpayer for the first 4 years of income differs depending upon whether the taxpayer is an "original non-resident" taxpayer or not. If a person is an original non-resident taxpayer, the AETI will be determined according to subsection (4). If not, then subsection (3) will apply to determine the AETI.
Under the new subsection 158K(2), an "original non-resident taxpayer" will be a taxpayer who was not a resident for tax purposes at any time during the year of income immediately before the first year of income.
The majority of persons who are eligible persons in relation to a year of income will fall to have their average eligible taxable income determined under subsection 158K(3) - this is because they would be residents for income tax purposes during the year of income immediately preceding the first year of income and, accordingly, would not be taken to be original non-resident taxpayers.
The calculation of average eligible taxable income will differ according to the relevant year of income:
- •
- for the first year of income (see notes to subsection (1)), the average eligible taxable income is nil. Therefore, all of the eligible taxable income would be abnormal income - paragraph (a).
- •
- for the year of income which follows immediately after the first year of income (the "second year of income") the average eligible taxable income is one-third of the taxpayer's eligible taxable income of the first year of income - paragraph (b).
- •
- for the year of income which follows immediately after the second year of income (the "third year of income"), the average eligible taxable income is one-quarter of the aggregate of the taxpayer's eligible taxable incomes of the previous 2 years of income - paragraph (c).
- •
- for the year of income which follows immediately after the third year of income, that is, the fourth year in which the taxpayer has received eligible assessable income (having in the first year of income met the requirements of subsection (1)), the average eligible taxable income is one-quarter of the aggregate of the taxpayer's eligible taxable incomes of the previous 3 years of income - paragraph (d).
- •
- for every year of income following the year of income mentioned in paragraph (d), the average eligible taxable income of the taxpayer is one-quarter of the aggregate of the taxpayer's eligible taxable incomes of the preceding 4 years of income - paragraph (e).
For a person who is an original non-resident taxpayer (as discussed above in relation to subsection 158K(2)) the calculation of his or her average eligible taxable income is made on a different basis, but again according to which of the 5 paragraphs of subsection 158K(4) applies:
- •
- where the year of income in relation to the taxpayer is a "first year of income" (see notes to subsection (1)), the average eligible taxable income of the taxpayer is the eligible taxable income of the taxpayer of that year - paragraph (a). This means an original non-resident cannot have an abnormal income in the first year of income.
- •
- for the year of income which follows immediately after the first year of income (the "second year of income") the average eligible taxable income of the taxpayer is the taxpayer's eligible taxable income of the first year of income - paragraph (b).
- •
- for the year of income which follows immediately after the second year of income (the "third year of income") the average eligible taxable income of the taxpayer is one-half of the aggregate of the taxpayer's eligible taxable income of the previous 2 years of income - paragraph (c).
- •
- for the year of income which follows immediately after the third year of income, that is, the fourth year in which the taxpayer has received eligible assessable income (having in the first year met the requirements of subsection (1)), the average eligible taxable income is one-third of the aggregate of the taxpayer's eligible taxable incomes of the previous 3 years of income - paragraph (d).
- •
- for every year of income following the year of income mentioned in paragraph (d), the average eligible taxable income of the taxpayer is one-quarter of the aggregate of the taxpayer's eligible taxable incomes of the preceding 4 years of income - paragraph (e).
The difference between the effect of subsections (3) and (4) may be illustrated as follows:
| Year of income | Eligible taxable income | Average eligible taxable income |
|---|---|---|
| 1987-88 | $15,000 | Nil |
| 1988-89 | $25,000 | $ 5,000 |
| 1989-90 | $30,000 | $10,000 |
| 1990-91 | $30,000 | $17,500 |
| 1991-92 | $40,000 | $25,000 |
| Year of income | Eligible taxable income | Average eligible taxable income |
|---|---|---|
| 1987-88 | $15,000 | $15,000 |
| 1988-89 | $25,000 | $15,000 |
| 1989-90 | $30,000 | $20,000 |
| 1990-91 | $30,000 | $23,333 |
| 1991-92 | $40,000 | $25,000 |
Section 158L : Abnormal income
This section completes the set of four which gives operative effect to the system of averaging of abnormal income of artists, composers, inventors, performers, production associates, sportspersons and writers which proposed Division 16A will provide.
The first requirement for the taxable income of a taxpayer to be taken to include an abnormal income amount is contained in paragraph (a) of section 158L. This is that the taxpayer must be a "qualifying resident taxpayer" in relation to the year of income. (Qualifying resident taxpayer is defined in proposed section 158E and discussed in the notes to that section above.) The year of income is referred to in section 158L as the "current year of income".
The second requirement (paragraph (b)) is that one of two specified conditions have been met. The first (in subparagraph (i)) is that the eligible taxable income (see notes to section 158H) of the taxpayer of the current year of income (see above) exceeds $2,500. Alternatively (subparagraph (ii)), in a preceding year of income the taxpayer must have been a qualifying resident taxpayer (section 158E) and his or her eligible taxable income of that year must have exceeded $2,500.
The final requirement (paragraph (c)) which must be satisfied is that the eligible taxable income of the taxpayer of the current year of income exceeds the average eligible taxable income of the taxpayer (as calculated under section 158K - see earlier discussion on this section) for the current year of income.
Where all of these requirements are met the taxable income of the taxpayer of the current year of income is taken to include an abnormal income amount equal to the amount of the excess referred to in paragraph (c).
The abnormal income amount thus determined is aggregated with any capital gains component for assessment purposes. For a detailed explanation of the calculation of tax on those amounts refer to the notes to Part III of this Bill - the amendments of the Income Tax Rates Act 1986 - in particular the notes to clause 54.
To illustrate the calculation of the abnormal income amounts the examples in the notes to section 158K might be used.
| Year of income | Eligible taxable income | Average eligible taxable income | Abnormal income amount |
|---|---|---|---|
| 1987-88 | $15,000 | Nil | $15,000 |
| 1988-89 | $25,000 | $ 5,000 | $20,000 |
| 1989-90 | $30,000 | $10,000 | $20,000 |
| 1990-91 | $30,000 | $17,500 | $12,500 |
| 1991-92 | $40,000 | $25,000 | $15,000 |
| Year of income | Eligible taxable income | Average eligible taxable income | Abnormal income amount |
|---|---|---|---|
| 1987-88 | $15,000 | $15,000 | Nil |
| 1988-89 | $25,000 | $15,000 | $10,000 |
| 1989-90 | $30,000 | $20,000 | $10,000 |
| 1990-91 | $30,000 | $23,333 | $ 6,667 |
| 1991-92 | $40,000 | $25,000 | $15,000 |
This clause will amend some definitions in section 159GP, an interpretative provision in Division 16E of the Principal Act. That Division prescribes an accruals basis of assessment for the return on "qualifying securities" issued after 16 December 1984 and the definitions to be amended relate to the determination of the assessable income of a holder of a qualifying security.
Firstly, the amendments will modify the existing definition of "notional accrual amount" (which basically refers to the amount of income accruing on a qualifying security for a particular period), to cater for qualifying securities which incorporate either:
- •
- payments, other than payments of periodic interest, during the security term; or
- •
- payments of periodic interest other than at the end of a notional accrual period.
Secondly, the amendments will prescribe the annuities to be treated as "qualifying securities" for the purposes of Division 16E.
It is relevant to the first of those amendments that in calculating a "taxpayer's yield to redemption" (broadly, the measure of the return) in relation to a qualifying security, the timing and amounts of all payments (periodic interest and other) under the security are taken into account. In determining the notional accrual amount for each notional accrual period (i.e., each six monthly period within the term of the security), the existing legislation assumes that each interest payment during the period will be made at the end of the period. Furthermore, there is no specific allowance for reductions in the security's value when payments, other than interest payments, are made during the security's term. The amending paragraphs correct this situation.
Paragraph (a) amends the existing definition of component B in the "notional accrual amount" formula in section 159GP by providing that payments other than payments of periodic interest will reduce the security's value. This reduction is necessary because the income accruing in each accrual period is determined by reference to the reduced principal outstanding at the commencement of each accrual period. Example 1 at the end of the notes on this clause illustrates the effect of this amendment.
Paragraph (b) amends the existing definition of component C in the same formula to allow for a proper adjustment to be made where payments are made other than at the end of an accrual period.
The adjustments are required where the payments made are periodic interest payments (new subparagraph (a) of the section 159GP description of item C in the "notional accrual amount" formula) and payments other than periodic interest (new subparagraph (b) of item C). Examples (2) and (3) at the end of the notes on this clause demonstrate the adjustments required.
Paragraph (c) amends the definition of "qualifying security" to exclude from it's scope annuities other than those specifically designated as qualifying securities for the purposes of Division 16E by proposed new subsection 159GP(10) (see the notes on paragraph (e) below).
Paragraph (d) gives meaning to the term "ineligible annuity" as well as importing, into section 159GP and thus Division 16E, definitions used in other areas of the Principal Act. The definitions included in the paragraph are:
- "agreement" and "associate" as defined in Subdivision D of Division 3 which addresses the deductibility of losses or outgoings under various avoidance schemes. These definitions are relevant to the effective operation of proposed subsection 159GT(6) (see the notes on clause 40);
- "ineligible annuity" as used in proposed new subsection 159GP(10) (to which the notes of paragraph (e) below refer) and describes annuities which are not to be treated as "qualifying securities" for the purposes of Division 16E, and to which section 27H will continue to apply. The definition of "ineligible annuity" will cover annuities issued by either a "life assurance company" or "registered organisation" as defined in Subdivision AA of Division 2 (that Subdivision contains methods for taxing lump sum retirement and termination payments and payments in the form of annuities). Further, for an annuity to be "ineligible", it must be issued to or for the benefit of a natural person (other than in the capacity of a trustee of a trust estate). For example, an annuity issued to a person in the capacity of a trustee of a trust estate, where the beneficial interest in the annuity is held by a natural person who is under a legal disability, would fall within the proposed definition.
Paragraph (e) contains proposed new subsection 159GP(10) of the Principal Act, which specifies those annuities which are to be "qualifying securities" for the purposes of the application of Division 16E. The annuities to which the Division 16E accruals method of assessment is thus made clearly to apply are those (immediate and deferred annuities) issued on or after 29 October 1987 (the date of introduction of this Bill) which have the characteristics of a qualifying security for purposes of Division 16E, and which are not "ineligible annuities" - i.e., other than an annuity issued to or for the benefit of a natural person (other than in the capacity of trustee) by either a life assurance company or registered organisation (eg. a trade union or friendly society). Income from the latter securities will continue to be assessed to income tax on a receipts basis under section 27H of the Principal Act.
In addition, transitional clause 49 to this Bill provides that the Division 16E accruals method of assessment will also apply to relevant deferred annuities issued after the time of the first announcement which foreshadowed this measure and before 29 October 1987.
The following examples illustrate the effect of the amendments proposed in paragraphs (a) and (b) of clause 39 above.
Example 1
This example illustrates the application of Division 16E where the terms of issue of a zero coupon fixed return "qualifying security" of a face value of $180 permit payments, other than payments of periodic interest, during the loan term (see the notes on paragraph (a) of clause 39).
| Issue price (IP) | : | $112.10 |
| Term (T) | : | 3 years, i.e., 6 notional accrual periods (NAP's) |
| Repayments | : | 3 payments of $60 commencing at the end of the fourth NAP. |
| Redemption yield (A) | : | 10% per NAP. |
| Eligible return (ER) | : | $67.90 |
The correct notional accrual amounts (NAA's) which will result from the amendment proposed to item B in the NAA definition formula
(A*B-C)
| NAP | B($) | C | NAA($) |
|---|---|---|---|
| 1 | 112.10 | - | 11.21 |
| 2 | 123.31 | - | 12.34 |
| 3 | 135.65 | - | 13.56 |
| 4 | 149.21 | - | 14.92 |
| 5 | 104.13 | - | 10.42 |
| 6 | 54.55 | - | 5.45 |
| TOTAL ASSESSABLE AMOUNT (Equals the ER) | 67.90 | ||
By way of contrast, application of the existing formula would have resulted in the following NAA's :
| NAP | B($) | C | NAA($) |
|---|---|---|---|
| 1 to 4 | (As above) | - | 52.03 |
| 5 | 164.13 | - | 16.41 |
| 6 | 180.54 | - | 18.05 |
| TOTAL ASSESSABLE AMOUNT (Exceeds the ER) | 86.49 | ||
Example 2
This example incorporates periodic interest payments at other than the end of a NAP and demonstrates the correct NAA's which will result from one of the amendments proposed to item C in the NAA definition formula AB-C (see the notes on subparagraph (a) of the substituted component C inserted by paragraph (b) of clause 39).
| Face value | : | $100 |
| Term (T) | : | 3 years (6 NAP's) |
| Coupon interest | : | $2 every 3 months |
| Issue price (IP) | : | $81.87 |
| Eligible return (ER) | : | $18.13 |
| Redemption yield (A) | : | 8% per NAP |
The correct NAA's (i.e.,
(A*B)-C
| NAP | B($) | C($) | AB - C($) |
|---|---|---|---|
| 1 | 81.87 | 4.08 | 2.47 |
| 2 | 84.34 | 4.08 | 2.67 |
| 3 | 87.01 | 4.08 | 2.88 |
| 4 | 89.89 | 4.08 | 3.11 |
| 5 | 93.00 | 4.08 | 3.36 |
| 6 | 96.36 | 4.08 | 3.64 |
| TOTAL ASSESSABLE AMOUNT (Equals the ER) | 18.13 | ||
The existing provisions did not have regard to the proper adjustment required when periodic interest was paid other than at the end of a NAP. Application of the existing legislation without the proper adjustment would have resulted in item C being $4 for each NAP and the NAA's totalling $18.70 (by comparison with the ER of $18.13).
The correct adjustment resulting from the relevant amendment of item C in the NAA formula, reflecting the payment of $2 half way through a NAP is 2(1.08)1/2 or $2.08. The formula value of C for each NAP is then $4.08 as no adjustment is required for the $2 payment at the end of a NAP.
Example 3
The facts are the same as in Example 1, except that the $60 repayment at the end of NAP 4 is made half way through NAP 4 (see the notes on subparagraph (b) of the substituted item C inserted by paragraph (b) of clause 39).
The redemption yield is to remain at 10%, which results in an increased issue price of $114.10 and an eligible return of $65.90. The correct NAA's (ie
(A*B)-C
| NAP | B($) | C($) | AB-C($) |
|---|---|---|---|
| 1 | 114.10 | - | 11.41 |
| 2 | 125.51 | - | 12.56 |
| 3 | 138.07 | 13.80 | |
| 4 | 151.87 | 2.93 | 12.26 |
| 5 | 104.13 | 10.42 | |
| 6 | 54.55 | 5.45 | |
| 65.90 |
As illustrated in Example 1, the value of B needs to be adjusted, having regard to payments other than payments of periodic interest. This is reflected in the value for B for NAP's 5 and 6 above. Further, where those payments are made during a NAP there needs to be a proper adjustment to ensure that the NAA is reduced in accordance with the reduced principal once the payment is made. In the example above, the adjustment in NAP 4 is the interest on the repayment of $60 for half the NAP. The value of $2.93 is calculated by applying the effective rate for half a NAP
[[(1.1)^(1/2) - 1] or (4.881%)]
The relevant amendment to item C of the NAA formula allows for this proper adjustment.
Clause 40: Deductions allowable to issuer of qualifying security etc
This clause will add proposed subsection 159GT(6) to the Principal Act. Section 159GT, subject to certain exceptions, allows the issuer of a qualifying security a deduction each year on an accruals basis for an appropriate proportion of the discount or other deferred interest component of a qualifying security. This accruals basis of deductions broadly mirrors the assessment on an accruals basis of the return on the security in the hands of the holder.
Subsection 159GT(5) specifies the securities in respect of which the accruals basis of deductions is applicable. They are all qualifying securities issued on or before 22 May 1986 (the introduction date of the existing provisions) and only registered qualifying securities issued in Australia after that date. Accordingly, issuers of either bearer securities or securities issued offshore after 22 May 1986 will not qualify for deductions on the accruals basis but will obtain their deduction when the discount or deferred interest is paid.
Paragraph (a) of clause 40 effects a consequential adjustment to subsection 159GT(5) that follows from the addition by paragraph (b) of the clause of a new subsection 159GT(6), which specifies certain qualifying securities to which section 159GT of the Principal Act will not apply.
The qualifying securities are those issued - after the time of the announcement of the Government's intention to legislate in relation to the matter - to, on behalf of, or for the benefit of, a non-resident associate of the taxpayer, or subject to an agreement under which the security is or was to be transferred to a non-resident associate.
Clause 41: Insertion of new Division
Division 16F - Thin capitalisation by non-residents
Clause 41 will insert new Subdivision 16F in Division 3 of Part III of the Principal Act. Subdivision 16F will, in specified circumstances, reduce a deduction which would otherwise be allowable under the Principal Act for interest incurred. The interest affected is that incurred after 1 July 1987 in relation to amounts owing to "foreign controllers" of Australian entities. Put very broadly, Australian entities over which those controllers have a control exceeding 15% (control being measured generally by reference to shareholding, voting power or entitlement to income flows) will be subject to the new provisions.
Interest deductions will be limited where the requisite degree of foreign control exists and the ratio between the Australian entity's debt to the foreign controller and the equity of the foreign controller in the Australian entity exceeds 6:1 for financial institutions and 3:1 for other businesses.
The broad plan of the provisions, contained in three Subdivisions A, B and C, is as follows.
Subdivision A contains the general interpretative provisions. It defines exhaustively the key terms upon which the operation of the legislation depends, namely, "foreign controller" (proposed section 159ZGE), "foreign debt" (proposed section 159GZF) and "foreign equity" (proposed section 159GZG). The thin capitalisation legislation only applies to interest on debts owed to a foreign controller. Deductions for debt interest will only be reduced under these measures where it is paid or payable to the foreign controller on debt having a ratio to that controller's foreign equity which exceeds the statutory ratios. Interest payments on debts owed to unrelated persons at arm's length are not affected by these measures.
Subdivision B contains a number of special interpretative provisions. Many are of an anti-avoidance nature and deal with schemes to manipulate foreign equity and debt levels in one way or another so as to circumvent the operative provisions.
Subdivision C contains the machinery provisions setting out how, for various classes of foreign controllers, the interest deduction otherwise allowable in relation to foreign debt is to be reduced. The most common case is likely to be that of an Australian resident company or company group (proposed sections 159GZS and 159GZT, respectively).
For details of how the proposed legislation will operate in its initial stages, i.e., broadly until the end of the 1988 income year, reference should be made to the notes on clause 51. That clause contains transitional provisions, including a number of measures to ensure that taxpayers are not disadvantaged in the early stages of the operation of the new provisions. In particular, the measurement of foreign debt at its peak, will only be made, for the first income year in which these measures apply, by reference to the period commencing after 30 November 1987 (see, especially, the notes on subclause 51(8)).
Subdivision A - General interpretative provisions
Section 159GZA : Interpretation
Section 159GZA contains a number of definitions and interpretative provisions necessary for the operation of proposed new Division 16F. The section referentially defines several key terms which have a general use in the Division. Other terms are defined fully in the section. Each defined term is to have the given meaning unless the contrary intention appears.
- "arm's length transaction" means a transaction between independent parties dealing with each other on an arm's-length (i.e., genuinely commercial) basis. The term is used in the definition of "arm's length value".
- "arm's length value" is the amount of consideration that could reasonably be expected to be received by the transferor of an asset if it were transferred for full commercial value under an agreement between independent parties. The term is used in subsection 159GZG(2) in relation to the ascertainment of a realistic figure for the asset revaluation reserve component of foreign equity (see the notes on proposed subsection 159GZG(2)).
- "financial institution" is defined to include both banks and financial corporations. By paragraph (a) of the definition, a financial institution means a bank within the meaning of that expression in the Banking Act 1959. In that Act, the term "bank" is defined as, broadly, a body corporate authorised to carry on banking business in Australia. By paragraph (b), it also means a corporation falling under paragraph 8(1)(a) or (b) of the Financial Corporations Act 1974 ('the FCA') or to which those paragraphs would apply except for paragraph 8(2)(j), (k) or (l). The paragraph (b) arm of the definition of financial institution also adopts a substituted wording for paragraph 8(2)(j) of the FCA. Paragraph 8(1)(a) applies the FCA to a foreign corporation, to a trading corporation formed in Australia and to a financial corporation so formed where the sole or principal business activities in Australia of the corporation are the borrowing of money and the provision of finance. Each type of corporation is defined in subsection 4(2) of the FCA in terms of the meaning given by paragraph 51(xx) of the Constitution. Paragraph 8(1)(b) of the FCA applies that Act to such corporations having, generally, over 50% of their assets in the form of debts resulting from their provision of finance. For practical reasons, the proposed definition excludes the in-house (i.e., not separately incorporated) financing activities of retailers but, by disregarding paragraphs 8(2)(k) and (l) of the FCA, ensures that two types of corporations excluded from the FCA can benefit from the 6:1 debt/equity ratio of the thin capitalisation provisions. The two types of corporations are those having assets valued at, generally, $1m or less (paragraph (k)) and those which the Treasurer has, by Gazette notice, exempted from the application of the FCA (paragraph (l)). The disregarded paragraph 8(2)(j) of the FCA prevents a corporation, whose sole or principal purpose in borrowing money is to lend money to a related corporation, from being treated as a financial corporation. The paragraph (j) notionally substituted by paragraph (b) differs essentially from paragraph 8(2)(j), in referring to 'associate, within the meaning of Division 16F', rather than to related corporation. The purpose of this change is to ensure that a financial institution the sole or principal purpose of which is to borrow money to lend to an "associate" (within the meaning of proposed Division 16F) is not treated as a financial corporation in that Division.
- "foreign debt interest" means interest that is payable on "foreign debt", a key term having the meaning given by proposed section 159GZF which sets out what is to be regarded as foreign debt in relation to resident companies, partnerships, trusts and foreign investors (being individual investors and non-resident companies).
- "foreign equity product" is a multiple of the foreign equity and is used under Subdivision C, the operative part of proposed Division 16F, to set the maximum permissible level for foreign debt of resident companies or groups of resident companies, partnerships, trusts and foreign entities. In Subdivision C, a deduction for debt interest will only be denied, in whole or in part, where the foreign debt interest of a resident company or company group, or of a partnership, trust or foreign investor exceeds the relevant foreign equity product. A separate foreign equity product will be calculated for each year of income. Paragraph (a) gives a general definition of foreign equity product in relation to a resident company or a foreign investor. Where a resident company or a foreign investor is a financial institution, the foreign equity product will be 6 times the relevant foreign equity. In any other case, the foreign equity product will be 3 times the relevant foreign equity. By virtue of paragraph (b), the foreign equity product of a partnership or trust estate will be ascertained each year by multiplying the foreign equity of the partnership or trust estate by 3. In certain circumstances, an adjustment may be made to the foreign equity product as ordinarily calculated, e.g., where a financial institution is entitled to receive income from a resident company, or from a partnership or trust estate, that is not a financial institution; see the notes on proposed section 159GZH.
- "foreign investor" means generally a non-resident who derives assessable income from sources in Australia. However, it excludes a beneficiary of a trust estate and persons acting solely in the capacity of a partner in a partnership or as a trustee in a trust estate. These persons are dealt with elsewhere in the provisions (see notes on proposed section 159GZE). For purposes of the thin capitalisation rules, a foreign investor is a non-resident individual or a non-resident company deriving Australian source assessable income, whether through a permanent establishment or branch or through the passive derivation of income such as rents. A non-resident could be a foreign investor in relation to his or her own direct investment and be, at the same time, a foreign controller in relation to a resident company, or a partnership or a trust estate.
- "interest" is defined consistent with the definition for interest withholding tax purposes that is contained in subsection 128A(1) and to include certain amounts deemed to be interest for the purposes of section 159GZH.
- "Paid-up value", in relation to an interest in a share, means the proportionate interest in the paid-up value of the share represented by the interest concerned. Example: A resident company issues 100 x $1 fully paid 'A' class shares to an Australian resident and 100 x $1 'B' class shares paid to 50 cents to a foreign controller. The foreign controller will have $50 equity in the company.
- "scheme" is defined in a manner similar to that used in Part IVA (the general anti-avoidance provision). Paragraph (a) of the definition covers any agreement, arrangement, understanding, promise or undertaking whether it is express or implied and whether or not legally enforceable. By paragraph (b), any scheme, plan, proposal, action, course of action or course of conduct is also to be treated as a "scheme". "Scheme" in the sense in which it is used in paragraph (b) will include arrangements of a unilateral kind as well as those where there are two or more parties involved.
- "votes in a company" means the maximum number of votes that may be cast at a general meeting of a company. This will be the maximum number if all members of the company were represented at the meeting and exercised all their votes in an ordinary vote of members.
Section 159GZB : Assessable (non-resident partner) income and assessable (non-resident beneficiary) income
Proposed section 159GZB sets out the criteria for determining the assessable income of a partner so as to ascertain whether the partner has an interest in the partnership sufficient to bring the partner's investment under these provisions as an investment by a foreign controller. The section also operates in a broadly similar manner in relation to beneficiaries of trust estates.
Under subsection (1) the amount (non-resident amount) of any non-resident partner's individual interest in the portion of net income of a partnership or partnership loss attributable to sources in Australia is the "assessable (non-resident partner) income" of the partnership for the year of income.
It is necessary to link the partner and the assessable income because section 90 (the operative provision for partnerships) of the Principal Act only links partners with a share of a partnership net income or loss which is the result of matching deductions against assessable income. For the purpose of determining whether, under the thin capitalisation provisions, the partnership is entitled to a deduction for interest, it is first necessary to calculate the assessable income of the partnership from sources in Australia referable to partners who are foreign controllers or associates of foreign controllers.
In relation to trust estates, it is necessary to establish a link (equivalent to that established by subsection (1) regarding partnerships) between non-resident beneficiaries and the assessable income of the trust estate. This link will determine whether the trust estate is entitled to a deduction for interest. Subsection (2) provides for calculation of the amount of assessable income of the trust estate from sources in Australia, referrable to beneficiaries who are foreign controllers or associates.
The assessable income of the trust estate attributable to the non-resident amount is the assessable (non-resident beneficiary) income.
The subsection (1) definition of "associate" has substantially the same meaning as in other parts of the Principal Act, e.g., sections 26AAB and 160E. The definition specifies who is an associate of a natural person, a company, a trustee of a trust estate or a partnership and, in broad terms, refers to those persons who by reason of family or business connections might appropriately be regarded as being associated with a particular person. The definition principally differs from the definitions of associate mentioned above in that substantial control of a company in sub-subparagraphs (a)(v)(B), (b)(iv)(B) and (b)(v)(B) has been defined in terms of the casting of 15%, rather than 50% of the votes.
The next subsection is based on subsection 160K(2). By subsection (2), any references in subsection (1) to the spouse of a person are to include, in relation to the person, another person who, although not legally married to the person, lives with the person on a bona fide domestic basis as husband or wife. Subparagraph (a)(ii), however, excludes from any references to the spouse of a person, a person who, whilst legally married to the person, permanently lives separately and apart from the person.
Subsection (3) ensures that, as for shareholders of the same company and beneficiaries of the same trust, partners of the same partnership are not to be considered to be associates of each other if their association with each other is limited to only the partnership to which subsections 159GZE(2), 159GZF(2) or 159GZG(3) refer.
The definition of "associate" is relevant to several key terms used in the legislation. For example, in determining whether a party is a "foreign controller" or "foreign investor", the definitions of those terms look to the holdings of associates of such parties as well as to those of the parties themselves to test whether a degree of foreign control or foreign investment, sufficient to attract the thin capitalisation rules, exists.
An associate can, of course, be a foreign controller in his or her own right as well as contributing to the classification of one or more parties as a foreign controller(s) or foreign investor(s).
Section 159GZD : Australian-owned non-resident company
Proposed section 159GZD defines the term "Australian-owned non-resident company". Such a company is excluded, by proposed paragraph 159GZD(a), from the section 159GZE definition of "foreign controller" and hence from the scope of the thin capitalisation legislation, i.e., from having any debt/equity ratios imposed on Australian businesses in which it has an interest. This is consistent with the former treatment of such companies under foreign investment policy.
An Australian-owned non-resident company is one:
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- in which a resident directly or indirectly controls, or is capable of casting, or controlling the casting of 85% or more of the votes (paragraph (a)); or
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- from which a resident is beneficially entitled to receive 85% or more of any dividends paid, or of any distribution of capital made by the non-resident company (paragraph (b)).
Section 159GZE : Foreign controller
This section will ensure that the debt/equity ratio imposed on companies, partnerships and trusts will only apply where a non-resident has the requisite substantial degree of control of the company, partnership or trust. Very broadly, a non-resident having 15% control of such an entity is a "foreign controller" under the proposed thin capitalisation rules. Control for these purposes is to be measured by reference to four separate tests. They relate to control of voting power and of entitlement to income or capital, as well as the ability to gain or to exercise such control through indirect means. A non-resident will be a foreign controller where, either alone or together with any associates whether resident or non-resident, the non-resident satisfies any of the four separate tests in respect of a resident company or a partnership or trust.
Subsection (1) defines the term "foreign controller" as it applies to resident companies. First, subparagraph (a)(i) expresses foreign control in terms of "substantial control of voting power", an expression defined in section 159GZJ (see the notes on that section). Secondly, under subparagraph (a)(ii), the beneficial entitlement to receive, directly or indirectly, at least 15% of any dividends from, or any distribution of capital by, a resident company will also constitute foreign control (see notes on proposed section 159GZH). Thirdly, where a non-resident is capable, under a scheme, of gaining such control or entitlement, subparagraph (a)(iii) provides that the non-resident will be a foreign controller. Paragraph (b) sets out the fourth test which operates where control is less direct or formal. This test applies to a resident company and to the directors of a resident company. Under the paragraph, foreign control will exist where such a company or such directors are accustomed to act or are under a formal or informal obligation to act in accordance with the directions, instructions or wishes of a non-resident. It will also exist where there is no past pattern of conduct but the circumstances are such that the company or the directors 'might reasonably be expected' to so act.
Subsections (2) and (3) respectively impose four and five separate tests of whether a non-resident is to be considered a foreign controller of a partnership or trust estate respectively. In each subsection four of the tests are essentially the same and only one need be met for the relevant partnership or trust estate to be foreign controlled. Where a non-resident is the trustee of a trust, the non-resident will be a foreign controller.
For partnerships, the beneficial entitlement test (subparagraph (2)(a)(ii)) refers to the capital or profits of a partnership. For trust estates, the equivalent test in subparagraph (3)(b)(ii) is defined in relation to the corpus, i.e., the trust capital and accumulations which increase it, and to income of a trust estate. In paragraph (2)(b) and (3)(c) the 'act in accordance' test described in the notes on paragraph (1)(b) is imposed on the partners, or the other partners, in a partnership and on the trustee of a trust estate.
This section defines "foreign debt" for the purposes of the thin capitalisation rules. As was the case under foreign investment policy, foreign debt will be limited to interest-bearing debt from non-arm's length sources and owing to certain non-residents, i.e., debt owed directly to foreign controllers and their non-resident associates by the person deriving assessable income. Debt owing to resident associates of foreign controllers is excluded from foreign debt because interest on that debt would ordinarily be assessable income of those associates. Foreign debt will also include debt owed indirectly to foreign controllers or their non-resident associates that is deemed, by proposed Subdivision B, to be directly so owed.
Interest-free non-arm's length debt will be excluded from the debt/equity ratio, as will all arm's length debt. In a relaxation of previous foreign investment policy, arm's length debt which is the subject of a guarantee by an overseas parent of an Australian business will also be excluded from the ratio, unless there is a 'back-to-back' lending arrangement (see notes on section 159GZO) or there are special conditions applying to the guarantee, e.g., where the parent is required to deposit funds with the lender as surety.
Subsections (1) to (4) of section 159GZF define "foreign debt" to be the balance outstanding on any amount owing by a resident company, a partnership, a trust estate or a foreign investor, respectively, subject to three conditions.
First, paragraph (a) of the first three subsections (relating respectively to resident companies, to partnerships and to trust estates) provides that interest is or must become payable to a foreign controller or a non-resident associate of a foreign controller in respect of the amounts owing.
In the fourth subsection, which relates to foreign investors (see notes on section 159GZA), the interest must be or become payable to a non-resident associate of a foreign investor.
In all four subsections, it is not necessary for the principal on which the interest is paid to be owing to the party to whom the interest is or may become payable.
Secondly, paragraph (b) of each of the four subsections requires that the interest is or will be allowable as a deduction from, respectively, the assessable income of the resident company, the assessable (non-resident partner) income, the assessable (non-resident beneficiary) income and the assessable income of the foreign investor.
Thirdly, in all four subsections, paragraph (c) generally excludes from "foreign debt" any debt that bears interest that would be assessable income to the recipient in Australia. The reason for this exclusion is that, if debt interest attracts Australian income tax, there will be no loss of tax revenue to Australia as would otherwise occur under thin capitalisation arrangements. For example, interest would be assessable in Australia where it forms part of the income attributable to a non-resident company's permanent establishment in Australia. Paragraph (c) will not have application, however, where the interest is taken to be payable under section 159GZO, payable by a resident company or foreign investor under section 159GZL, or payable by a resident company, a partnership or a trust under section 159GZN.
Section 159GZG : Foreign equity
"Foreign equity" is defined, in proposed section 159GZG, separately in relation to: resident companies (subsections (1) and (2)); partnerships (subsection (3)); trust estates, (subsection (4)); and foreign investors, being natural persons or non-resident companies earning Australian-sourced assessable income (subsection (5)). Only direct equity of a foreign controller or a foreign investor will be measured by this section. However, special rules for measuring indirect interests through interposed partnerships and trusts are contained in section 159GZN.
The definition of equity in each instance broadly follows the shareholders' funds concept found in company accounts. Subsection (1) sets out what is to be taken into account in determining the foreign equity for resident companies. Foreign equity will comprise the monetary total of relevant interests of foreign controllers and their foreign associates in issued shares, share premium accounts, accumulated profits or losses, and asset revaluation reserves reduced by specified items.
Paragraph (a) provides that the relevant interest of foreign controllers or their non-resident associates in the issued shares of a company is the beneficially-owned proportion of the paid-up value of such shares or the amount of any interest in shares. Where two persons jointly own a share and only one is a foreign controller, only one half of the paid-up value of that share will be included as foreign equity. Likewise, where a foreign controller has a beneficial interest in a share registered in the name of a nominee, regard will be had to that beneficial ownership. Both preference shares and ordinary shares will count as equity.
The level of foreign equity in shares is generally to be measured at the end of the year of income, thus giving a foreign controller considerable flexibility. At any time during the year, therefore, a foreign controller will be able to take up further shares, or pay up partly-paid shares, to overcome a potential shortfall in the debt/equity ratio arising, for example, through an unexpected increase in the resident company's foreign debt.
In determining equity for the year, paragraph (b) provides that the relevant amount of share premium account entitlements applicable to foreign controllers and their associates is their proportionate interest in the share premium account that would be available for distribution to shareholders if:
- •
- the company were to be wound up at the end of the year of income (subparagraph (b)(i)); and
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- the net assets of the company then exceeded the company's paid-up capital by not less than the credit balance in the share premium account (subparagraph (b)(ii)).
- •
- the "foreign controller" proportionate share of the accumulated profits and asset revaluation reserves of the company at the beginning of the year of income calculated as if those profits and reserves were distributed as dividends at that time (subparagraph (i)); or
- •
- the same proportionate share measured at the same time, but on the basis that the company was then wound up and the company's net assets were not less than the amount of the accumulated profits and asset revaluation reserves (subparagraph (b)(ii)).
The reason for taking the lesser of these amounts is that, on a winding-up, reserves may be applied to make good a loss of capital and therefore be unavailable for distribution to shareholders.
In the transitional year commencing 1 July 1987 the asset revaluation reserves of a company will be taken as the amount of asset revaluation reserve on 28 October 1987 (see clause 51).
Paragraph (d) reduces the amount of equity by any amounts lent back by the company to a foreign controller or to his or her non-resident associates. Thus, to the extent that share capital is subscribed and some or all of the funds are then lent back to the foreign controller or his or her non-resident associates, only the net amount will be treated as equity.
Paragraph (e) is designed to avoid the double counting of equity where, for example, accumulated profits or asset revaluation reserves at the beginning of the year are applied during the year towards the issue of bonus shares (subparagraph (i)). Such an issue increases the paid-up capital at the end of the year but reduces the accumulated profits or asset revaluation reserves which are measured at the beginning of the year under paragraph (c) above. To the extent that foreign controllers' equity (subparagraph (ii)) would consequently rise, it is to be reduced by the operation of this paragraph.
A cash dividend paid during the year of income out of accumulated profits will not reduce the level of foreign equity for that income year.
Where a company has accumulated losses rather than profits, those losses at the beginning of the year are taken into account, under paragraph (f), as if they had represented a deficiency of capital upon a winding-up. A reduction in the equity calculated in accordance with paragraphs (a) to (e) results from this adjustment process.
Subsection (2) ensures that amounts shown as asset revaluation reserves are not inflated, e.g., by placing an excessive value on company assets, and thereby artificially boosting a foreign controller's equity.
Paragraph (a) provides that asset revaluation reserves will be taken into account only where the accounting records of the company concerned provide such a reserve. The value shown in the company's books will generally be taken to be the amount of the reserve. However, by paragraph (b), a lesser amount is to be taken as the amount of the reserve where the arm's length value of the assets concerned at the date of the revaluation would produce a lesser amount of reserve than shown in the accounting records.
Further, by subparagraph (c)(i), where asset revaluation reserves were applied to pay up shares, or where, by the operation of paragraph (b), the true value of the reserves is less than the book figure (subparagraph (c)(i)), the foreign equity amount calculated under subsection (1) is to be reduced.
Foreign equity is to be calculated for partnerships in accordance with subsection (3). It covers both partnerships that derive only Australian-sourced assessable income (resident partnerships) and partnerships that derive income from sources both in and out of Australia.
The equity held in a partnership by foreign controllers is ascertained in two steps. First, reference is to be made to a balance sheet prepared for purposes of this subsection and which, at the end of the year of income, includes, as partners' equity, an amount referable to foreign controllers or their non-resident associates. This amount of equity is then reduced by amounts owing to the partnership by foreign controllers or their non-resident associates. In effect, only the equity net of any loan back to the foreign controllers or their non-resident associates is taken into account.
Where a partnership has both Australian-sourced and overseas-sourced income, the non-resident partners are not subject to Australian tax on their ex-Australian income. Where foreign controller partners derive ex-Australian-sourced income through the partnership, regard is to be had only to the activities of the partnership in producing Australian-sourced income. From the amount so calculated the portion applicable to resident partners is excluded (paragraph (a)). Activities of the partnership include not only business activities but also those that produce any other assessable income, e.g., rental income. The notional balance sheet will normally be prepared as at the end of the year of income (paragraph (b)) and will exclude assets and liabilities referable to earning that ex-Australian income. Where a partnership ceases, other than temporarily, to derive assessable income, the notional balance sheet will be prepared as at the time of that cessation.
Partners' equity will generally be the amount of partnership capital contributed by foreign controllers less any loans from the partnership back to the foreign controllers or their associates. Loans from the foreign controllers and associates to the partnership are treated as debt.
Where any interest on borrowing by a foreign controller from foreign associates is claimed in the foreign controller's Australian tax return, the amount borrowed, if subscribed to the partnership as a capital contribution, is nevertheless to be treated as foreign interest-bearing debt under an anti-avoidance measure contained in section 159GZQ. The purpose of the measure is to prevent foreign controllers from circumventing the debt/equity ratio restriction.
Foreign equity for trusts is calculated under subsection (4). It encompasses both resident and non-resident trust estates. As with partnerships, where a trust produces both Australian-sourced and ex-Australian income, regard will be had only to trust property used to produce Australian assessable income in relation to foreign controllers or their non-resident associates (paragraph (a)). Foreign equity is calculated by reference to beneficiaries' equity shown in a notional balance sheet which will normally be prepared as at the end of the year of income (paragraph (b)). The beneficiaries' equity will be, in effect, the interests of foreign controllers and their non-resident associates in the corpus (including accumulations) of the trust that represent assets used to produce Australian-sourced assessable income of foreign controllers and their non-resident associates.
Because foreign equity is measured at the end of the year of income, it will be possible for a beneficiary of a unit trust to take up additional units to prevent the debt/equity ratio of the trust rising above 3:1. The same may not be possible in the case of a fixed or discretionary trust. The ability of beneficiaries to contribute to corpus will depend on the terms of the particular trust instrument. Where the trust instrument does not allow for additional corpus to be added, the result may well be that any interest on debt in excess of the approved debt/equity ratio will not be an allowable deduction unless 'excess' debt is converted to interest-free debt.
Subsection (5) provides for the calculation of the foreign equity of foreign investors other than as a partner in a partnership or as a trustee or beneficiary of a trust estate. Their investments in real estate or businesses in Australia will usually be held directly by the foreign investor who will be a non-resident individual or company. Foreign investment could be through a permanent establishment or by way of a passive investment, e.g., in rental property.
"Foreign investors" equity will be calculated in two steps. It is first necessary to find the amount that would be shown as that investor's equity if:
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- only a foreign investor's activities in producing assessable income in Australia were considered (paragraph (a)); and
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- a notional balance sheet were prepared, usually at the end of the year of income, in relation to those activities (paragraph (b)).
That amount is then reduced by outstanding balances owed to the foreign investor by non-resident associates to determine foreign equity. Put simply, that equity will be the funds provided by the foreign investor to fund his or her Australian investment. As a separate anti-avoidance measure, however, funds borrowed from non-resident associates will be treated as debt under proposed section 159GZO .
The term 'activities' referred to in subsections (3), (4) and (5) includes any kind of income-producing activity.
To discourage foreign controllers who introduce equity during the year of income from taking it out prematurely, subsection (6) provides for a modification of the basic rule that foreign equity is to be measured at the end of the year of income.
This provision is essentially an anti-avoidance measure. It is intended to ensure that foreign equity is not injected at year end (perhaps in the form of redeemable preference shares) to produce mere temporary compliance with the debt/equity ratio. The effect of subparagraph 6(a)(i) and paragraph (b) is to exclude foreign equity from the debt/equity calculations of the two years prior to its being returned to the foreign controller. Thus, for example, equity contributed by a foreign controller during the year ending 30 June 1988 in the form of redeemable shares which are redeemed at some point in time prior to the close of the year ending 30 June 1990 will be excluded from the debt/equity calculations of the years ending 30 June 1988 and 1989. The reduced amount so calculated will be substituted for that otherwise ascertained under the section. It will not apply in the above example if the redeemed shares are immediately replaced with a fresh issue of shares, so that continuity of the level of equity is maintained. In that circumstance, the ordinary calculation method set out in the section applies.
Subparagraph 6(a)(ii) prevents the clawback provision applying where there cease to be any foreign controllers in relation to the company, partnership or trust estate. In those circumstances, the investment is no longer a thinly-capitalised foreign investment warranting special taxation controls. If the Australian entity subsequently becomes sufficiently foreign-owned for there to again be a foreign controller, the thin capitalisation legislation will generally be treated as only applying from when that new investment threshold is reached. Where, however, a foreign controller enters into a scheme or arrangement to circumvent the operation of this provision, e.g., by selling to an associate with an option to buy back, the general anti-avoidance provisions in Part IVA of the Principal Act would be available against that scheme or arrangement.
Further specific anti-avoidance provisions, in relation to schemes to manipulate foreign equity levels, are contained in proposed sections 159GZN and 159GZQ.
Section 159GZH : Indirect beneficial entitlements or interests
Section 159GZH enables beneficial entitlements to capital or income of companies, partnerships and trust estates to be traced through a chain of companies, partnerships or trusts. It is necessary to trace such interests for the purpose of determining whether a non-resident is a foreign controller in relation to the Australian company, partnership or trust estate. For the purposes of this section beneficial entitlements will, of course, include the appropriate proportion of joint beneficial entitlements.
The purpose of subsection (1) is to enable a person's beneficial interest in the whole or part of a dividend or distribution of capital of a company to be traced through any interposed companies, partnerships and trusts.
Subsections (2) and (3) similarly enable a person's beneficial entitlement to a share of, respectively, the profits or capital of a partnership, or the corpus (or capital in the case of a unit trust) or income of a trust estate, to be traced through any interposed companies, partnerships and trusts.
Each of these sections provides for the tracing of a person's entitlement to a distribution of income or capital on the assumption that successive distributions would be made by all interposed entities to permit that person to receive the relevant distribution.
Example: A non-resident individual (A) is beneficially entitled to 50% of the income of a resident trust estate (B) but not to any of the corpus. B holds 50% of the shares in a resident company (C). A therefore has no direct interest in C. However, section 159GZH assumes that C may pay a dividend to B which will then flow on to B's income beneficiaries. Thus B will receive 50% of the dividend paid by C and 50% of that sum (i.e., one-quarter of C's dividend) would flow on to A. In those circumstances, A is said to be beneficially entitled to 25% of any dividends paid by C and would be a foreign controller in relation to both B and C.
Section 159GZI : Resident company group
For purposes of applying the debt/equity ratio to wholly-owned company groups, a consolidated debt/equity ratio will normally be taken. Proposed section 159GZT defines resident company group broadly by reference to the tests found in section 80G (the company group loss provisions) of the Principal Act. For thin capitalisation purposes, however, only Australian resident companies are taken to be part of a group.
- Example: If A, B and C are resident companies and B and C are wholly owned direct subsidiaries of A then A,B and C would be a company group for these purposes. If, however, A were a non-resident, B and C would not constitute a group. Likewise, if A and B are resident companies and C is a non-resident, A and B would be a group but C would not be part of that group.
The resident company group provisions are applied, as are the debt/equity ratio tests, in relation to a year of income. Further, to qualify as a group for these purposes, companies must generally satisfy the resident company group test during the whole of the year of income. An exception will be made in relation to 'shelf' companies acquired during an income year: see the measures contained in Clause 16 of this Bill.
Section 159GZJ : Substantial control of voting power
For the purpose of determining whether a person is a foreign controller in relation to a company, partnership or trust estate one of the tests (see the notes on section 159GZE) is whether the non-resident has substantial control of the voting power. Proposed section 159GZJ explains what is meant by 'substantial control of the voting power' in various entities.
Subsection (1) relates to votes in a company. A person is taken to have substantial control of the voting power in a company if the person directly or indirectly controls or is capable of controlling 15% of the votes in the company. This would apply whether or not there were companies, partnerships or trusts interposed between the person and the relevant company.
- Example: If non-resident (A) held 50% of the shares in resident company (B) which held a 50% partnership interest in (C) which held 50% of the voting power of company (D), A would be a foreign controller in relation to D. Although A has only a 12.5% indirect beneficial interest (less than the 15% minimum threshold) in D, A is capable, through interposed entities B and C, of controlling 50% of the votes of D.
Subsection (2) deals with substantial control of the voting power in a partnership. As with companies, measurement of control of a partnership can be traced through one or more interposed companies, partnerships and trusts.
Subparagraph (a)(i) refers to a person who is able to control or conduct the management or affairs of the partnership, e.g., a managing partner in jurisdictions permitting limited partnerships, or a person who has the right under a partnership agreement to conduct the management of the partnership. By subparagraph (a)(ii), substantial control will exist where a person has the right to admit or expel, or to veto the admission or expulsion of, a partner to or from the partnership.
Paragraph (b) refers to substantial control by a person who controls or is capable of controlling 15% of any votes that might be cast at a partnership meeting:
- •
- for the purpose of controlling or conducting the partnership's management or affairs (subparagraph(b)(i)); or
- •
- for admitting or expelling, or to veto the admission or expulsion of, a partner (subparagraph (b)(ii)).
Substantial control of the voting power in a trust estate is defined in terms of subsection (3). As with companies and partnerships, control can be traced through interposed companies, partnerships and trusts.
Paragraph (a) describes as a substantial controller of voting power, a person who is able to appoint or remove, or to veto the appointment or removal of, a trustee of the trust estate. The separate tests in paragraph (b) treat a person who controls or is capable of controlling at least 15% of the votes that may be cast at a meeting to appoint or remove, or to veto the appointment or removal of, a trustee of the trust estate as having substantial control of the voting power in a trust estate.
Subdivision B : Deeming and other special interpretative provisions
Section 159GZK : Effect of deemed section 128AC and 128AD interest payments
Proposed section 159GZK sets out the circumstances in which certain payments, under specified types of financial agreements under which an amount is owing to a foreign controller or his or her non-resident associates, are to be treated as interest. Typical financial agreements to which the section will apply are hire purchase and lease agreements. The section also provides that where, at any point:
- •
- the sum of the balance of the remaining hire purchase or lease payments to which section 128AC of the Principal Act applies;
- •
- less the portion of such payments that will be treated as interest,
Subsection (1) sets up three cumulative conditions to be met before the operative part of the subsection applies. First, by paragraph (a), there must be payments (under relevant agreements) which are deemed by section 128AC of the Principal Act to be wholly or partly interest income. Paragraph (b) requires that the whole or a part of the payment is allowable as a deduction in relation to assessable income, assessable (non-resident partner) income or assessable (non-resident beneficiary) income of the interest payer. By paragraph (c) the section 128AC interest must not be assessable income of the interest payee.
Where paragraphs (a) to (c) are satisfied, the consequences, for the purposes of Division 16F, are set out in paragraphs (d) to (f). Paragraph (d) provides for so much of the paragraph (b) deductible amount of the payment to be taken to be what it terms 'adjusted section 128AC interest'.
Paragraph (e) sets out, indirectly, how the amount of foreign debt owing at a particular time is to be calculated. Broadly, it will be:
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- the eligible value of the relevant agreement property;
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- reduced by the amount of attributable agreement payments made or liable to be made before that time;
- •
- less the amount of 'adjusted section 128AC interest'.
Paragraph (f) is essentially a technical measure. It will ensure that 'adjusted section 128AC interest', a term developed for purposes of paragraph (d) and applied in paragraph (e), will be limited to that application and will not constitute assessable income of the interest payee.
Subsection (2) adopts section 128AC meanings for expressions used in subsection (1).
Certain payments in relation to bills of exchange and promissory notes to which section 128AD applies may also fall within subsection (3). An example of the payments to which the subsection applies is payments made by a resident drawer of a bill of exchange to indemnify or reimburse an offshore acceptor of a bill for its face value at maturity. Where an indemnification amount referred to in subsection 128AD(1) or (2) is deemed by either of those subsections to be interest income, then, by paragraph (a) interest is to be taken as section 128AD interest and, by paragraph (b), that section 128AD interest is to be taken to be payable regarding an amount of foreign debt. In the latter paragraph, the foreign debt is described as so much of the indemnification amount as is not treated as interest.
Section 159GZL : Deemed recipient of certain subsection 128F(6) interest
This section is a deeming provision in relation to certain amounts in the nature of interest to which subsection 128F(6) of the Principal Act applies. Broadly, the interest to which that subsection applies must be payable by a resident company to a wholly-owned non-resident subsidiary company where that subsidiary has on-lent, to the resident company, borrowings raised by the subsidiary by the issue of debentures outside Australia. For withholding tax purposes, subsection 128F(6) deems the debentures to have been issued by the resident parent company and the interest is treated on the same basis as if it were paid directly to the holders of the debentures.
Section 159GZL ensures comparable treatment of subsection 128F(6) interest in proposed Division 16F. It provides that where:
- •
- subsection 128F(6) applies to deem relevant interest to be treated as referable to debentures issued as described above (paragraph (a)); and
- •
- the interest, when paid, is section 128F interest (paragraph (b)),
A debenture will only be considered to be foreign debt, and the interest on the debenture to be foreign debt interest, when it is held by a foreign controller or a non-resident associate of a foreign controller.
Section 159GZM : Adjustment of foreign equity product in certain cases involving financial institutions
Proposed section 159GZM enables adjustments to be made, in appropriate cases, to the 'foreign equity product' (see the notes on the definition of that term in section 159GZA), either upwards from three times the level of foreign equity towards six times that level or downwards from six times towards three times. The adjusted foreign equity product will reflect the extent to which, in a given financial year, the equity of a foreign controller is ultimately invested in financial institutions as distinct from other investments.
The proposed section contains four paragraphs. The first three set out conditions that must apply before an adjustment can be made to the foreign equity product for a particular year of income; the fourth requires the Commissioner to determine the extent to which the foreign equity product should be adjusted.
The first precondition (paragraph (a)) is that there must be foreign equity, i.e., equity of foreign controllers or their non-resident associates, in a resident company, a partnership or a trust estate. The relevant company, partnership or trust estate is thereafter referred to in the section as the 'foreign equity entity'.
By virtue of paragraph (b), the foreign equity entity must have a direct or indirect beneficial entitlement or interest, as defined by sub-paragraphs (i), (ii) and (iii), in what is called a 'subordinate entity', i.e., another company, (whether resident or not), partnership or trust estate. For a subordinate entity company, the entitlement must be to receive either the whole or part of a present or possible future dividend paid by the company or a distribution of capital. For a subordinate entity partnership, the interest must be a proportion of the capital or profits of that partnership and for a subordinate entity trust estate, it must be a proportion of the corpus (including accumulations) or income of the trust estate.
The effect of paragraph (c) is that, where a foreign equity entity and all subordinate entities are financial institutions, no adjustment is to be made to the foreign equity product, because, in that case, the foreign equity entity would have a foreign equity product six times the level of foreign equity. Similarly, where the entity and all subordinates are not financial institutions, there is to be no adjustment made under this section.
The Commissioner is required, by paragraph (d), to make an adjustment to the foreign equity product in two circumstances. First, where the foreign equity entity is a financial institution, the Commissioner must decide the extent to which the foreign equity product of six times the level of foreign equity should be adjusted down towards three times the level of foreign equity, the level applicable to a foreign equity entity that is not a financial institution. Secondly, where the foreign equity entity is not a financial institution, the Commissioner must decide the extent of a converse adjustment, i.e., from three times towards six times. In making the determination, the Commissioner is to have regard to the extent to which the foreign equity of a foreign equity entity is attributable to interests or entitlements in subordinate entities. While the proposed legislation expresses a broad principle to avoid the complexity of attempting to provide detailed rules for every possible case, the following examples serve to illustrate the way in which it is intended that the Commissioner would determine the appropriate figure.
Example 1 A resident company (A), the shares in which are wholly owned by a non-resident company, is not a financial institution as defined by section 159GZA. However, all of A's foreign equity is attributable to its shareholding in another resident company (B) which is a financial institution. The multiplier used in calculating the foreign equity product of A would be adjusted from 3 to 6 because, effectively, all of the foreign equity is used in B's activities as a financial institution.
Example 2 A resident company (C) is a financial institution. Half of its foreign equity is attributable to its activities as a financial institution and half attributable to its interest in a partnership (D) which is not a financial institution. The multiplier used in calculating the foreign equity product of C would be adjusted from 6 to 4.5, i.e., the midpoint between 3 and 6 because, effectively, half of the equity is not used by C in its role as a financial institution.
Example 3 Half the foreign equity of a unit trust (E) is attributable to the business activities carried on by the trustee of E. The other half is attributable to the trustee's shareholding on behalf of the trust in a financial institution (F). In turn, two-thirds of F's foreign equity is attributable to its activities as a financial institution and one-third is attributable to its interest in an overseas subsidiary that is not a financial institution as defined. The multiplier used in calculating the foreign equity product of E would be initially adjusted from 3 to 4.5, as in Example 2, and then from 4.5 to 4. The reduction (of 0.5) from 4.5 to 4 is made because one-third of the initial adjustment (of 1.5) upwards from 3 to 4.5 is, by a deemed tracing process, found to be unwarranted - it does not relate to activities as a financial institution.
Section 159GZN : Debt and equity where interposed partnerships and trusts
Section 159GZN applies where one or more trusts or partnerships are interposed between a foreign controller and his or her Australian investment. Because trust and partnership income maintains its character when distributed to beneficiaries and partners, it is necessary to restrict eligibility for interest deductions by reference to the ratio of debt and equity investments by partnerships and trusts. In the absence of such restrictions, the debt/equity ratio could be easily circumvented.
Where, for example, a foreign controller has an investment as a beneficiary in a trust, that investment will be subject to the application of normal debt/equity ratios. If the trustee of the first trust then invests in another trust, partnership or company, this section extends similar debt/equity rules to that trust's investment. In effect, the investment is treated as if the beneficiary had invested directly in the second trust, partnership or company.
Paragraphs (a) and (b) set out the pre-conditions for operation of the section. The term 'head person' is used to described the person who is a foreign controller in relation to at least one of the entities in the chain of partnerships, trusts, etc.
Subparagraph (a)(i) looks to identify the head person as being beneficially entitled through interposed partnerships or trusts (but not companies) a percentage (called the 'head person percentage') of any dividend that might be paid by a company.
The head person percentage of profits of a partnership ascertained under subparagraph (a)(ii) is the indirect beneficial interest in the whole or a particular fraction of the profits of a partnership.
An indirect beneficial interest in the whole or a particular fraction of the income of a trust estate is, by subparagraph (a)(iii), the head person percentage in relation to a trust estate.
In tracing beneficial entitlements through any interposed discretionary trusts it will be assumed, for the purposes of administering this provision, that the trustee's discretion is exercised to fully distribute trust income to the class of income beneficiaries.
Paragraph (b) requires that the head person be a foreign controller of at least one, but not necessarily all, of the subsidiary entities.
Where paragraphs (a) and (b) are satisfied, paragraphs (c) and (d) operate.
Paragraph (c) applies the head person percentage to the interest that is or would be payable by each subsidiary entity to an entity between it and the head person.
Paragraph (d) applies the head person percentage as if all shareholders, partners or beneficiaries in the subsidiary entity were foreign controllers. In effect, the head person percentage of the debt or equity of the entity is treated as if it were foreign debt or foreign equity.
Section 159GZO : Schemes involving debt owing to foreign controllers etc through intermediaries
Section 159GZO applies to back-to-back loans, i.e., loans made through one or more conduits to give an arm's length appearance to the borrowing transaction. Where a person is interposed between a foreign controller and his or her Australian investment, any loans made through the intermediary are to be treated as if they had been made directly from the foreign controller to the Australian company, trust or partnership. In effect, this provision disregards the apparent arm's length lending from the intermediary and instead looks to the foreign controller or his non-resident associate as the true source of the funds. In this way, borrowings through an apparent arm's length person in the circumstances described will be treated as foreign debt and subject to the statutory debt/equity ratio, which may result in the denial of deductions for interest payable on that debt.
Subsection (1) provides, broadly, for back-to-back loans to be counted as foreign debt where they are channelled, via an intermediary, to a foreign controlled Australian entity.
Subparagraph (a)(i) applies where an intermediary owes money to a foreign controller or to a non-resident associate of the foreign controller.
Subparagraph (a)(ii) deals with those loans that are channelled through two or more intermediaries, that is, where there are two or more parties interposed between the borrower and the foreign controller arranging the loan.
While paragraph (a) is concerned with the party owing an amount to the foreign controller (or an associate) either directly or through one or more intermediaries, paragraph (b) seeks to identify an amount or amounts owing by a resident company, a partnership or a trust to one or more intermediaries. It is not necessary that the amount be owing to the foreign controller or his non-resident associate by the intermediary before an amount is owed by the resident. Nor does this provision require the establishment of any particular purpose to which the amounts owed are to be put.
When the conditions set by paragraphs (a) and (b) are satisfied, an adjustment to the Australian entity's foreign debt is made under paragraphs (c) and (d) of the subsection.
By paragraphs (c) and (d), the amount, or a proportion of the amount, owing by the resident company, partnership or trust to an intermediary owing it, in turn (directly or indirectly), to a foreign controller or associate of that foreign controller is treated as if it were owed directly to that controller or associate. In short, it becomes foreign debt of the Australian entity and interest payable is treated as payable to the foreign controller or associate, as the case may be.
This subsection will apply where a resident company is indebted to another resident company, trust, etc that has foreign controllers with the same ultimate beneficial ownership with the first resident company. Example : A, B and C are all foreign companies; B and C are subsidiaries of A; B and C have Australian resident subsidiaries D and E respectively; C's investment in E is funded to the limit of the 3:1 ratio but B's investment in D is funded at a ratio of 1:1. If E is indebted to D at interest, D will be treated as an intermediary and the amount owing will be included in E's debt/equity ratio as if the amount were owing directly from E to B.
Subsection (2) applies the principles set out in subsection (1) to the case where an intermediary owes an amount to a non-resident associate of a foreign investor (as defined in proposed section 159GZA). As with subsection (1), the intermediary is disregarded and the amount owing is treated as being owed directly from the foreign investor to the associate. Without the provision, amounts owing by a foreign investor via an intermediary to a non-resident associate would be treated as arm's length-sourced debts and so would be excluded from debt/equity ratio requirements.
Section 159GZP: Schemes involving debt owing by foreign controllers etc. through intermediaries
This section is an anti-avoidance measure to deal with schemes by which a foreign controller purports to take up or increase equity in an Australian enterprise but the funds are, in whole or in part, lent back to the foreign controller through one or more intermediaries.
Subsection (1) sets up three conditions, either of the first two of which may apply in conjunction with the third if the proposed section is to apply. First, by subparagraph (a)(i), it looks to whether, under a scheme, an amount becomes owing by an intermediary to a resident company, a partnership or the trustee of a trust estate. In the alternative, by subparagraph (a)(ii), it asks whether the first intermediary owes an amount to another intermediary. In other words, it guards against the use of chains of 'middlemen' to obscure the real transaction.
The test in paragraph (b) is whether an amount becomes owing by a foreign controller (or a non-resident associate), of the resident company, partnership or a trust estate to an intermediary. It is not material whether this amount becomes or became owing before or after the amount referred to in paragraph (a) became owing.
Once the conditions set by paragraphs (a) and (b) are met, the operative words of subsection (1) provide that the foreign controller's (or associate's) debt to an intermediary is taken to be a debt owing to the resident company etc, rather than to the intermediary.
The consequence is that the amount of contributed equity which is effectively lent back to the foreign controller by the resident company etc is, for example, by paragraph 159GZP(1)(b), denied the status of equity. A calculation of the true debt/equity ratio of the Australian company etc, can then be made under proposed section 159GZG.
Like subsection (1), subsection (2), sets up three conditions to test whether an arrangement is to be attacked as a device to escape the effect of the thin capitalisation rules.
Subparagraph (a)(i) asks whether an amount becomes, under a scheme, owing by an intermediary to a foreign investor (as defined in proposed section 159GZA). Next, subparagraph (a)(ii) looks through chains of intermediaries. Paragraph (b) provides the third test, that is, whether an amount becomes owing, by the foreign investor's non-resident associate, to one or more intermediaries.
If the relevant tests are met, the subsection requires the debt owing by the non-resident associate to be taken to be owing to the foreign investor and not to the intermediary. The result is that the real loan to the foreign investor by his or her non-resident associate is exposed.
That debt, by subsection 159GZP(2), is denied the status of foreign equity for the purposes of subsection 159GZG(5). Funding received directly from non-resident associates is itself denied equity status. If it were not for this safeguard, a foreign investor could artificially boost equity in an Australian business operation, etc by channelling funding from non-resident associates through one or more intermediaries to give that funding an arm's length appearance.
Section 159GZQ : Equity borrowed from non-resident associates to be treated as debt in certain cases
Section 159GZQ is an anti-avoidance provision intended to prevent borrowings from related non-resident sources from being treated as an equity contribution to a partnership or trust. But for this provision, the debt/equity ratio might be circumvented by the conversion of debt into equity by passing it through an intermediary. Three paragraphs set out the conditions to be met before the section will operate. By paragraph (a), there will be a foreign controller or his or her non-resident associate who borrows funds from a non-resident associate to contribute to a partnership as capital or to a trust estate as capital or corpus. By paragraph (b), the borrower contributes the borrowed funds as such capital or corpus. Thirdly, by paragraph (c), there must be interest which is or will be payable by the borrower and which is or will be an allowable deduction from the borrower's assessable income.
Where these conditions are satisfied, the section operates to treat the capital or corpus so contributed as 'foreign debt' (see the notes on proposed section 159GZF) rather than as foreign equity.
Section 159GZR : Part year application of Division in certain circumstances
Foreign debt and foreign equity are generally measured on a year of income basis. Proposed section 159GZR is designed to modify the impact of debt/equity ratios to make appropriate allowance for cases where there has been a foreign controller for part only of the year of income or where there are different (unrelated) foreign controllers during separate parts of the year of income. Where the section applies, calculation of the debt/equity ratio will only be made for the period when there was a foreign controller. If there has been a change of (non-associated) foreign controllers, separate debt/equity calculations will be made for the periods up to and after the change.
Under subsection (1), where either of two conditions applies in relation to a resident company, a partnership or a trust estate, i.e., where:
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- there is a foreign controller or controllers for part only of the year (paragraph (a)); or
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- there are different foreign controllers for two or more parts of the year (paragraph (b)),
By subsection (2), the equity maintenance provision (subsection 159GZG(6)) may be disregarded in the application of these part-year provisions. But for this subsection, foreign equity would have been excluded from the calculation of equity for the two years prior to the reduction by virtue of its transfer to another foreign controller or there ceasing to be a foreign controller during a year. This subsection will avoid that result.
Subdivision C - Reduction of interest deduction
Section 159GZS : Resident companies
This section is the first of six operative provisions in Subdivision C of proposed new Division 16F. These sections will, where applicable, operate to reduce the amount of interest that would otherwise be allowable as a deduction in cases where the greatest total foreign debt (as defined by section 159GZF) at any point during the year of income of a company exceeds the foreign equity product (defined by section 159GZA). The amount of the total foreign debt interest which will not be deductible will be calculated by reference to the proportion that excess foreign debt bears to total foreign debt, i.e., if one half of the total foreign debt is excess foreign debt, one half of the otherwise deductible foreign debt interest will be non-deductible.
For resident companies, other than members of a resident company group, the amount of any non-deductible foreign debt will be calculated by reference to section 159GZS. The section imposes two conditions that must be satisfied before any amount of interest can be disallowed. By paragraph (a), there must be an amount of foreign debt interest that would otherwise be allowable as a deduction from the assessable income of the relevant year of income. By paragraph (b), the greatest total foreign debt of the resident company at any point during the year of income must exceed that company's foreign equity product for the year of income. If both conditions are satisfied, a proportion of the total amount of foreign debt interest will not be an allowable deduction. That proportion will equal the proportion which the excess foreign debt calculated under paragraph (b) bears to the total foreign debt. This proportion of non-deductible debt is expressed in the formula
(E)/(D)
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- E is the amount of the excess referred to in paragraph (b); and
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- D is the amount of foreign debt referred to in that paragraph.
Section 159GZT : Resident company groups
Section 159GZT will apply to those resident companies that are members of a resident company group within the meaning of proposed section 159GZI. It will operate to reduce the interest deduction otherwise allowable to members of a wholly-owned resident company group where the greatest total foreign debt of all members of the group exceeds the foreign equity product of the group member having foreign equity.
Subsection (1) of section 159GZT is, in its operation, broadly equivalent to section 159GZS, but applies to a resident company group as a whole, rather than to each company within it. The preconditions to the application of the proposed section appear in two paragraphs. Paragraph (a) requires that foreign debt interest is payable by any member of the resident company group. Under paragraph (b), it is necessary to determine whether the greatest total foreign debt of all group members exceeds the foreign equity product of the group member in which a foreign controller holds foreign equity. That member will be the resident holding company in the group because, whilst foreign debt may be lent to any company within the group, foreign equity will only be invested in the resident holding company of the group. It follows that the greatest total foreign debt at any time during the income year must exceed the foreign equity product of that holding company before paragraph (b), and therefore the section as a whole, can have any application. Where the paragraph (a) and (b) preconditions are met, the operative part of the subsection applies the section 159GS formula, as modified by reference to paragraph (b), to ascertain the proportion of foreign debt interest which is not an allowable deduction. Where, by this subsection, a proportion of the total foreign debt interest is not allowable as a deduction, that proportion will apply to the foreign debt interest (if any) of each member of the resident company group.
Example: Resident holding company (A) has $100 share capital, all of which is owned by a foreign controller; B and C are resident company subsidiaries of A; and A, B and C each owe $200 of interest-bearing debt directly to the foreign controller. The total foreign debt of the group is $600 and the foreign equity product of the group is $300 (i.e.,
3 * $100
(E)/(D)
Grouping companies in this way allows them maximum flexibility because it will not be necessary for each company in the group to separately comply, provided the group as a whole complies with the debt/equity ratio. If it were not for the grouping provisions, B and C in the above illustration would each have foreign debt of $200 and no foreign equity.
Subsection (2) is an anti-avoidance measure to ensure that the value of any foreign equity arising from any transaction between members of the resident company group reflects the value that would have been attributable to foreign equity had the transaction been between companies dealing with each other at arm's length. That is, it prevents group foreign equity from being boosted by the creation of artificial profits on intra-group transactions.
Paragraph (a) asks whether any of the foreign equity is due to intra-group transactions and paragraph (b) asks whether that equity would have been lower if the transactions had been at arm's length. If so, subsection (2) deems subsection (1) to apply to the reduced equity figure derived by effectively recasting the transaction.
Section 159GZU, Section 159GZV and Section 159GZW : Partnerships, trust estates and foreign investors
These three sections operate in a manner identical to the way in which section 159GZS operates in relation to companies. The sections apply, respectively, to:
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- partnerships (section 159GZU);
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- trust estates (section 159GZV); and
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- foreign investors (section 159GZW).
Section 159GZX : Effect of subsection 159GT(6) interest payments
This section extends the thin capitalisation rules to security payments excluded from Division 16E by proposed new subsection 159GT(6) (see notes on clause 40).
Under section 159GZX, the issue price of a security issued or transferred to a foreign controller or a non-resident associate will generally be treated as foreign debt for each year of income in which the security is held by a foreign controller. In each year in which the foreign equity product is exceeded, a notional adjustment of deemed interest on the security is to be recorded. In the year in which an Australian entity would otherwise be entitled to a deduction for interest on the security (i.e., when the security is redeemed), the total of any notional adjustments will be applied to reduce the amount of any interest deduction that would otherwise be allowable.
Subsection (1) defines a number of expressions used in subsection (2), the operative subsection.
Paragraph (a) defines '159GT(6) interest payment' as, in effect, the interest payment that would have been allowed as a deduction under subsection 159GT on an accruals basis were it not for proposed subsection 159GT(6).
Paragraph (b) is complementary to paragraph (a) and defines 'notional 159GT deduction' as the interest deduction that otherwise would have been allowable to the interest payer in a year of income but for the subsection 159GT(6) exclusion.
"Foreign controller year" is defined by paragraph (c). In relation to a 159GT(6) interest payment, it is a year in which:
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- an interest payment is made or is liable to be made to a foreign controller (or its non-resident associate) of the payer (subparagraph (c)(i)); or
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- if a payment had been made or had been liable to be made, the recipient would have been a foreign controller (or a non-resident associate of the foreign controller) of the payer (subparagraph (c)(ii)).
Paragraph (d) and the operative part of the section enable all of the notional adjustments of deemed interest payments to be aggregated into what it terms the 'notional reduction amount'. Because no actual payment of interest occurs where a deduction is claimed under section 159GT on an accruals basis, no adjustment of interest paid is to be made until the year in which interest is actually paid or is liable to be paid.
Subsection (2) is the operative provision. It will apply where there is at least one foreign controller year prior to the year in which a 159GT(6) interest payment is made. In effect, a foreign controller or associate must have held the security in a year of income prior to the 159GT(6) interest payment.
Paragraph (a) provides a link between foreign debt described elsewhere in the Subdivision and the notional 159GT(6) interest payments. For each foreign controller year in respect of which there is a notional interest deduction claimed, a portion of the 159GT(6) interest payment is treated, in quantifying foreign debt for a year of income, as having been made in that year.
The mechanism for adjusting the deduction for interest that would be allowed apart from this Division is provided by paragraph (b). In a year of income in which a 159GT(6) interest payment is made, the deduction that would otherwise be allowed for such interest is to be reduced by the sum of the notional reduction amounts. A reduction of the deduction under this subsection will apply whether or not the holder of the security at its redemption date is a foreign controller or a non-resident associate of a foreign controller.
Clause 42: Transfer of excess credit within company group
Section 160AFE of the Principal Act applies where the amount of foreign tax paid by a company on foreign-source income exceeds the Australian tax payable on that income. It enables any excess foreign tax credit in relation to a class of income, arising in a particular year of income, to be transferred between companies within a wholly-owned company group and set-off against Australian tax payable on income of the same class derived by other companies in the group in the same income year.
The provisions of section 160AFE which determine the circumstances in which a company is a group company in relation to another company, and which allow the transfer of an excess foreign tax credit to that other company, operate in the same manner as those contained in section 80G of the Principal Act which applies to the transfer within a company group of the right to a deduction for an income loss.
The amendments proposed by clause 42 to section 160AFE of the Principal Act, viz:
- •
- the amendment of subsection (6) to make that subsection subject to proposed new subsection (6A) (paragraph (a)); and
- •
- the insertion of new subsection 160AFE(6A) concerning the acquisition of a "shelf company" in the year of income that commenced on 1 July 1986 or in a subsequent year of income (paragraph (b)),
That is, a company that was dormant, with the meaning of Part VI of the Companies Act 1981, from the time of incorporation until the time of its acquisition by another company in a year of income, will be able to satisfy the 100% common ownership test in relation to that other company for the year of income, where the shares in the dormant company were acquired in 1986-87 or a subsequent financial year.
Clause 43: Other interpretative provisions
This clause will amend section 160K, which is an interpretative provision for Division 1 of Part IIIA of the Principal Act that deals with capital gains and capital losses. Paragraph (a) will omit from the definition of "relevant exemption provision" the reference to paragraph 23(ja) of the Principal Act which exempts the income of certain superannuation funds established for the self-employed. Paragraph 23(ja) is to be repealed.
Paragraph (b) of this clause will ensure that references to paragraph 23(ja), 23F, 23FA and 23FB apply only until the day on which this Bill comes into operation.
Clause 44: Transfer of net capital loss within company group
Clause 44 proposes to amend section 160ZP of the Principal Act which allows a group company to transfer to one or more other companies in the group all or part of a net capital loss incurred for the purposes of Part IIIA of the Principal Act (treatment of capital gains or capital losses).
The provisions of section 160ZP which determine the circumstances in which a company is a group company in relation to another company, and which allow the transfer of a net capital loss to that other company, operate in the same manner as those contained in section 80G which applies to the transfer within a company group of the right to a deduction for an income loss.
The amendments proposed by clause 44 to section 160ZP of the Principal Act, viz:
- •
- the amendment of subsection (6) to make that provision subject to proposed new subsection (6A) (paragraph (a)); and
- •
- the insertion of new subsection 160ZP(6A) that contains measures concerning the acquisition of a "shelf company" in the year of income that commenced on 1 July 1986 or in a subsequent year of income (paragraph (b)),
That is, a company that was dormant, within the meaning of Part VI of the Companies Act 1981, from the time of incorporation until the time of its acquisition by another company in a year of income, will be able to satisfy the 100% common ownership test in relation to that other company for the year of income, where the shares in the dormant company were acquired in 1986-87 or a subsequent financial year.
Clause 45: Transfer of asset between companies in the same group
Clause 45 will amend section 160ZZO of the Principal Act that permits a rollover for asset transfers between companies in the same group, where the companies share 100% common ownership. The effect of a rollover is to defer, for the purposes of Part IIIA of the Principal Act (treatment of capital gains or capital losses), a tax liability on capital gains that may otherwise arise by reason of the transfer of an asset acquired by the transferor company after 19 September 1985. In cases where an asset acquired before 20 September 1985 is transferred, the broad effect of the rollover is that the transferee company is also taken to have acquired the asset before 20 September 1985 so that the asset continues to be outside the scope of the tax on capital gains.
The provisions of section 160ZZO which determine the existence of a company group relationship operate in the same way as those contained in section 80G of the Principal Act (transfer of an income loss between companies within a company group). The amendments proposed by clause 45 to section 160ZZO, viz:
- •
- the amendment of subsection (8) to make that provision subject to proposed new subsection (8A) (paragraph (a)); and
- •
- the insertion of new subsection 160ZZO(8A) that contains measures concerning the acquisition of a "shelf company" in the year of income that commenced on 1 July 1986 or in a subsequent year of income (paragraph (b)),
That is, a company that was dormant, within the meaning of Part VI of the Companies Act 1981, from the time of incorporation until the time of its acquisition by another company in a year of income, will be able to satisfy the 100% common ownership test in relation to that other company for the year of income, where the shares in the dormant company were acquired in 1986-87 or a subsequent financial year.
Clause 46: Liability to pay instalments of provisional tax
Section 221YBA of the Principal Act as proposed to be amended by the Taxation Laws Amendment Bill (No.3) 1987 (together with section 221YDA) contains a general requirement for the payment of provisional tax by quarterly instalments during the year of income by taxpayers whose previous year's provisional tax liability exceeds $5,000. Certain categories of taxpayer specified in subsection 221YBA(2) are exempted from that requirement. A taxpayer to whom the present Division 16A applies is (by paragraph 221YBA(2)(b)) not required to pay instalments of provisional tax in respect of the abnormal income, for the purposes of that Division, derived by that person.
Clause 46 of the Bill will, as part of the package of measures related to the introduction of a new Division 16A - see particularly clause 38 - omit paragraph 221YBA(2)(b) and insert a new paragraph. That new paragraph will change a reference to section 158C (the "abnormal income" section of the old Division 16A) to its counterpart in the new Division 16A - section 158L. The effect of the substituted paragraph will be that an artist, composer, inventor, performer, production associate, sportsperson or writer will not have to pay quarterly provisional tax instalments on any abnormal income amount received during the year of income.
Clause 47: Provisional tax on estimated income
Section 221YDA (as proposed to be amended) of the Principal Act allows a taxpayer who has received a notice of the amount of provisional tax payable in respect of a year of income, or a notice in respect of an instalment of provisional tax, to seek to have that amount or instalment varied. A taxpayer who seeks such a variation is required, by a certain date in relation to the notice, to furnish to the Commissioner a statement showing the details of certain estimates made for the purposes of section 221YDA (among which are estimates of taxable income, salary and wage income, amounts of prescribed payments, tax instalments deducted, rebate entitlements, etc). Where such a statement is furnished, the taxpayer's provisional tax liability is recalculated on the basis of the estimates made.
Clause 47 will amend section 221YDA (paragraph 46(a)) by inserting new paragraph (1)(dab) to allow an artist, composer, inventor, performer, production associate, sportsperson or writer to whom the new Division 16A (see notes on clause 38) applies to also make an estimate of the eligible taxable income and average eligible taxable income of the taxpayer for the purposes of that Division.
Where such a taxpayer has included in a statement furnished to the Commissioner for the purposes of section 221YDA an estimate of the amounts of eligible taxable income and average eligible taxable income for a year of income, under new subparagraph 221YDA(2)(a)(iii) to be inserted by paragraph 46(c) of the Bill, that taxpayer may have those amounts taken into account in the recalculation of his or her provisional tax liability.
Clause 48: Application of amendments etc
Clause 48 sets out the way in which various amendments made by the Principal Act are to apply.
Subclause (1) is an interpretative provision. References in clause 48 to "Amended Act" mean the Income Tax Assessment Act 1936 as amended by Part II of this Bill.
Subclause (2) operates so that consequential amendments of the Principal Act arising as a result of the establishment of the new supervisory arrangements for superannuation funds and approved deposit funds apply in relation to the 1986-87 and subsequent income years. This is in line with the Treasurer's announcement of 11 June 1986 that the new operational standards for funds would apply from 1 July 1986.
By subclause (3), three amendments are proposed to apply as if they had come into operation on 29 October 1987, i.e., the date of introduction of this Bill. The amendments are to remove any doubt that Division 16E applies to certain forms of financing arrangements in the form of annuities. The three amendments are:
- •
- the change made by clause 13 to the subsection 27H(4) definition of "annuity" (paragraph (a));
- •
- the amendments proposed by paragraphs (c) and (e) of clause 39 to clarify the application of the Division 16E accruals basis of assessing the return on certain financial arrangements taking the form of annuities (paragraph (b)); and
- •
- the insertion, by paragraph (d) of clause 39, of the definition of "ineligible annuity" in subsection 159GP(1) of the Principal Act (paragraph (c)).
The provisions of subclause (3) are subject to the transitional provisions in clause 49 of this Bill, which will effectively operate so that Division 16E will apply to relevant deferred annuities issued after the time of the Treasurer's announcement (19 September 1986) and before the date of introduction of this Bill.
Subclause (4) is the application provision which relates to the amendments made to the Principal Act to introduce a new averaging system - under new Division 16A - for artists, composers, inventors, performers, production associates, sportspersons and writers, the operation of which is explained in detail in the notes to clause 38. Those amendments, including the consequential amendments made by clauses 14 and 37, will apply to assessments in respect of income of the year of income that commenced on 1 July 1986 and of all subsequent years of income.
Subclause (5) will give effect to the decision announced by the Treasurer in the 1986 Budget that a taxpayer to whom the present Division 16A applies (authors and inventors) may, for the 1986-87 year of income only, make an application under the present subsection 158D(1) to have a notional income determined. In effect, this means that the present Division 16A will apply to a person making such an application as if the various amendments made by this Bill in relation to the authors and inventors abnormal income provisions had not been made.
Subclause (6) will enable the modification to the definition of "dependant" for the purposes of Subdivision AA of Division 3 of Part III of the Principal Act to apply from 1 July 1986 which is the date fixed for the Occupational Superannuation Standards Act 1987 to come into operation.
Subclause (7) provides for the amendments made by clause 18 to certain definitions for the purposes of Subdivision AB of Division 3 of Part III of the Principal Act to apply to eligibility for deductions for contributions made to superannuation funds on or after 1 July 1986 and to funds during the year of income commencing on 1 July 1986 and subsequent years of income.
Subclause (8) will apply the consequential amendments made by clauses 22, 23 and 35 to superannuation funds and approved deposit funds in relation to the year of income commencing on 1 July 1986 and subsequent years of income.
By subclause (9), the purely technical amendments of the formula contained in the definition of 'notional accrual amount' in subsection 159GP(1) of Division 16E proposed by paragraphs (a) and (b) of clause 39 will apply as if they had come into operation on 17 December 1984. That date is specified because Division 16E applies in respect of qualifying securities issued on or after that day.
Subclause (10) enables two proposed amendments to operate as if they had come into effect on 23 April 1987, the day on which the Treasurer announced that amendments would be made to preclude the allowance, to issuers of qualifying securities, of deductions on an accruals basis where those securities are issued in Australia to or on behalf of a non-resident associate of the issuer. The two amendments are:
- •
- the insertion, by paragraph (d) of clause 39, of definitions of "agreement" and "associate" in subsection 159GP(1) of the Principal Act (paragraph (a)); and
- •
- the denial, by new subsection 159GT(6) proposed to be inserted by clause 40, of an accruals basis of deductions to issuers of qualifying securities issued in Australia to or on behalf of their non-resident associates (paragraph (b)).
Subclause (11) will apply the amendments to be made by clause 41 to insert new Division 16F in Part III of the Principal Act (dealing with thin capitalisation by non-residents) to assessments in respect of the 1987-88 and subsequent years of income.
Subclauses (12) and (13) are the application provisions which relate to the amendments made by clauses 46 and 47 in respect of the calculation of the provisional tax liability of taxpayers to whom the new Division 16A will apply. The operation of those amendments is explained in the notes to those clauses.
Clause 49: Transitional - Sections 27H and 159GP
This clause, which will not amend the Principal Act, complements the application provisions of subclause 48(3). That subclause relates to amendments made by the Bill in respect of certain annuities (immediate and deferred) issued on or after 29 October 1987. Clause 49 effectively provides for those amendments to apply in relation of such deferred annuities issued during the transitional period 19 September 1986 (the date of the press release which first foreshadowed these changes) to 28 October 1987. It achieves this result by:
- •
- requiring the application date of 29 October 1987 specified in subclause 48(3) to be read as if it were a reference to 19 September 1986 (paragraph (a));
- •
- notionally substituting in place of the clause 13 change to the subsection 27H(4) definition of "annuity" a change that effectively excludes relevant deferred annuities from that definition for the transitional period (paragraph (b));
- •
- notionally omitting paragraph (c) of clause 39, because the objective of that paragraph (which is, in broad terms, to exclude relevant annuities from the definition of "qualifying security") is achieved for the transitional period by the notional change to clause 13 provided by paragraph (b) (paragraph (c)); and
- •
- notionally omitting paragraph (e) of clause 39 and substituting a new paragraph (e) which clarifies the application of the Division 16E accruals basis of assessing for a relevant deferred annuity issued in the transitional period - being a deferred annuity within the meaning of Subdivision AA of Division 2 of the Principal Act that has the characteristics of a 'qualifying security' for purposes of Division 16E and which is not an 'ineligible security' (as defined by the definition proposed by clause 39(d)) (paragraph (d)).
Clause 50: Transitional - Subdivision AB of Division 3 of Part III
This clause will enable contributions made before 1 July 1986 by eligible persons for the purposes of section 82AAS of the Principal Act to paragraph 23(ja) or section 23FB superannuation funds with a substituted accounting period for 1986-87 commencing prior to 1 July 1986 to continue to be deductible notwithstanding the amendments made to the Principal Act by this Bill.
This clause, which will not amend the Principal Act, is a transitional provision that relates to the thin capitalisation rules contained in clause 41. Those rules will generally apply from 1 July 1987 to investments by foreign investors (see notes on proposed section 159GZA) and to Australian entities in which foreign controllers and their associates, if any, have a 15 per cent or greater interest. Where, prior to 1 July 1987, a foreign investor or foreign controller was requested to provide an undertaking to the Government to abide by the foreign investment policy debt/equity ratio requirements, that investment is to be subject to the corresponding thin capitalisation rules from 1 July 1987. However, other classes of foreign investment that have not previously been subject to debt/equity ratio constraints will, by the transitional provisions of clause 51, be given additional time to restructure their pre-1 July 1987 in-house financing arrangements.
Under the transitional provisions:
- •
- pre-1 July 1987 financing arrangements not subject to prior undertakings will generally not be required to comply with the relevant debt/equity ratio until the earlier of the date of refinancing of the debt or 30 June 1988;
- •
- taxpayers with approved substituted accounting periods will be catered for as follows:
- -
- periods ending on any day in the 1987 calendar in lieu of the income year ended 30 June 1987 will be deemed to commence on 1 July 1987 and to run to their normal conclusion date, i.e., as early as 1 January 1988 and as late as 31 December 1988;
- -
- periods starting in the 1987 calendar year but before 30 June 1987 and ending on or after 1 January 1988 in lieu of the income year ending 30 June 1988 will be deemed to commence on 1 July 1987 and to run to their normal conclusion date, i.e., as early as 1 January 1988 and as late as 29 June 1988;
- •
- that part of equity consisting of the balance of an asset revaluation reserve account is to be measured by looking at the balance of the account at the end of 28 October 1987, i.e., the day preceding the introduction of the amending legislation;
- •
- the test for compliance with the relevant debt/equity ratio by reference to the highest point of debt during the year will only be applied for that part of the transitional income year which occurs after 30 November 1987.
Subclause (1) contains a number of definitions relevant to the application of the transitional provisions. Put broadly, under those provisions, debt and equity are to be calculated separately for each transitional controller (i.e., a foreign controller during a transitional period) in relation to an entity.
- "eligible entity" is defined as a resident company, a partnership or a trust estate.
- "new debt", in relation to an eligible entity, means, by paragraph (a) of the definition, foreign debt, in relation to transitional controllers, that is not 'old debt'. That is, it means an eligible entity's post-30 June 1987 foreign debt. In relation to foreign investors, by paragraph (b) of the definition, new debt is the foreign debt that is not old debt of the foreign investor.
- "new equity", in relation to an eligible entity, is so much of the amount of foreign equity for the year of income as exceeds the 'old equity' (a defined term) in relation to transitional controllers, i.e., only equity created on or after 1 July 1987 or profits, etc, arising after that date (paragraph (a)). New equity of a foreign investor is, by paragraph (b), such of the amount of equity for the year of income as exceeds the old equity.
- "old debt", in relation to an eligible entity, is the balance outstanding on amounts owing to the foreign controller and his or her non-resident associates under contracts entered into before 1 July 1987 (paragraph (a)). For foreign investors, old debt is the balance owing to non-resident associates of the foreign investor under pre-1 July 1987 contracts (paragraph (b)).
- "old equity" generally means, by subparagraph (a)(i), the equity of foreign controllers and their non-resident associates for the 1986-87 year of income. Subparagraph (a)(ii) takes account of the part year provisions and adjusts the old equity where there has been a change in foreign controllers during the 1986-87 year of income sufficient to bring those provisions into play. Paragraph (b) provides, in relation to a foreign investor, that old equity means the foreign investor's equity for the 1987 year of income.
- "old equity product", in relation to an eligible entity, is the foreign equity product (see notes on section 159GZA) that is the result of taking into account only old debt and old equity in relation to a transitional controller (paragraph (a)). The foreign equity product of the 1987 year of income taking into account only old equity will give the old equity product for a foreign investor (paragraph (b)).
- "transitional period" is a term defined in respect of each of three classes of foreign investors and entities controlled by foreign controllers which are transitional controllers. Subparagraph (a)(i) deals with entities where foreign controllers were not, prior to 1 July 1987, requested to provide a debt/equity undertaking in relation to their investment. This class of foreign controller will obtain the benefit of the transitional provisions until:
- •
- 30 June 1988 (sub-subparagraph (A)); or
- •
- the earlier compliance with the relevant debt/equity ratio or refinancing of his or her pre-1 July 1987 approved investment (sub-subparagraph (B)). Such compliance or refinancing would cause the transitional period to end.
Subparagraph (a)(ii) deals with foreign controllers whose sole or principal business activity at 30 June 1987 was that of mineral exploration. Investments by these foreign controllers have not previously been subject to debt/equity ratio constraints. They will be given until:
- •
- 30 June 1988 (sub-subparagraph (A));
- •
- the earlier commencement of mining (sub-subparagraph (B)) or other income derivation (sub-subparagraph (C)); or
- •
- if, earlier, the time when old debt ceases to exceed old equity by a ratio of 3:1 (sub-subparagraph (D)),
The third category of transitional period (subparagraph (a)(iii)) covers the few cases where, prior to 1 July 1987, approval had been given to financing arrangements that fall outside the standard 3:1 and 6:1 ratios administered under foreign investment policy. Where the transitional controller is one to whom subparagraph 3(a)(ii) applies (sub-paragraph (A)), or where official approval was given in return for a non-standard debt/equity undertaking (sub-subparagraph (B)), the old debt and old equity will be allowed to remain unaffected by the new ratio requirements until the old debt ceases to exceed the old equity product, i.e., until it conforms with the appropriate standard 3:1 or 6:1 debt/equity ratio. This could occur, for example, if the debt were reduced. Any injection of new debt and new equity by such transitional controllers will be subject to testing for compliance with the relevant standard ratio.
In relation to foreign investors, paragraph (b) sets out rules comparable to those provided by paragraph (a) for foreign controllers.
- "1987 year of income" means the year of income commencing on 1 July 1986 and ending on 30 June 1987, regardless of whether the foreign investor or eligible entity concerned has a substituted accounting period. This is relevant for the purpose of calculating 'old debt', 'old equity' and 'old equity product'.
Subclause (2) provides that, where old debt is payable under a contract (paragraph (a)) entered into prior to 1 July 1987 and, by paragraph (b), the original contract required that at some time a new contract be entered into, old debt is not to cease being treated as old debt by reason only that the original contract has so expired or the new contract has been entered into. Where, however, after 30 June 1987, a new contract is entered into that was not required by the original contract, or a debt is refinanced or rolled over, the debt will be regarded as new debt.
Subclause (3) is complementary to subclauses (1) and (2). It contains tests for determining whether a foreign controller is a 'transitional controller' and whether a foreign investor is a 'transitional investor'. Transitional controllers and investors may benefit from the transitional provisions.
Subparagraph (a)(i) sets out the first test of whether a foreign controller is a transitional controller in relation to an eligible entity. The test is whether a foreign controller had old debt at 30 June 1987 exceeding its old equity product. Broadly, this category will include foreign controllers who have not been requested prior to 1 July 1987 to provide a foreign investment policy debt/equity ratio undertaking and where, as at 30 June 1987, their debt/equity ratio exceeded the standard debt/equity ratio.
Subparagraph (a)(ii) provides a second and cumulative test: where the foreign controller was given approval for an investment in exchange for an undertaking to maintain its financial structure within certain debt/equity controls more generous than the standard 3:1 and 6:1 ratios.
Only foreign controllers who meet the tests in both subparagraph (a)(i) and (ii) will be "transitional controllers".
Paragraph (b) applies comparable rules to those in paragraph (a) in relation to certain foreign investors. Those foreign investors who are to benefit from the transitional provisions are called 'transitional investors'.
For both transitional controllers and transitional investors, the benefits of the transitional arrangements are available if they provide more generous treatment than the standard 3:1 or 6:1 ratios.
Subclause (4) is a drafting device to facilitate the appropriate application of the proposed new legislation to calculate 'old debt', 'old equity', and the 'old equity product'. It does this by deeming proposed Division 16F of Part III of the Principal Act to have always been in force.
Subclause (5) enables separate debt/equity calculations to be made for old debt and old equity for transitional controllers, and provides for new debt and new equity to be calculated for all foreign controllers in relation to an entity. Specifically, paragraph (a) permits a part-year calculation of the debt/equity ratio where a foreign controller ceases to be a transitional controller part way through a year of income. Similarly, paragraph (b) authorises a part-year calculation where there is a transitional controller during only a portion of the year.
Subparagraphs (c)(i) and (ii) enable a pre-1 July 1987 approved funding arrangement (see the notes on paragraph 3(a)) to be substituted for the standard 3:1 or 6:1 ratios in calculating the debt/equity ratio applicable to old debt and old equity of a transitional controller.
The operation of paragraphs (a), (b) and (c) is, however, by paragraph (d), made subject to subclauses (7) and (8) (which are discussed hereunder).
Subclause (6) enables separate debt/equity calculations to be made for old debt and equity and new debt and equity of a transitional investor. Its terms follow the model of subclause (5) in relation to transitional controllers.
Subclause (7) will apply to a limited number of entities that have substituted accounting periods and transitional controllers. The first transitional year is to commence on 1 July 1987 and end when their then current financial year would have ended. In practice, there can be transitional years running from 1 July 1987 to as early as 1 January 1988 and as late as 31 December 1988.
Subclause (8) contains technical provisions modifying the standard operation of the thin capitalisation rules so that, in the transitional year, foreign controllers and foreign investors will not be disadvantaged. The modified rules do not, however, override the part year transitional provisions of section 159GZR of the Principal Act.
Thus, by subparagraph (a)(i), the asset revaluation reserve component of equity which, by proposed paragraph 159GZC(1)(c) of the Principal Act, is normally measured at the start of an income year is instead, in the transitional year, to be measured at the end of 28 October 1987 (the day prior to the introduction of the legislation).
Similarly, subparagraph (a)(ii) modifies the normal operation of the mechanism in proposed subparagraph 159GZG(1)(e)(i) of the Principal Act for reducing the opening balance of asset revaluation reserves by so much of the reserves as are applied during an income year, in paying up shares. In the transitional year, only the application of those reserves after 28 October 1987 will be taken into account because subparagraph (a)(i) makes that date the measuring point for those reserves.
By paragraph (b) the reference to 'greatest total foreign debt at any time in a year of income' is modified in five specified proposed paragraphs of the Principal Act. The effect, in each case, of that modification is that testing for compliance with the debt/equity ratios contained in the thin capitalisation rules by reference to the high point of foreign debt for an income year is to be applied, in the transitional year, only to foreign debt in existence after 30 November 1987. In practice, this will give parties with 'excessive' foreign debt time after the legislation is introduced to rearrange their affairs so as to avoid or minimise the impact of the new rules.
Clause 52: Amendment of assessments
By this clause, the Commissioner of Taxation will be authorised to amend an assessment made before the amendments proposed to the Income Tax Rates Act 1936 by Part II of the amending Bill came into operation, in order to give effect to those amendments.
This clause facilitates references to the Income Tax Rates Act 1986, which in Part III of the Bill is known as the "Principal Act".
This clause proposes several amendments to section 3 of the Principal Act which contains various definitions necessary for the operation of that Act and certain interpretive provisions.
The first of those amendments (in paragraph (a)) relates to the definition of "eligible part" which is used in the calculation of the tax on the capital gains component of the taxable income of a taxpayer, or the net income of a trust estate, where Division 6AA of Part III of the Income Tax Assessment Act 1936 (the Assessment Act) applies to the taxable income or net income, as the case may be.
Paragraph 52(a) of the Bill will substitute a new paragraph for the existing paragraph (a) of the definition so that references to the "capital gains component" will be replaced by references to the "special income component" (see notes to that new definition below). The effect of the amendment is that references to "eligible part" will now relate not only to the capital gains amount (see below) included in the taxable income of the taxpayer but also to any abnormal income amount (also see below) included in that taxable income.
Paragraph (b) proposes consequential amendment of the definition of "reduced notional income" to delete a reference to section 158D (the notional income provision of the Division 16A of the Assessment Act which is to be repealed by this Bill). As the new Division 16A proposed to be inserted does not require the determination of a notional income, the reference in the definition of "reduced notional income" to section 158D is inappropriate and will be withdrawn.
The existing definitions of "capital gains component" and "reduced taxable income" in subsection 3(1) of the Principal Act will be omitted by paragraph 52(c) and new definitions inserted.
- "capital gains component", read in conjunction with the new definition of "capital gains amount" (see below), provides a similar, but simpler, definition of the component of a capital gain which is included in the net income of a trust estate.
- "reduced taxable income" refers to the amount of the taxable income other than the part to which special tax averaging arrangements apply. The amendment to the definition is consequential upon the aggregation of "abnormal income amounts" and "capital gains amounts" (see notes to those terms below) for the purposes of calculating the tax payable on them. The aggregated amount is referred to in the Principal Act as the "special income component" (see below). The new definition deletes the reference to the "capital gains component" and includes in its place a reference to the "special income component".
Three new definitions are inserted by paragraph (d). All are related to the aggregation for the purposes of the Principal Act of any "abnormal income amount" - for the purposes of the new Division 16A of the Assessment Act inserted by clause 38 - and any capital gains amount (for the purposes of Part IIIA of the Assessment Act). The aggregated amount is referred to in the Principal Act as the "special income component". The definitions are:
- "abnormal income amount" is defined by reference to the amount (if any) specified in section 158L of the Assessment Act (for discussion of the calculation of that amount refer to the notes to clause 38).
- "capital gains tax amount" means the amount (if any) included in the taxable income of a taxpayer (paragraph (a) of the definition) or included in the net income, or share or part of the net income, of a trust estate under section 160ZO of the Assessment Act (paragraph (b)).
- "special income component" is a definition which encompasses 3 possible situations where an abnormal income amount and/or a capital gains amount are included in a taxpayer's taxable income:
- (a)
- if there is a capital gains amount but no abnormal income amount, the special income component is so much of the taxable income that consists of the capital gains component;
- (b)
- if there is an abnormal income amount but no capital gains amount, the special income component is so much of the taxable income that consists of the abnormal income amount; and
- (c)
- if there is both a capital gains amount and an abnormal income amount, the special income component is so much of the taxable income that consists of the sum of the capital gains amount and the abnormal income amount.
This clause will amend the definition of "tax" in section 5 of the Principal Act, to substitute references to the "trustee of an approved deposit fund" for the existing references to the "trustee of an ineligible approved deposit fund".
Clause 56: Rates of tax and notional rates
Section 7 of the Principal Act provides the legislative basis for various rates of tax and notional rates of tax which apply for the financial year commencing on 1 July 1986. Subsection 7(5) provides for the rates of tax which apply to taxable income where certain sections of the Income Tax Assessment Act 1936 require the determination of a notional income.
The present section 158D of the Assessment Act requires a determination of a notional income and is referred to in subsection 7(5) of the Principal Act. That section is to be repealed by clause 38 of this Bill as part of the repeal of the existing Division 16A of the Assessment Act. The new Division 16A does not require the determination of a notional income. Clause 56 therefore omits the reference in subsection 7(5) to section 158D.
Clause 57: Rates of tax and notional rates
Section 12 of the Principal Act has the same effect for the financial year commencing on 1 July 1987 and for all subsequent financial years as does section 7 of the Principal Act (see notes to clause 56) for the financial year commencing on 1 July 1986. Subsection 12(5) has similar terms and effect to subsection 7(5).
The amendment proposed by clause 57 (identical in effect to that proposed by clause 54 - see above) will also omit a reference to section 158D made redundant consequent upon the repeal (by clause 38) of the present Division 16A of the Income Tax Assessment Act 1936.
Clause 58: Rates of tax payable by trustees of superannuation funds
This clause will amend section 26 of the Principal Act by inserting new subsections 26(1), 26(2) and 26(2A). The amendments are consequential on the changes to Division 9B of Part III of the Principal Act made by this Bill as a result of the establishment of the new supervisory arrangements for superannuation funds under the Occupational Superannuation Standards Act 1987.
In particular, new subsection 26(1) will specify that the investment income of a fund to which subsection 121CC(2) applies is to be taxed at the rate of 24%, and under new subsection 26(2) any excessive non-arm's length income derived by a fund to which subsection 121CC(3) applies will be taxed at the 49% rate. New subsection 26(2A) will have the effect that any excessive non-arm's length income derived by a fund otherwise exempt under section 23FC of the Principal Act will also be taxed at the 49% rate. These are the rates of tax which currently apply to such income.
Clause 59: Rates of tax payable by trustees of approved deposit funds
New subsection 27(2), which this clause inserts into the Principal Act, will declare a rate of tax of 49% to be imposed on the taxable income (see the notes on clause 29) of an approved deposit fund to which section 23FD of the Income Tax Assessment Act 1936 applies. For the 1986-87 year of income only, the rate of tax is to be 50% (see notes on subclause (3) of clause 61).
Clause 60: Amendment of Schedules
Clause 60 affords a simple drafting procedure for amendment of Schedules 1,3,5,7,9 and 11 of the Income Tax Rates Act 1986 to make consequential changes to several references in those schedules to "capital gains component" and to section 158D of the Income Tax Assessment Act 1936. Those amendments are indicated in Schedule 1 to this Bill.
Clause 1 of Schedule 1, which amends Schedules 1,3,5,7,9 and 11 of the Principal Act, omits "capital gains component" where that term occurs and substitutes for the omitted term "special income component". As explained in the notes to clause 54 of the Bill, any "abnormal income amount" included in the taxable income of a taxpayer is aggregated for assessment purposes with any "capital gains amount" and the combined amount is referred to in the Principal Act as a "special income component". The amendment made by Clause 1 will facilitate the substitution of the relevant references in the mentioned schedules.
Similarly Clause 2 of the Schedule 1 will amend Schedules 3 and 9 of the Principal Act to omit references to section 158D of the Assessment Act. The notes to clauses 56 and 57 of the Bill explain the reasons for the omission of references to section 158D in sections 7 and 12 of the Principal Act. Clause 2 will facilitate the omission of similar references (wherever they occur) to section 158D in Schedules 3 and 9 of the Principal Act.
Clause 61: Application of amendments
By subclause (1) of this clause, the amendments made by Part III of the Bill, subject to subclause (2) - see below - are specified to apply to assessments in respect of income of the year of income that commenced on 1 July 1986 and of all subsequent years of income.
Subclause (2) of this clause is a companion to subclause 47(5) of this Bill - see the notes to that subclause - which allows an author or inventor to apply for the determination of a notional income under the provisions of the present subsection 158D(1) of the Income Tax Assessment Act 1936 - as if the amendments made by clause 38 of this Bill had not been made. Where a taxpayer makes such an application, subclause 61(2) enables the Principal Act to apply to that taxpayer's assessment in respect of the year of income that commenced on 1 July 1986 as if the amendments made by Part III of the Bill had not been made.
In effect, subsection 7(5) of the Principal Act will allow the rate of tax in respect of such a taxpayer's taxable income to be as set out in Schedule 3 of the Principal Act on the basis of the notional income determined under the present section 158D of the Assessment Act.
Subclause (3) provides that the investment income of a fund to which section 121CC of the Assessment Act applies will be taxed at the rate of 24.2% in relation to the 1986-87 income year. This is in accordance with the rate imposed on such fund income under the Principal Act. In subsequent years the rate of tax on such income is to be 24%.
By subclause (4) the rate of tax payable in respect of taxable income arising under section 121D or 121DAAA of the Assessment Act from certain private company dividends and other excessive non-arm's length income of otherwise exempt superannuation funds and approved deposit funds in the 1986-87 year of income is to be 50%. In subsequent years the rate is to be 49% (see the note on clause 59).
Clause 62: Amendment of assessments
By this clause, it is proposed to allow the Commissioner of Taxation to amend an assessment made before the amendments proposed to the Income Tax Assessment Act 1936 by Part II of the amending Bill came into operation, in order to give effect to those amendments.
PART IV - AMENDMENT OF THE OCCUPATIONAL SUPERANNUATION STANDARDS ACT 1987
This clause facilitates references to the Occupational Superannuation Standards Act 1987 which, in Part IV, is referred to as the "Principal Act".
Clause 64 will amend section 3 of the Principal Act which contains the definitions and interpretative provisions of the Principal Act.
Paragraphs (a) and (b) of this clause will make necessary consequential amendments to section 3 as a result of the amendments to the Taxation Administration Act 1953 (Administration Act) to permit the Insurance and Superannuation Commissioner to take prosecution action against the current trustees of a superannuation fund or approved deposit fund in certain circumstances (see also notes to clauses 78-88).
Paragraph (c) is a technical amendment to the definition of superannuation fund in subsection 3(1) of the Standards Act to ensure that where the Insurance and Superannuation Commissioner approves certain ancillary purposes for a fund pursuant to that subsection, such an approval is given in writing. The Commissioner's approval in this regard will be necessary if the relevant fund wishes to qualify as a superannuation fund for purposes of the Standards Act and be eligible to receive a notice of approval under section 12 of that Act.
Paragraph (d) will make certain technical amendments to the definitions of "dependant" and "year of income" in section 3. The definition of "dependant" will be varied to make it clear that it does not include the former spouse of a fund member other than the widow or widower of such a person. The change to the definition of "year of income" will ensure that it is fully consistent with the definition of that term in the Income Tax Assessment Act 1936 (Assessment Act), and thereby have the effect of excluding from the purview of the Insurance and Superannuation Commissioner the 1985-86 year of income of a fund even if part of that year of income occurs after 1 July 1986. At the same time it will ensure that the Insurance and Superannuation Commissioner is able to oversight compliance by certain superannuation funds and approved deposit funds with requirements contained in the Assessment Act in relation to that part of the year of income of the fund which occurred before 1 July 1986. Affected funds are those with a substituted accounting period for 1986-87 which commenced after 30 November 1985 - but prior to 1 July 1986.
Paragraph (e) will make consequential amendments to section 3 to insert 3 new definitions associated with the amendments of the Taxation Administration Act 1953 (the Administration Act) under Part V of the Bill. Those definitions are:
- "document certification provision" means section 15A of the Administration Act - see also the notes to clause 88.
- "prosecution provisions" means Part III of the Administration Act - see also the notes to clauses 82 to 84.
- "State taxation officer disclosure provision" means section 13J of the Administration Act - see also the notes to clauses 85 to 86.
This will enable a fund to provide superannuation benefits to the de facto spouse of a member in the event of the member's death and still remain eligible for exemption from income tax.
Paragraph (f) will make a technical amendment to section 3 of the Principal Act by inserting new subsection 3(3). Subsection 3(1) empowers the Commissioner to approve certain ancillary purposes for which a fund may be established and still qualify as a superannuation fund for the purposes of the Standards Act. This amendment will facilitate the issue of such approvals by the Commissioner by enabling an approval to apply in relation to a specific fund or class of funds.
Clause 65: Application of Act in relation to periods before commencement etc
This clause will amend section 4 of the Principal Act to substitute a new subsection (1) and insert new subsection (2A).
Revised subsection 4(1) will make a technical adjustment to section 4 to ensure consistency with the definition of the year of income in subsection 3(1) (see notes on clause 64) which makes it clear that the Insurance and Superannuation Commissioner is able to effectively supervise those superannuation funds whose income year straddles 1 July 1986 because of the adoption of a substituted accounting period.
New subsection 4(2A) will make a technical amendment to ensure that any approval given by the Insurance and Superannuation Commissioner for the approved purposes of a superannuation fund pursuant to subsection 3(1) of the Principal Act can operate with effect from 1 July 1986 notwithstanding that the approval is given after that date.
Clause 66: Satisfaction of superannuation fund conditions
Clause 66 will amend section 5 of the Principal Act which provides that a reference in that Act to a superannuation fund satisfying the relevant conditions in relation to a year of income is a reference to the fund satisfying the conditions set out in that section.
Paragraph (a) of this clause substitutes new paragraph 5(2)(a) which will make a technical correction to section 5 to make it clear that a fund whose income year straddles 1 July 1986 is not required to qualify as a superannuation fund for the purposes of the Principal Act in relation to that part of the income year which occurred before 1 July 1986 in order to obtain a notice of approval from the Insurance and Superannuation Commissioner although, as noted above, it will be required to meet the relevant Assessment Act requirements over this period.
Paragraph (b) makes minor technical corrections to paragraphs 5(2)(d) and 5(2)(e) to reflect the fact that the relevant provisions in the Assessment Act which impose supervisory requirements in relation to funds will be repealed by this Act.
Clause 67: Satisfaction of approved deposit fund conditions
Clause 67 will make corresponding amendments to section 6 of the Principal Act which provides that a reference in the Act to an approved deposit fund satisfying the relevant conditions in relation to a year of income refers to the satisfying of conditions specified in that section.
Paragraph (a) of the clause substitutes new paragraph 6(a) which will make a technical correction to section 6 to make it clear that a fund whose income year straddles 1 July 1986 was not required to qualify as an approved deposit fund for purposes of the Principal Act in relation to that part of the income year which occurred before 1 July 1986 in order to obtain a notice of approval from the Insurance and Superannuation Commissioner, although it will be required to meet the relevant Assessment Act requirements over this period.
Paragraph (b) makes a further technical correction to section 6 to ensure that the Insurance and Superannuation Commissioner is able to effectively supervise those approved deposit funds whose income year straddles 1 July 1986. (A similar provision for superannuation funds is not necessary because the relevant provisions relating to such funds will be saved by paragraphs 5(2)(d) and 5(2)(e) of the Principal Act.)
Clause 68: Operating standards for superannuation funds
This clause will amend section 7 of the Principal Act to insert new paragraph 7(2)(ja) and new subsection (3).
New paragraph 7(2)(ja) will allow regulations to be made under the Principal Act to prescribe standards in relation to the maintenance of records for superannuation funds.
New paragraph 7(3) will make it clear that the relevant provisions in the Assessment Act relating to the taxation of excessive non-arm's length income derived by superannuation funds will not limit any standards that may be prescribed in Regulations under the Principal Act including, in particular, any investments standards.
Clause 69: Operating standards for approved deposit funds
This clause will amend section 8 of the Principal Act to insert new paragraph 8(2)(ea) and new subsection 8(3).
New paragraph 8(2)(ea) will permit regulations to be made under the Principal Act to prescribe standards in relation to the maintenance of records by approved deposit funds.
New subsection 8(3) will make it clear that sections 23FD and 121DAAA of the Assessment Act which relate to the taxation of excessive non-arm's length income derived by approved deposit funds will not limit the standards that may be prescribed in regulations under the Principal Act, including, in particular, any investment standards.
Clause 70: Information to be given to Commissioner
This clause will amend subsection 10(1) of the Principal Act which requires the trustees of a superannuation fund or approved deposit fund established after the commencement of the legislation to supply the Insurance and Superannuation Commissioner with prescribed information within the prescribed period after establishment.
In other words, the subsection effectively requires all funds to lodge prescribed information with the Commissioner including those funds (for example, excess benefit funds) that may not wish to obtain tax exemption and will thus be assessed by the Commissioner of Taxation under the relevant provisions in Division 8B of the Assessment Act.
Paragraph (a) will insert a new subsection 10(1A) to ensure that where fund trustees fail to provide prescribed non-statistical information to the Commissioner pursuant to subsection 10(1), they will not be guilty of an offence by virtue of section 8C of the Administration Act. This approach reflects the view that it may be beyond the Commonwealth's taxation power under the Constitution to impose a specific penalty for a breach of a general information gathering provision by those funds which will not be seeking exemption from tax. Funds which do not comply with the information requirements under subsection 10(1) will not, of course, be eligible for tax exemption.
It should be noted that sanctions can be applied to fund trustees for breach of requirements to provide information or documents pursuant to subsection 10(2) and section 11 of the Standards Act because such information, etc will be required by the Commissioner to determine whether funds have met the necessary conditions to obtain a notice of approval from the Commissioner.
Paragraph (b) is a drafting measure to ensure that where the Insurance and Superannuation Commissioner gives a notice in writing to the trustees of a superannuation fund or approved deposit fund to require them to provide certain information or reports, such a notice is issued for the purposes of the Standards Act.
Clause 71: Commissioner may require production of documents
The amendment proposed by this clause to section 11 of the Principal Act is a drafting measure to ensure that, where the Insurance and Superannuation Commissioner by notice in writing to the trustees of a superannuation fund or approved deposit fund requires them to furnish any documents of the fund, such notice is issued for the purposes of the Standards Act.
Clause 72: Notice as to satisfaction of the superannuation fund conditions
This clause will make technical amendments to section 12 of the Principal Act which deals with the procedures to be followed by the Insurance and Superannuation Commissioner in deciding whether to give a notice of approval to a superannuation fund.
Paragraph (a) of this clause will require that the approval by the Insurance and Superannuation Commissioner of the form of return to be lodged by superannuation funds be given in writing.
Under subsection 12(4) the Commissioner is empowered to revoke a notice of non-approval given to a superannuation fund pursuant to this section if the Commissioner becomes satisfied that the fund has met the relevant conditions for approval after consideration of information that was not previously available. Paragraph (b) of this clause will enable the Commissioner to also revoke a notice of non-approval given under section 13 in similar circumstances. Under section 13 of the Principal Act, the Commissioner has a discretion to give a notice of approval to a superannuation fund notwithstanding that it has not complied with the relevant conditions for approval if the Commissioner is satisfied that it would be reasonable to do so.
Clause 73: Notice as to satisfaction of the approved deposit fund conditions
This clause will make technical amendments to section 14 of the Principal Act which deals with the procedures to be followed by the Insurance and Superannuation Commissioner in deciding whether to give a notice of approval to an approved deposit fund.
The amendments to section 14 proposed by this clause are identical in effect to section 14 relating to approved deposit funds as those proposed to be made to section 12 by clause 72. Similarly, they will require the approval by the Insurance and Superannuation Commissioner of the form of return to be given in writing (paragraph (a)) and will enable that Commissioner to revoke a notice of non-approval given under section 15 (paragraph (b)).
Clause 74: Insertion of new section
Clause 74 will insert new section 15A in Part IV of the Principal Act.
Section 15A : Application of Tax Act
As noted above, paragraphs 5(2)(d) and 5(2)(e) of the Principal Act will save the operation of the relevant supervisory provisions relating to superannuation funds contained in the Tax Act pending their relocation in Regulations to be made under the Principal Act on a future date to be proclaimed. During this interim period, the Insurance and Superannuation Commissioner will be responsible for the administration of the relevant Tax Act requirements and new section 15A enables the Commissioner to make reasonable assumptions about:
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- the exercise by the Commissioner of Taxation of any power conferred by the relevant provisions prior to their repeal by this Act;
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- the attainment by the Commissioner of Taxation of any state of mind relevant to the application of those provisions; and
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- any action taken by the fund trustees for the purposes of those provisions as then in force.
The Commissioner would base those assumptions on such matters as the Taxation Rulings issued by the Commissioner of Taxation.
The amendments proposed by this clause to section 18 (the secrecy provisions) of the Principal Act is a consequential one to ensure appropriate protection of any information obtained by a superannuation standards officer (as defined in subsection 3(1) of the Principal Act) pursuant to the "prosecution provisions" - within the meaning of the new definition added by clause 64.
This clause will amend section 20 of Part IV of the Principal Act which enables the Insurance and Superannuation Commissioner to delegate all the Commissioner's powers under the Act other than the power of delegation, and the obligation to prepare and give the Minister an annual report.
Paragraph (a) of this clause will enable the Commissioner to delegate those powers available to the Commissioner under the "document certification provision", the "State taxation office disclosure provision" and the "prosecution provisions" (see notes on clauses 64, 82 to 86 and 88).
Paragraph (b) will ensure that where a power is exercised by a delegate pursuant to a delegation from the Commissioner, it will be deemed to have been exercised by the Commissioner for the purposes of the relevant provisions of the Administration Act as well as the Standards Act.
This clause will amend section 21 of the Principal Act which requires the Insurance and Superannuation Commissioner to prepare an annual report to the Minister on the working of the Principal Act. The amendment will ensure that the Commissioner's report also covers the working of the "document certification provision", "State taxation officer disclosure provision" and the "prosecution provisions" (see notes on clauses 64, 82 to 86 and 88).
PART V - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953
Part III of the Taxation Administration Act 1953 (the "Administration Act") contains offence and prosecution provisions which create a number of offences which are of general application to the various Commonwealth tax laws and makes provision for their prosecution. As noted earlier, it is proposed to amend the Occupational Superannuation Standards Act 1987 (the "Standards Act") and the Administration Act to permit the Insurance and Superannuation Commissioner to utilise the prosecution provisions of the latter Act for the purpose of taking action against the current trustees of a superannuation fund or approved deposit fund in the event of a breach of certain Standards Act requirements. The relevant requirements are those contained in sections 10 and 11 of the Standards Act relating to the provision of information and documents to the Insurance and Superannuation Commissioner. This approach has been adopted for purposes of simplicity since the amendments required to replicate the tax provisions in the Standards Act would have been substantial.
This clause facilitates references to the Taxation Administration Act 1953 which, in Part V, is referred to as the "Principal Act".
This clause will amend section 3B of the Principal Act by inserting a new subsection (IA) to ensure that the Commissioner of Taxation will not be required to prepare and furnish an annual report in relation to those matters arising under the Principal Act for which responsibility will rest with the Insurance and Superannuation Commissioner by virtue of the amendments contained in this Part.
This clause will amend section 3C of the Principal Act by inserting a new subsection (1AA) to ensure that the Insurance and Superannuation Commissioner will not be bound by the secrecy requirements of the Principal Act in relation to any information, etc concerning the affairs of funds which the Commissioner may obtain by virtue of utilising the prosecution provisions of the Principal Act. The secrecy provisions in section 18 of the Standards Act will, of course, apply to the Insurance and Superannuation Commissioner in such circumstances.
This clause will amend section 8A of the Principal Act which contains the definitions and interpretive provisions of Part III relating to prosecutions and offences to add a further definition:
- "produce" where this expression is used in Part III of the Principal Act it will include 'permit access to'.
Clause 82: Application of Part to the Occupational Superannuation Standards Act 1987
This clause will insert new section 8AA in Division 1 of Part III of the Principal Act. Section 8AA will ensure that Part III of the Principal Act relating to prosecutions and offences will apply in relation to the Standards Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the Insurance and Superannuation Commissioner. It effectively enables the latter Commissioner to utilise the prosecution provisions of the Principal Act to take action against fund trustees in certain circumstances.
This clause will amend section 8J of the Principal Act by inserting new paragraph (ka) to ensure that a statement made in a fund document furnished to the Insurance and Superannuation Commissioner pursuant to section 11 of the Standards Act does not give rise to an offence for the purposes of the prosecution provisions of the Principal Act in the event that such a statement is false or misleading in a material particular. This approach is consistent with that adopted under the various taxation statutes in relation to documents furnished by taxpayers to the Commissioner of Taxation.
Clause 84: Court may order payment of amount in addition to penalty
Section 8W of the Principal Act enables a court, where it is satisfied that a false or misleading statement or incorrectly kept records of account had resulted in a tax liability of a lesser amount, in addition to any penalty imposed upon a person convicted of offences under Part III of the Principal Act, to order the convicted person to pay to the Commissioner of Taxation an additional amount of tax.
Clause 84 will amend section 8W to enable a court to have regard to a decision made under section 12, 13, 14 or 15 of the Standards Act as if that decision were part of the process of making an income tax assessment of a superannuation fund or approved deposit fund.
Clause 85: Provision of Commonwealth taxation information to State taxation authorities
This clause amends section 13J of the Principal Act by inserting new subsection (7) to permit the Insurance and Superannuation Commissioner to communicate information which the Commissioner obtains on the affairs of funds pursuant to the administration of the Standards Act to State taxation authorities. Where such information is communicated, however, those State taxation authorities are subject to a burden of secrecy imposed under subsection 13J(2) of the Principal Act.
Clause 86: Certification by State taxation officer of copies of, and extracts from, documents
This clause will amend section 13K in Division 4 of Part IIIA of the Principal Act which empowers a State taxation officer to certify copies of documents (including extracts) obtained pursuant to State tax law. The amendment proposed by inserting new subsection 13K(10) will allow the section to apply in relation to the Standards Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the Insurance and Superannuation Commissioner.
Clause 87: Appearance by Commissioner etc.
This clause will amend section 15 in Part V of the Principal Act which enables the Commissioner of Taxation (or a Second Commissioner of Taxation or a Deputy Commissioner of Taxation) to appear personally or be represented by specified persons in any action arising out of a taxation law instituted by or on behalf of the Commissioner and to which the Commissioner is a party or seeks to intervene. The amendment proposed by inserting new subsection 15(3) will ensure that the section will apply in relation to the Standards Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the Insurance and Superannuation Commissioner. References to a Second Commissioner or Deputy Commissioner will be excluded for this purpose.
Clause 88: Certification by Commissioner of copies of, and extracts from, documents
This clause will amend section 15A in Part V of the Principal Act which enables the Commissioner of Taxation to certify copies of documents (including extracts) obtained pursuant to a taxation law. The amendment proposed by inserting new subsection 15A(10) will allow the section to apply in relation to the Standards Act as if that Act were a taxation law and references to the Commissioner of Taxation were references to the Insurance and Superannuation Commissioner.
PART VI - AMENDMENT OF THE TAXATION LAWS AMENDMENT ACT (NO.3) 1987
This clause facilitates reference to the proposed Taxation Laws Amendment Act (No.3) 1987 which, in this part of the Bill, is referred to as the "Principal Act".
Clause 90: Provisional tax for 1987-88 year
Section 37 of the Principal Act, specifies the basis for calculating the 1987-88 provisional tax payable by a provisional taxpayer who does not 'self-assess' by seeking a variation of provisional tax on the basis of his or her estimate of income for the relevant year.
The notes to clause 56 discuss the reasons why references to the present section 158D of the Income Tax Assessment Act 1936 - a section which provides for the determination of a notional income - will no longer be appropriate when the new Division 16A (refer to notes on clause 38) is enacted as a result of this Bill. Paragraph (a) of this clause will delete a reference in subparagraph 37(1)(a)(i) to the present section 158D which is no longer required for the same reasons.
In respect of a taxpayer who is an eligible person for the purposes of the new Division 16A of the Assessment Act inserted by clause 38 - that is, an artist, composer, inventor, performer, production associate, sportsperson or writer - paragraph (b) of the clause will insert a new subparagraph 1(a)(iia) into section 37 to allow the calculation of the taxpayer's provisional tax liability to be made on the basis that his or her eligible taxable income for the purposes of section 158H of the Assessment Act (see earlier notes to clause 38) is increased by 11%. No adjustment will be made, however, to the amount of the taxpayer's average eligible taxable income (refer to notes on section 158K under clause 38) in making that calculation.
In relation to a taxpayer to whom new Division 16A of the Assessment Act would apply, being a taxpayer whose taxable income is not wholly provisional income, paragraph (d) of the clause will make a similar consequential amendment to paragraph 37(1)(b) of the Principal Act. This will allow the Commissioner of Taxation to calculate that person's provisional tax liability on the basis of the amount (if any) of an eligible taxable income in respect of that taxpayer as determined by the Commissioner.
Clause 91: Application of amendments
This clause excludes the application of the amendments made by Part VI for those authors and inventors who, by applying under the present section 158D of the Income Tax Assessment Act 1936 for the continued application of the repealed Division 16A of that Act will not have an eligible taxable income or average eligible taxable income as specified in new sections 158H and 158K of the Assessment Act.
Those taxpayers will continue to have their provisional tax liability calculated by applying to their 1986-87 taxable income increased by 11%, the 1987-88 rate of tax applicable to their 1986-87 notional income.
This Part will repeal certain prior year income tax imposition and rating Acts, and certain Medicare Levy Acts specified in Schedule 2. The Income Tax Assessment Act 1936 will apply in relation to any tax or levy imposed or declared by any Act proposed to be repealed as if the Act was still in force.
By subclause 92 (1), the Acts specified in Schedule 2 are proposed to be repealed.
By subclause (2) an Act which was incorporated with an Act proposed to be repealed will not be repealed by the operation of the clause. This is a standard savings provision included in repeal provisions.
Subclause (3) ensures that the Income Tax Assessment Act 1936 continues to apply in relation to income tax and Medicare levy imposed, or the rates of which were declared, by a repealed Act as if the repealed Act were still in force.