Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of this Bill are as follows:
This Bill will give effect to proposals, announced in the May 1988 Economic Statement, to withdraw certain special concessional arrangements for the write-off of capital expenditure on the cost of plant and equipment used for the purpose of producing assessable income. The amendments proposed by the Bill will terminate:
- the general accelerated depreciation concession allowing write-off of most plant over 3 or 5 years (section 57AL of the Income Tax Assessment Act 1936);
- the special 5 year depreciation arrangements for storage facilities for hay, grain and fodder (section 57AE), and for new primary production plant (section 57AH); and
- the special write-off for capital expenditure incurred on plant used in general mining or petroleum mining activities (Divisions 10 and 10AA), except for expenditure on plant for use in exploration or prospecting. Expenditure to which the amendments will apply is currently deductible over the lesser of 10 years or the life of the mine or petroleum field, commencing in the year in which the expenditure is incurred.
Plant which was previously eligible for write-off under these arrangements will now be depreciated at the rate determined for that plant by the Commissioner of Taxation. The Commissioner's determination is based on the estimated effective life of the plant. Depreciation may be claimed on either the prime cost or diminishing value method and depreciation will commence to be allowable in the year in which the plant is first used, or installed ready for use, for the purpose of producing assessable income.
The Bill will also increase, from 18% to 20%, the special statutory loading that is allowed on the effective life rates of most items of plant.
The Bill will also require each taxpayer to elect, on a year-by-year basis, which of the two depreciation methods (prime cost or diminishing value) is to apply to all plant that first becomes depreciable by the taxpayer in that year. The method elected will continue to apply to that plant throughout its depreciable life in the hands of that taxpayer. Only one depreciation method may be adopted by a taxpayer in respect of each year and, once the election is made, it will be irrevocable. These amendments will replace the existing arrangements under which the diminishing value method applies unless, or until, the taxpayer elects to apply the prime cost method.
The amendments under this heading will apply in respect of:
- plant acquired under a contract entered into after 25 May 1988;
- plant constructed by the taxpayer under a contract entered into after 25 May 1988, or under a series of contracts the first of which was entered into after that date;
- where there is no contract for the construction, plant commences to be constructed after 25 May 1988; and
- any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.
The Bill will give effect to the May Economic Statement proposal to limit the immediate deductibility of expenditure incurred in advance of the provision of the relevant services. Expenditure incurred in advance under agreements entered into after 25 May 1988 will generally be written off, on a straight line basis, over the period during which the relevant services are to be provided, subject to a maximum write-off period of 10 years.
The new rules will not apply to expenditure where:
- the relevant services will be provided within 13 months of the date on which the expenditure is incurred;
- the prepayment is required by order of a court or by law;
- the amount of the expenditure is less than $1000; or
- the expenditure is in respect of salary or wages.
Where, at the end of a year of income, a taxpayer no longer has any rights under a prepaid agreement - either because of the discharge of the agreement or the transfer of the remaining rights under the agreement to a third party - any undeducted expenditure will be brought forward and allowed as a deduction in the year of discharge or transfer.
In the case of a transfer of rights under a prepaid agreement as a consequence of the formation, reconstitution or dissolution of a partnership, the person or partnership holding the rights after the change will be entitled to the deductions that would have been available to the person or partnership that incurred the expenditure. A proportionate deduction will be allowable in the year of change.
The Bill will give effect to the Government's proposal, announced on 25 May 1988, to deny the intercorporate dividend rebate in relation to dividends paid by corporate entities which, under certain provisions of the Principal Act, are exempt from tax on their income.
In raising capital through conventional borrowings tax-exempt entities do not obtain the tax benefit of deductibility of servicing costs that is ordinarily available to taxpaying entities, while the servicing costs are taxed as income of the lenders of the funds. By restructuring the raising of capital through the issue of equity instruments rather than debt securities, tax-exempt entities have been able to pay the providers of the funds a return in the form of dividends. Because dividends are normally fully rebateable, that is, effectively tax-free, in the hands of corporate investors, such investors would be willing to provide funds, as equity, at a before-tax rate of return which is equivalent to the after-tax return they would receive in the form of interest on a conventional loan.
The raising of capital in the form of equity represents an advantage to tax-exempt entities derived at the expense of the Commonwealth revenue. The denial of the intercorporate dividend rebate on dividends paid by a tax-exempt entity will remove that tax advantage. The rebate that would otherwise be available will be denied whether or not the dividend was paid as part of a dividend stripping operation.
The amendments proposed by clauses 17 and 18 will apply in relation to dividends paid after 25 May 1988 other than those paid on shares or stock issued on or before 25 May 1988. For dividends paid on shares or stock issued on or before 25 May 1988, the amendments will apply in relation to dividends paid after the amending Act comes into operation.
It is proposed to amend the intercorporate dividend rebate provisions of the Principal Act to deny the rebate to private companies to the extent the dividends they receive are not franked. Denial of the rebate in these circumstances will remove the tax deferral incentive for private companies to be used as repositories for dividends which are not fully franked.
The rebate will not be denied in relation to the unfranked part of a dividend which is a phasing-out dividend for the purposes of the arrangements for the phasing-out of undistributed profits tax, or where both the company paying the dividend and the company receiving the dividend belong to the same company group.
The proposed measure will apply in relation to dividends paid to private companies after 25 May 1988, the day on which the proposal was announced, other than dividends declared on or before that date.
Clause 15 will give effect to the 25 May 1988 Business Tax Reform proposal that the provision in the income tax law (section 26AAA) that includes in assessable income profits in respect of short-term property sales will cease to apply to sales of property after that date. The effect of terminating the operation of section 26AAA is that transactions formerly taxed under that section will now be subject to the capital gains and capital losses provisions. This will mean that capital gains arising from short term property sales will qualify for the five year notional averaging of liabilities under the capital gains provisions and that short term capital gains may be offset against allowable capital losses. In addition, the exemptions contained in the capital gains provisions, for example the principal residence exemption, will extend to assets bought and sold within 12 months.
The Bill will implement the proposal, announced in the May Economic Statement, to replace with a write-off over 10 years the immediate deductibility of capital expenditure incurred in connecting mains electricity facilities (or upgrading an existing connection) to a property on which a business is carried on . The amendment will apply to capital expenditure incurred under contracts entered into after 25 May 1988.
The income tax law provides that live stock on hand at the end of a year of income may be valued at cost price, market selling value or such other value as circumstances may justify. Where the cost price of natural increase of a particular class of live stock has not previously been taken into account, the taxpayer may select a cost price per head in respect of natural increase of that class. The amount selected then continues to be used by the taxpayer in subsequent years unless the Commissioner of Taxation agrees to the adoption of another cost price. The amount selected may not be less than the minimum cost price prescribed in respect of the particular class of live stock.
In the May Economic Statement it was announced that the prescribed minimum cost prices are to be increased, for natural increase occurring after 30 June 1988, from $1 to $4 for sheep, from $5 to $20 for cattle and horses and from $4 to $12 for pigs. Minimum values of $20 and $4 respectively are to be prescribed in respect of deer and goats.
For taxpayers whose actual cost of production of natural increase of a class of live stock is less than the minimum cost price prescribed in respect of that class, the natural increase may be brought to account at actual cost. The actual cost of production is to be calculated on the same basis as is used by manufacturers for the purposes of determining the cost price of manufactured goods - that is, on an absorption cost basis.
The Bill will give effect to the May 1988 Business Tax Reform proposal to increase, for the 1988-89 and subsequent income years, the level of the maximum rebate of tax, from $250 ($308 for service pensioners) to $430, available for taxpayers in receipt of Australian social security or repatriation pensions. The income level at which the rebate begins to shade-out will also be increased from $6142 ($6384 for service pensioners) to $6892. The maximum rebate will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $6892. No rebate will thus be available at taxable incomes in excess of $10331.
The Bill will also give effect to the 1988-89 Budget proposal to increase for 1988-89 and subsequent income years the maximum rebates of tax, and the income levels above which the rebates shade-out, for taxpayers in receipt of a social security unemployment, sickness or special benefit, a Formal Training Allowance or an allowance paid under certain Commonwealth educational schemes. For married taxpayers (and de facto couples) the maximum rebate will be increased from $430 to $600 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $11059. For other taxpayers the maximum rebate will increase from $180 to $260 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $6184. No rebate will be available at taxable incomes in excess of $15,858 for married taxpayers and $8,263 for others.
The Bill will give effect to a Budget proposal to exempt from income tax a special temporary allowance payable under the Social Security Act 1947 or the Veterans' Entitlements Act 1986.
The special temporary allowance is payable to a surviving pensioner by fortnightly instalments for twelve weeks following the death of his or her pensioner spouse. In that twelve week period, a surviving pensioner continues to receive the amount of pension that would have been payable to him or her if the spouse had not died. In addition, the surviving pensioner is paid an amount, called a special temporary allowance, equal to the pension that would have been payable to the deceased spouse if he or she had not died.
The exemption will apply for an allowance received in the 1988-89 or subsequent income years.
Provisional tax for the 1988-89 year of income is to be calculated by applying 1988-89 rates of tax and Medicare levy to 1987-88 taxable incomes increased by 12 per cent. Rebates, other than those on franked dividends which are to be increased by 12 per cent, and credits allowed in 1987-88 income tax assessments will be taken into account as appropriate in calculating the 1988-89 provisional tax.
This Bill will implement, subject to some minor variations, the proposal which was announced on 4 February 1985 to tax non-cash business benefits.
The proposal was announced to overcome practices that became more prevalent following the adverse decision of the Full Federal Court in F C of T v. Cooke & Sherden 80 ATC 4140; (1980) 10 ATR 696 concerning non-transferable overseas trips given to some soft drink vendors under a sales incentive scheme sponsored by the manufacturer. The Court held that the existing law taxes non-cash business benefits only if the benefits are convertible to cash and are in the nature of income according to ordinary concepts. The overseas trip being non-transferable was not convertible to cash and was accordingly held to be not subject to tax under any provision of the Principal Act. The benefits were also held not to be assessable under subsection 26(e) of the Principal Act as the taxpayers had not rendered any services to the manufacturer.
The decision highlighted a substantive defect in the application of the charging provisions of the Principal Act.
In addition to more prevalent income-type benefits, there had been an increase in non-cash benefits provided to induce business taxpayers to purchase items of plant or equipment.
To implement the proposal the Bill proposes separate simple rules to deal with the following types of practices described in the announcement:
- the provision of non-cash business benefits that (apart from their non-convertibility to cash) are in the nature of income; and
- the provision of non-cash benefits to induce business taxpayers to purchase any items of plant or equipment.
The practice of providing non-cash business benefits that are in the nature of income but that had been held to be tax free because they are not-convertible to cash is dealt with by providing that the benefits be treated as if they were convertible into cash. A new section - section 21A - is to be inserted in the Principal Act, and will operate to treat non-convertible cash benefits as convertible into cash. In addition, the new section contains a valuation rule to apply to convertible non-cash business benefits, which are presently taxable subject to the ordinary concepts of income. In determining the income derived by a taxpayer, the new section will require the taxpayer to include the arm's length value of any non-cash business benefit, whether or not it is convertible to cash, if it is otherwise income by ordinary concepts of income.
The new section 21A will place all non-cash business benefits in the same category as cash items of income . The assessment of non-cash business benefits would depend on whether the benefits are income items under ordinary concepts of income, i.e., subject to the same common law rules that determine whether cash items are income items. The new section will apply to non-cash benefits provided after 4 February 1985 (the date of announcement).
The second proposed change deals with a practice of providing non-cash business benefits to induce business taxpayers to purchase items of plant or equipment (including practices relating to agreements for services). Another new section - section 51AK - is to be inserted to exclude from business expenditure the arm's length value of any private benefit received by a taxpayer. This will ensure that where a benefit is received as a result of business expenditure, an amount attributable to the private benefit will not be deductible or form part of the cost of unit of property for depreciation purposes. The new provision will apply in respect of non-cash business benefits provided after the date of introduction of this Bill.
Under the new section 21A for taxing non-cash business benefits that are not-convertible to cash as if they were convertible to cash, the normal rules that apply for the taxation of convertible non-cash benefits will be automatically applied. It is therefore unnecessary to include provisions to give effect to special rules set out in the Announcement relating to:
- the year in which a benefit is to be taxed;
- the taxpayer who is to pay the tax;
- reduction of the taxable value where the benefit is otherwise deductible; and
- depreciation on the basis of the benefit's taxable value.
To ensure that there is no element of retrospectivity in the application of the new section 21A, special transitional provisions are included in the Bill so that benefits provided on or before the date of introduction of the Bill are taxed on the basis of the special rules set out in the announcement of 4 February 1985.
The Bill will implement a proposal, announced on 30 April 1987, to incorporate into the income tax law with effect from 1 July 1987 corporate restructure (debt creation) rules. These rules will have similar effect to those previously imposed administratively in the application of foreign investment policy as a condition of approval of certain foreign investment proposals. Previously, approval of proposals for restructuring of existing foreign investments by way of transfer of shares or assets between related companies was conditional on no additional debt being introduced into the group to finance the restructure.
These amendments will similarly apply to corporate restructure (debt creation) arrangements that involve the sale of assets between certain foreign owned companies. The aim of the rules is to ensure that there is no increase in the interest-bearing debt where assets are transferred between a related buyer and seller.
In the absence of rules to control these arrangements, additional debt introduced from outside the group has a twofold potential detriment to the revenue.
First, the additional debt to a foreign shareholder or a foreign associate enables profits to be shifted offshore in the form of tax deductible interest payments instead of as non-deductible dividends. Even if the additional debt is initially owed to an Australian resident, it may be refinanced offshore at a later date. Accordingly, the provisions will apply to both local and offshore interest-bearing debt introduced under a corporate restructure arrangement.
Secondly, receipt of the sale proceeds by the seller places the seller in a position where a tax free capital payment can be made to its overseas shareholders in substitution for dividend payments.
The former foreign investment policy administrative procedures prevented corporate restructure arrangements from taking place. The Bill will achieve a comparable result by effectively preventing interest-bearing debt from being introduced to fund acquisitions of assets from related companies. The new provisions will deny a deduction for interest incurred to an associate or to a local or foreign lender where the interest is incurred in connection with an acquisition of an asset from a related company. The rules will only apply where foreign shareholders together with their foreign associates (referred to as foreign controllers) have a 50% interest, or greater, in both the buyer and the seller of the asset acquired. This interest is determined by reference to beneficial entitlement to any capital distribution from the company.
The legislation will apply to deductions claimed in respect of interest incurred in connection with the acquisition of an asset where an interest-bearing debt becomes owing in any of the following situations:
- a non-resident company sells an asset to its resident subsidiary;
- a resident subsidiary sells an asset to the Australian branch of its non-resident parent; or
- a resident company sells an asset to another resident company where both have the same foreign controller.
Where a foreign controller does not have a 100% interest in both the buyer and the seller the denial of the interest deduction will be reduced proportionally to reflect the lower of the beneficial interests of the foreign controller in the buyer and seller of the asset. For example, where a foreign controller holds 75% of the capital entitlement in the seller of a wholly-owned asset and 70% in the buyer, the beneficial interest of the foreign controller in the buyer and seller would be 70% (i.e., the lower of 75% and 70%).
If any part of the buyer's interest in the asset is acquired from a non-related seller (i.e., a seller in which the foreign controller does not have the required 50% interest) then the denial of interest will be further reduced to reflect the proportion of the interest in the asset acquired from the related seller. So, in the example in the previous paragraph, if the related seller had only a 50% interest in the asset then the proportion of the buyer's deduction that will be disallowed will be 35% (i.e., 70% multiplied by 50%).
The new provisions will apply with effect from 1 July 1987 (the date on which the foreign investment policy administrative controls ceased to apply). Specifically, the provisions will apply to interest incurred on or after 1 July 1987 unless either the contract for the acquisition of the asset was entered into, or the acquisition of the asset occurred, before that date.
As a transitional measure, the proposed legislation will only apply before 20 June 1988 where the foreign controller had a 100% interest in both the buyer and the seller of the asset.
This clause will affect the operation of Division 6C of Part III of the Income Tax Assessment Act 1936, which taxes as a company the trustee of a public unit trust that carries on a trade or business (known as a "public trading trust"). Division 6C does not apply to a public unit trust the business of which consists solely of "eligible investment business". The amendment made by this clause will extend the meaning of the term "eligible investment business", thereby enabling a public unit trust to conduct a wider range of business activities than is presently possible without being taxed as a public trading trust. The amendment applies in relation to business conducted by a public unit trust in the year of income that commenced on 1 July 1987 or in a subsequent year of income.
Taxpayers are to be permitted to retain particular records rather than - as the present law requires - lodge them with the Commissioner of Taxation in completed income tax returns. The records are those that relate to income tax deduction claims for car expenses. This amendment reflects similar amendments to the fringe benefits tax law proposed by Taxation Laws Amendment Bill (No. 3) 1988.
At present gifts to the Duke of Edinburgh's Study Conference Account maintained by the Commonwealth are allowable deductions for income tax purposes under paragraph 78(1)(a)(xvi) of the Income Tax Assessment Act 1936.
Under new arrangements the Account is not to be maintained by the Commonwealth but will be maintained by a new organisation - HRM the Duke of Edinburgh's Commonwealth Study Conferences (Australia) Incorporated.
This Bill will amend the gift provision so that gifts to the new organisation are deductible from the date on which it was incorporated, i.e., 24 April 1986.
To reflect the fact that the new organisation and the Account maintained by the Commonwealth have operated concurrently since 24 April 1986 the amendment will operate to allow income tax deductions for gifts to both the new organisation and the existing Account between 24 April 1986 and 1 January 1989.
From 1 January 1989 donations will only be deductible if made to the new organisation.
This Bill provides for a spreading, generally over a five to seven year period, of the impact of the fringe benefits tax presently imposed on remote area employers who provide employees with specified types of housing assistance. In broad terms, the taxable value of a remote area housing benefit consisting of:
- a discount on the purchase of a home or of land on which to build a home;
- a reimbursement of the cost of buying land and/or building a home; or
- an option fee entitling the employer to first choice in repurchasing the house,
The remote area housing schemes eligible for this concessional treatment are ones designed as incentives to employees to acquire their own housing and thus establish themselves in the communities where they live and work. The concession does not extend to any contrived attempt by an employer to reduce its effective tax rate by taking advantage of the concessional treatment afforded to remote area fringe benefits in general and to these types of benefits in particular. Such a scheme would be struck down by section 67 of the Principal Act. As a further safeguard, it is to be a condition of eligible remote area housing schemes that the restraints on transfer of title be kept in place for a five year minimum period.
The amortisation concession is to be spread over a minimum of five years and a maximum of seven years. If no upper limit were in place, fringe benefits tax could be postponed indefinitely.
Remote area employers may see a need to purchase the homes of their employees. Indeed, some remote area home ownership schemes have a repurchase arrangement as a central feature. If a repurchase occurs before the amortisation period expires, i.e., before the whole of the taxable value of a fringe benefit provided in connection with the purchase of a remote area residence has been brought to account, the unamortised balance is to be brought to account in the fringe benefits tax year in which the purchase takes place.
Where an employer's purchase (or repurchase) of an employee's house gives rise to a fringe benefit (for example, where the price paid is above market value) that benefit is fully exposed to fringe benefits tax in the year of purchase. However, that part of an 'excessive' repurchase price which is less than a 'guideline price' will qualify for the remote area fringe benefits discount, i.e., a 50 per cent reduction in what would otherwise be the taxable value of the benefit. The guideline price is, broadly, the market value of the house at the time of its original purchase by the employee, adjusted for movements in the Consumer Price Index.
Finally, the Bill provides for a reduction of an employer's fringe benefit taxable amount in a year in which an employee is forced, by the terms of a remote area housing obligation (i.e., by a contractual buy-back arrangement), to incur a loss on the disposal of his or her home to the employer. This could occur, for example, where house prices rose sharply but the employee was locked into a below-market figure. The rationale for this reduction - which is to be limited to one half of the loss incurred by the employee - is that, taking an overall view, any fringe benefit given to the employee to facilitate the original purchase of the house (and on which benefit the employer has been subjected to fringe benefits tax) is being offset, wholly or partly, by the loss on its subsequent resale to the employer. The reductions provided for by the Bill will not, however, give rise to a negative fringe benefits amount capable of being carried forward.
Clause 59 repeals a provision (section 14ZKA) which was inserted into the Act by the Taxation Administration (Recovery of Tax Debts) Act 1986. That Act was a consequence of the decision of the Full Supreme Court of Queensland in Federal Commissioner of Taxation v Moorebank Pty Ltd 86 ATC 4560. In that case the Court held that a State Limitations Act applied to taxation debts by virtue of section 64 of the Judiciary Act 1903. The decision overturned a long held legal principle that the recovery of tax debts could commence at any time. Section 14ZKA was then inserted into the Act to give immediate protection to the revenue. The Commissioner of Taxation appealed against the Full Supreme Court's decision in Moorebank and on 9 June 1988 the High Court of Australia found that State and Territory Limitation Acts did not apply to taxation debts, hence section 14ZKA is now redundant.
This Bill will amend the Income Tax Act 1986 to impose for 1988-89 and the subsequent financial year the rates of tax payable as declared by the Income Tax Rates Act 1986.
The Medicare levy will, by this Bill, be payable on taxable incomes for 1988-89 and the subsequent income year. The amendments to the levy arrangements contained in the Bill will -
- impose the Medicare levy in respect of 1988-89 and the subsequent financial year 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:
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- a person whose taxable income does not exceed $9,560; or
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- a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $16,110, or by a sole parent where his or her taxable income does not exceed $16,110; 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.