Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of the Bills are as follows:
The Bill will give effect to the proposal announced on 4 June 1987 to extend the operation of sections 46A and 46B of the Income Tax Assessment Act 1936 (referred to as the "Assessment Act") to ensure that the intercorporate dividend rebate will be reduced or denied, as appropriate, where a dividend is paid in the course of a dividend stripping operation and the relevant property was acquired after 19 September 1985, i.e., where the capital gains and capital loss provisions in Part IIIA of the Assessment Act would apply to a disposal of the share or property.
Section 46A of the Assessment Act limits the amount of section 46 rebate allowable on intercorporate dividends if the Commissioner is satisfied that the dividends are paid in the course of a dividend stripping operation. In brief terms, the section requires that certain deductions (principally the cost of shares or other relevant property acquired as a part of the dividend stripping operation) be offset against the amount of dividends otherwise eligible for the rebate.
Section 46B of the Assessment Act applies where shares in a company are purchased for dividend stripping purposes and the stripped dividend is paid to another company on a special class of shares, but the cost of the shares purchased from the first company (and the resultant tax loss) is borne by a company or other entity associated with the stripping company. Where the conditions of the section are met the dividend is ineligible for the intercorporate dividend rebate.
Both sections 46A and 46B operate where the relevant property is acquired as trading stock or in circumstances where any profit that would arise from the disposal of the relevant property would be included in the assessable income of the shareholder, or any loss that would arise from the disposal would be an allowable deduction. As presently worded, the sections do not apply to limit or deny the intercorporate dividend rebate in cases where a dividend stripping operation gives rise to a net capital gain or a net capital loss for the purposes of Part IIIA of the Assessment Act.
The amendments proposed by clauses 6 and 7 will apply in relation to relevant dividends paid on or after 5 June 1987, other than where the dividends were declared before that date.
As part of the imputation system of company tax a resident company is entitled to a franking credit if, during a franking year, it receives a franked dividend either directly as a shareholder, or indirectly through a partnership or trust estate. A rebate of tax - calculated by reference to the extra amount included in the shareholder's assessable income under section 160AQT of the Assessment Act - is allowable in the assessments of resident individuals and certain trustees for franked dividend income received directly, or indirectly through a partnership or trust.
To prevent companies from engaging in dividend stripping arrangements to gain the benefit of franking credits attaching to franked dividends, the amendments proposed by this Bill will ensure that such credits are not available where franked dividends are paid as part of dividend stripping operations.
As franked dividends will be effectively tax free in the hands of resident individuals and certain trustees under the new imputation system, the double benefit from dividend stripping previously gained by companies would become available to these taxpayers. To prevent this, the amendments will also exclude from eligibility for the rebate of tax, franked dividends received by resident individuals and certain trustees (whether directly or through a partnership or trust estate) where those dividends are paid in the course of dividend stripping operations.
The amendments will deny franking credits to companies and franking rebates to individuals and certain trustees under the new imputation system in any case where the payment of a dividend arises out of, or is made in the course of, a scheme that is by way of, or is in the nature of, dividend stripping, or has substantially the same effect as such a scheme.
The amendments will apply in relation to dividends paid on or after 1 July 1987, when the imputation system commenced to apply.
The Bill proposes an amendment to address a means of avoidance of tax by companies on profits - in the form of income or capital gains, as the case may be - on the disposal of assets. In the most typical situation, a company which would otherwise be liable to pay tax on the gain arising from the sale of an asset could arrange its affairs so that the asset concerned is held by a wholly owned subsidiary. The subsidiary could revalue the asset to reflect its market worth at the time, and pay a dividend to the parent out of the profit on revaluation, the dividend being effectively free from tax because of the intercorporate dividend rebate. The dividend could be funded in a number of ways, e.g., by the purchase of further shares in the subsidiary by the parent, by a loan to the subsidiary by the parent, or a loan to the subsidiary by another (related or unrelated) party. The parent company, having effectively received the taxable gain on the asset in an untaxed form, would then be able to dispose of the shares in the subsidiary at a price equal to the paid-up value of the shares held - thus avoiding tax on the gain. The arrangements could be suitably ordered to ensure that the purchaser of the shares (and therefore the asset) acquires a cost base equal to the market value of the asset concerned, thus also ensuring that the purchaser is not at a later time exposed to tax on the gain realised by the vendor.
A new section - section 46E - is to be inserted in the Assessment Act, and will operate to deny the intercorporate dividend rebate to the vendor company in the types of circumstances outlined. The section will have effect only where the company revaluing its assets is not a listed company and where the revalued asset or assets of the company out of which dividends have been paid (being assets the disposal of which would, broadly, have given rise to a "taxable" gain) represent at least 75 per cent of the net worth of the company at the time of disposal of the shares by the "parent" company.
Sections 108 and 109 of the Assessment Act are anti-avoidance provisions which relate to private companies. In broad terms, they enable amounts to be deemed to be dividends (other than for withholding tax purposes) where private companies -
- make loans or advances to their shareholders which are disguised distributions of income, thereby avoiding personal tax at the shareholder level (section 108); or
- pay excessive remuneration or retirement allowances to their shareholders and directors and their relatives, thus obtaining a deduction at the company level (section 109).
The Bill will repeal the existing sections and substitute new sections, in order to remedy technical deficiencies that have become apparent in their application over the years. The new sections 108 and 109 will apply to relevant payments made on or after 5 June 1987.
Under the existing section 108, disguised distributions to shareholders by way of loans or advances or by way of payments by the company on behalf of, or for the individual benefit of, any of its shareholders, to the extent they represent distributions of income, are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section 108 is to be repealed and a strengthened provision inserted in its place.
The proposed new section 108 will apply in a greater range of circumstances than the existing section. It will encompass arrangements that fall outside the scope of section 108 as it is currently worded but which achieve, in essence, exactly the same ends against which the section is directed.
Instead of being limited to purported loans or advances to, or payments by a company on behalf of, or for the individual benefit of, actual shareholders, the new section will apply to loans or advances to, or payments or amounts credited on behalf of, or for the individual benefit of, a person associated with the company. An associated person for the purposes of the new section is to include a person who indirectly holds a beneficial interest in shares in addition to an actual shareholder, as well as relatives of such shareholders.
To the extent such amounts represent, in the opinion of the Commissioner, a distribution of profits (rather than a distribution of income as specified in the existing section) they will be deemed to be dividends paid by the company out of profits derived by it, and as if the recipient of the amount were a shareholder.
Under existing section 109, amounts paid or credited to a past or present shareholder, director or relative of a shareholder or director, either as remuneration for services rendered or as a retirement or termination payment, to the extent they exceed a reasonable amount, are not deductible against the company's assessable income and are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section is to be repealed and a strengthened provision inserted in its place.
As with the revision of section 108, the scope of the new section 109 is to be extended to encompass transactions which have essentially the same effect as those against which the existing provisions are directed.
To remove any doubt which may exist as to its meaning, the reference in the present section to amounts paid or credited is to be rewritten to expressly include the transfer of an asset. The class of recipients of excessive payments to which the proposed new section applies is to be extended to include persons with indirect beneficial holdings in shares and relatives of such persons.
To the extent that amounts paid or credited as remuneration for services rendered or as a retirement or termination payment exceed what is, in the Commissioner's opinion, a reasonable amount, they will not be deductible against the company's assessable income, and will be deemed to be dividends paid by the company out of profits derived by it as if the recipient of the amount were a shareholder.
Amounts deemed to be dividends under the new sections 108 or 109 will not be subject to the dividend franking rules which are to apply under the imputation system, as they do not fall within the definition of "frankable dividend" contained in section 160APA of Part IIIAA of the Assessment Act.
The Bill will give effect to proposals to extend those provisions of the Assessment Act that authorise deductions for gifts of the value of $2 or more made to specified organisations, to include the Australian-Hellenic Memorial Trust Fund and the Lionel Murphy Foundation. In accordance with announcements previously made, gifts made to the Lionel Murphy Foundation on or after 24 April 1987 will qualify for deduction, while those made to the Australian-Hellenic Memorial Trust Fund will qualify for deduction where they are made on or after 1 April 1987 and on or before 30 June 1989.
The Bill will also amend references to certain organisations currently listed in the gift provisions to reflect name changes to those bodies.
The Bill will give effect to the proposal, announced on 22 December 1986, to amend the income tax law to authorise deductions for contributions to private superannuation funds in circumstances where the contributor is also the subject of certain employer-provided superannuation benefits.
Under sections 82AAS and 82AAT of the Assessment Act, a deduction, limited to $1,500, is available for contributions made to qualifying superannuation funds, where the contributor is not a person for whom provision for superannuation benefits is - to any extent - funded by an employer or other person.
On 26 June 1986, the Australian Conciliation and Arbitration Commission agreed to the ratification by it, or a State industrial tribunal, of agreements between unions and employers providing for limited employer contributions to superannuation funds under certain conditions. An effect of these agreements, as the law stands, is that the employer-provided contributions would render employees for whose benefit they are provided ineligible for deductions under section 82AAT for their own contributions to qualifying superannuation funds.
The amendments made by this clause will ensure that taxpayers will not be denied deductions for contributions to qualifying superannuation funds by reason only that they also receive employer-provided superannuation support arising from -
- such an agreement; or
- an agreement that has not been ratified by an industrial tribunal, but which is identical to an agreement that has been made or ratified by an industrial tribunal for employees in the same industry as the relevant employer.
The amendments are to apply in respect of employer contributions made under such agreements on or after 1 July 1986.
From 1 January 1987 payments of income under the Commonwealth's Assistance for Isolated Children Scheme (AIC) and the Veterans' Children Education Scheme (VCES) to or in respect of students 16 years or over are to be made subject to tax by this Bill. The removal from 1 January 1987 of the existing exemptions for these payments is consistent with the removal, from the same date, of the exemption for AUSTUDY secondary education assistance (previously paid under the Secondary Allowances Scheme) by the Taxation Laws Amendment Act (No.4) 1986.
The payments under AIC or VCES may be made to the student or, where the student is 16 or 17 years old, to a parent, guardian or trustee in respect of the student. Payments made to a parent, guardian or trustee are to be regarded as made to that person in the capacity of an agent of the student and, as such, will be assessable income of the student.
Payments of income under VCES and payments under AIC in respect of students 16 years and over, to the extent they are for the maintenance or accommodation of a student, will be separate net income of the student for concessional rebate purposes.
This Bill will give effect to the 1987-88 Budget proposal to vary for 1987-88 the maximum rebates of tax (referred to as the "beneficiary rebates"), and the income levels above which the rebates shade-out, for taxpayers in receipt of social security unemployment, sickness or special benefits and certain Commonwealth educational allowances. For married (including de facto married) taxpayers the maximum rebate will be increased from $280 to $430 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $10,350 ($9,436 in 1986-87). For other taxpayers the maximum rebate will decrease from $190 to $180 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $5,850 ($5,669 in 1986-87). No rebate will be available at taxable incomes of $13,790 or more for married taxpayers and $7,290 or more for others.
The Bill will also extend, from 1 July 1987, the availability of the beneficiary rebates to students assessed on payments under the Assistance for Isolated Children Scheme or Veterans' Children Education Scheme. This is consistent with the availability of the beneficiary rebates to recipients of AUSTUDY general secondary educational assistance from that date.
The Bill will implement the proposal, announced on 23 December 1986, to amend the capital gains and capital losses provisions of the Assessment Act relating to the treatment of assets owned by a taxpayer who ceases to be a resident. The changes to the law are intended, amongst other things, to remove any deterrent to Australian residents wishing to gain work experience abroad or to foreign experts considering a temporary assignment in Australia.
Resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated. In this regard, assets held by a taxpayer who acquires residency status become subject to the capital gains tax provisions and are deemed to have been acquired for their market value at the time the taxpayer becomes a resident. However, non-residents are liable to tax on capital gains only on the disposal of an asset which, by section 160T, is treated as the disposal of a taxable Australian asset.
Where a taxpayer ceases to be a resident of Australia, the existing law deems there to have been a disposal of all the assets owned by the taxpayer (other than taxable Australian assets or assets that were acquired by the taxpayer before 20 September 1985) at the time that the taxpayer ceases to be a resident. Also, where a resident partnership ceases to be a resident, the partners in the partnership are deemed to have disposed of the assets of the partnership (other than taxable Australian assets or assets that were acquired by the partners before 20 September 1985) at the time the partnership ceases to be a resident partnership. These requirements ensure that tax on gains in respect of assets, other than taxable Australian assets, that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non-resident status.
The operation of the law will be modified where a taxpayer (not being a company or trustee of a trust estate) has been a resident for a total period of less than five years in the period of ten years immediately before the time when the taxpayer ceased to be a resident or when a partnership in which the taxpayer is a partner ceased to be a resident partnership. An asset will not be taken to have been disposed of for these purposes if the asset was owned by the taxpayer at the time he or she became or last became a resident, or was acquired by the taxpayer since that time as a beneficiary in the estate of a deceased person or as a surviving joint tenant. In this way, short-term residents will not be required to pay capital gains tax on assets they owned when they became a resident.
Another change proposed by the Bill is that a taxpayer who is a natural person will be able to elect that the provisions not apply that would otherwise deem a particular asset to have been disposed of by the taxpayer when he or she ceased to be a resident or when a partnership ceased to be a resident partnership. The election must be made in writing on or before the date of lodgment of the return for the year of income in which residency ceased, or within such further time as the Commissioner allows, and it must apply in respect of all assets owned by the taxpayer that would otherwise be deemed to have been disposed of.
The effect of an election will be to treat an asset subject to the election as a taxable Australian asset until such time as it is disposed of, or until the taxpayer again becomes a resident. This means that gains and losses on the asset related to a period in which the taxpayer was not a resident will be included in any gain or loss which is subject to the capital gains and capital losses provisions on eventual disposal of the asset.
The amendments will apply to assessments made for the year of income in which 20 September 1985 occurred (the date of first effect of the tax on capital gains) and all subsequent years of income.
Clauses 24 and 25 give effect to the proposal announced on 17 December 1986 to amend the capital gains and capital losses provisions relating to the return of capital on an investment in a trust. Section 160ZM operates to reduce the cost bases of interests in or units in a trust where a beneficiary or unitholder receives a distribution that is not assessable income of the beneficiary or unitholder, and is not in respect of the disposal of the interest or unit.
The provisions contained in this Bill will change the application of the law where the distribution made by the trustee includes an amount that was freed from income tax by the allowance of deductions for capital expenditure on traveller accommodation or certain income-producing buildings (under Division 10C or 10D of Part III of the Assessment Act, respectively). The cost base of the interest or units in the trust will not be reduced, for the purpose of determining capital gains, by the amount of the distribution which is attributable to the deductions so allowed.
These amendments will apply in relation to a payment made by a trustee after 17 December 1986.
Under the existing capital gains and capital losses provisions, the date of acquisition of bonus shares is taken to be the date on which the taxpayer acquired the original shares in respect of which the bonus shares are issued. Accordingly, a gain or loss on the disposal of bonus shares, where the original shares were acquired before 20 September 1985, is not subject to the capital gains and capital losses provisions because the date of acquisition of the bonus shares is deemed to be before 20 September 1985.
Similar rules also apply to the issue of bonus units that result in no amount being included in the assessable income of the recipient unitholder.
The Bill will implement the proposal announced on 10 December 1986 to amend the law where the original shares or units were acquired before 20 September 1985, the bonus shares or units were issued after 1pm Eastern Summer Time on 10 December 1986, and a payment is subsequently made by or on behalf of the taxpayer in respect of the bonus shares or units, e.g., payments of calls of capital in respect of such partly paid bonus shares or units. In such cases, the date of acquisition of the bonus shares or units will be taken to be the time when liability to make the first payment arose.
Where the new provisions apply to bonus shares or units to deem them to have been acquired at the time when liability to make the first payment arose, the cost base of the bonus shares or units will be the sum of their market value immediately before that time and the amount of the payment.
Where bonus shares issued after 30 June 1987 are not within the changes contained in clause 32 in respect of bonus shares issued after that date (that is, where no part of their paid-up value is a dividend), the new measures in respect of partly paid bonus shares will apply.
The Bill will also amend the capital gains and losses provisions so that certain bonus shares issued after 30 June 1987 will be subject to those provisions irrespective of the date of acquisition of the primary shares. This proposal was also announced on 10 December 1986.
The amendments apply to all bonus shares issued after 30 June 1987, where some or all of the paid-up value of the bonus shares is a dividend. Accordingly, bonus shares paid wholly out of a bona fide share premium account will continue to be subject to the existing rules (including those rules as modified by the new provisions in the Bill in respect of partly paid bonus shares).
Under the amendments, the cost base, indexed cost base and reduced cost base of the bonus shares include that part of their paid-up value that was included in assessable income as a dividend under the Assessment Act. The acquisition date of the relevant bonus shares will be determined under section 160U of that Act. This will generally mean that the bonus shares will be taken to have been acquired at the time of their issue, so that their disposal will be subject to the capital gains and capital losses provisions, irrespective of whether the date of acquisition of the original shares in respect of which the bonus shares were issued was before or after 19 September 1985.
Provisional tax for the 1987-88 year of income is to be calculated, basically, by applying 1987-88 rates of tax and Medicare levy to 1986-87 taxable incomes as increased by 11 per cent. Rebates and credits allowed in 1986-87 income tax assessments will be taken into account as appropriate in calculating the 1987-88 provisional tax.
In the case of the rebate of tax available to Christmas Island residents as part of the personal income tax phasing arrangements there the amount to be taken into account in the provisional tax calculation will be one-half of the amount allowed in 1986-87 assessments. Arrangements for pro-rating the tax free threshold which may apply where a person leaves full-time education in the 1987-88 year of income or is a resident of Australia for only part of the year will not be taken into account.
Section 14ZKA was inserted in the Taxation Administration Act 1953 (referred to as the "Administration Act") by the Taxation Administration Amendment (Recovery of Tax Debts) Act 1986 to guard against a potential revenue loss of $900 million that would occur if the decision of the Full Court of the Queensland Supreme Court in the case of Deputy Commissioner of Taxation v Moorebank Pty Ltd was upheld on an appeal pending by the Commissioner to the High Court. The Moorebank decision overturned an established principle that State or Territory limitation laws did not apply to the recovery of taxation debts.
In the absence of section 14ZKA, the Moorebank decision, if upheld by the High Court, would require recovery actions by the Commissioner of Taxation generally to be commenced within 6 years in the case of taxes and 2 years in the case of penalties, measured from the date the taxes became due and payable. However, where a tax debt that relates to an assessment is the subject of an objection or appeal, it may be several years after the date on which the tax became due and payable before the objection and appeal process is finalised. In these cases, the limitation period would commence on the due date for payment and could therefore expire at a time before the objection and appeal process is completed.
Section 14ZKA was inserted in the Administration Act to modify the operation of State and Territory limitation laws in those cases where an objection has been lodged against an assessment. The effect of the modification is simply to extend any State or Territory limitation period so that it continues to the date on which it would have ended if the limitation period had commenced on the date of finalisation of the relevant objection and appeal process. The section is drafted in such a way as to apply only if the Moorebank decision is upheld by the High Court.
Section 14ZKA also ensured that additional tax that is assessed - for example, additional tax for late lodgment, for making a false or misleading statement or for participating in a tax avoidance scheme - is treated as "tax" and not as a "penalty", so that the shorter limitation period that generally applies to the recovery of penalties does not apply to the recovery of such unpaid additional tax.
That treatment does not extend to additional tax for late payment, which is not an assessed tax. If, therefore, the Commissioner's appeal in the Moorebank case were to be unsuccessful, an action for recovery of additional tax for late payment would be subject to the shorter limitation period that applies to penalties. However, it was always intended that, where such additional tax relates to tax that is the subject of an objection or appeal, section 14ZKA would also operate to extend the normal (shorter) limitation period so that it too would run for a continuous period beginning on the date on which the tax became due and payable and ending when the limitation period would have ended if it had commenced on the date of finalisation of the relevant objection and appeal process.
A technical argument has been advanced to the effect that this intention has not been achieved by section 14ZKA. This Bill will amend section 14ZKA to make it clear that the modification by that section of State and Territory limitation laws also applies to additional tax for late payment.
The Bill will amend the Income Tax Act 1986 to impose the rates of tax payable for the 1987-88 and all subsequent financial years by -
- individuals and trustees generally;
- registered organisations; and
- trustees of prescribed unit trusts, superannuation funds, ineligible approved deposit funds, and certain other trusts,
as declared by the Income Tax Rates Act 1986. In addition, the Bill will repeal certain sections dealing with the imposition of provisional tax and instalments of company tax, consequent on amendments to be made to the Income Tax Assessment Act 1936 by the Taxation Laws Amendment Bill (No. 3) 1987.
The Medicare levy will, by this Bill, be payable on taxable incomes for 1987-88 and subsequent income years. The amendments to the levy arrangements contained in the Bill will -
- declare and impose the Medicare levy in respect of 1987-88 and all subsequent financial years at the rate of 1.25 per cent; and
- increase the level of the low income thresholds so that no levy will be payable by:
- • .
- a person whose taxable income does not exceed $8,980; or
- • .
- a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $15,090, or by a sole parent where his or her taxable income does not exceed $15,090; for each dependent child or student maintained by a married couple or sole parent the threshold for payment of the levy is to be increased by $2,100.
A more detailed explanation of the provisions of the Bills is contained in the following notes.