Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating M.P.)
The main features of the Bills are as follows:
This Bill will implement the proposal, announced initially on 1 July 1986 and in more detail on 9 April 1987, to exempt from interest withholding tax interest paid to non-residents by offshore banking units that operate in Australia and provides the legislative framework for the arrangements to apply in relation to that exemption.
The interest withholding tax exemption is, by the Bill, to be confined to certain eligible financial entities, being authorised banks subject to the Banking Act 1959, State Banks and other financial institutions authorised to deal in foreign exchange, where those entities are declared by the Treasurer in a Gazette notice to be offshore banking units. An offshore banking unit's activities may be conducted by an existing financial entity operating through a separate department, with separate accounts. Where a separately incorporated body is established for this purpose, that body would need to qualify as an eligible financial entity in its own right in order to attract the benefits of exemption.
The interest withholding tax exemption will apply where, in any currency, an offshore banking unit borrows, or accepts deposits from non-residents and where, in foreign currencies only, it borrows or accepts deposits from Australian residents. An offshore banking unit will be able to convert its foreign currency borrowings into Australian dollars, or into any other currency, before on-lending them.
Because the interest withholding tax exemption is basically intended to encourage offshore transactions and in particular on-lending only to non-residents, an offshore banking unit's funds that are exempt from interest withholding tax are not to be directly or indirectly lent to or deposited with Australian residents (other than another offshore banking unit). The Bill will not prohibit such lendings or deposits but, in combination with an associated measure, the Income Tax (Offshore Banking Units)(Withholding Tax Recoupment) Bill 1987, provides a significant disincentive through the proposed imposition of tax at a penal rate (but subject to remission in appropriate circumstances) in relation to withholding tax that would otherwise be payable on such transactions. The "lost withholding tax" is an amount determined in accordance with a prescribed formula contained in the legislation.
Although an offshore banking unit will be able to borrow from both non-residents and residents, only the former borrowings - in the Bill called "tax exempt loan money" - will generally attract the interest withholding tax exemption. To satisfy the legislative provisions it will be necessary that the accounting records of an offshore banking unit separately identify the amount of tax exempt loan moneys and other funds. Where an offshore banking unit receives a deposit from another such unit (the transfer being called an "offshore loan" in the Bill), the recipient offshore banking unit will be required to record the extent to which the funds received are tax exempt loan moneys.
The interest withholding tax exemption will have effect in relation to relevant interest payments (i.e., interest and amounts in the nature of interest) made in respect of relevant borrowings contracted for after 1 July 1986, but will not apply to relevant interest payments made before the payer becomes an offshore banking unit.
The Bill also contains provisions that will amend the relevant provisions of the Principal Act that are concerned with foreign source income and losses of residents so that:
- foreign tax credits generated in respect of offshore banking income will be available for offset only against the Australian tax payable on such income;
- the transfer by an offshore banking unit which is a wholly-owned subsidiary in a company group of excess foreign tax credits to any other company in the group will be precluded; and
- losses incurred by an offshore banking unit in a year of income in deriving offshore banking income will be quarantined for offset only against offshore banking profits of the offshore banking unit for a subsequent year or years of income.
Where an offshore banking unit is set up as a separate department within an entity, the maintenance of records separating the offshore banking unit's activities from the other activities of the entity will permit any foreign tax credits generated by an offshore banking unit to be appropriately quarantined. Similarly, it will be possible to ensure that any offshore banking unit losses incurred in a year of income are only offset against subsequent offshore banking unit profits. The Bill contains provisions quarantining credits and losses in this fashion.
Clause 36 will give effect to the proposal announced on 29 September 1987 to amend the capital gains and capital losses provisions to extend roll-over relief (that is, deferral of liability) to certain arrangements for the re-organisation of the affairs of a resident unit trust. Roll-over relief will be available where a resident company (not acting in the capacity of a trustee of a trust estate) is interposed between unitholders and a unit trust and the unitholders dispose of their units to the company solely in exchange for non-redeemable shares in the company. The amendments allow for the re-organisation of a unit trust to be carried out either by a direct exchange of units for shares or by the redemption or cancellation of units and an issue of shares.
The main requirements for allowance of roll-over relief where there is a disposal of units in a resident unit trust for shares in a resident company, are to be:
- the re-organisation commenced after the date of introduction of this Bill into the Parliament (9 December 1987);
- the consideration for the disposal consists solely of non-redeemable shares in the company;
- immediately after the re-organisation each of the former unitholders holds shares in the company in the same proportion as he or she held units in the unit trust immediately before the exchange, redemption or cancellation;
- the interest of each shareholder in the company immediately after the re-organisation is of the same value as the prior interest in the unit trust determined by comparing the value of the shareholding to the value of the units previously held;
- immediately after the re-organisation, the company is the sole unitholder in the unit trust and the former unitholders are the only shareholders in the company; and
- the company elects for roll-over relief to apply in respect of the re-organisation.
Where the required conditions have been satisfied, a unitholder (new shareholder) will be able to elect for roll-over relief. Any election must cover all the unitholder's units in the trust. The effect of the election is that there will be no capital gains tax liability in respect of the disposal to the company of units acquired after 19 September 1985. In addition, where the unitholder acquired all the units before 20 September 1985, the shares received by the unitholder as a result of the re-organisation will also be taken to have been acquired before 20 September 1985. This means that a later disposal of these shares by the taxpayer will not fall within the capital gains and capital losses provisions. If some only of a unitholder's units were acquired before 20 September 1985, an equivalent proportion of the shares received will be taken to have been acquired before that date. For shares taken to have been acquired on or after 20 September 1985, in determining a capital gain or a capital loss on a subsequent disposal of the shares the consideration in respect of the acquisition of the shares will be determined by reference to the relevant cost bases of the units.
For the company, the effect of the election for roll-over relief is that a proportion of the units in the unit trust may be taken to have been acquired before 20 September 1985. This will be determined by reference to the net value of assets of the unit trust that were acquired before 20 September 1985. For such remaining units as are taken to have been acquired on or after 20 September 1985, the amount of a capital gain or a capital loss on a subsequent disposal will be determined by taking into account the relevant cost bases of assets of the unit trust that were acquired on or after 20 September 1985 as reduced by any liabilities of the trust attributable to those assets.
The Bill will give effect to the proposal announced on 12 January 1987 to tax as eligible termination payments lump sum payments made to a person following the death of a member of a superannuation fund where the person had a right to elect to receive a superannuation pension or an annuity instead of the lump sum. The amendment, which will apply to payments made after 12 January 1987, will treat the payments in a similar way to payments in commutation of a superannuation pension or annuity entitlement.
Lump sum payments to dependants of deceased superannuation fund members will continue to be treated as not being eligible termination payments provided there is no entitlement to receive a pension or annuity as an alternative.
The Bill will also remedy a shortcoming in the law that allows certain payments, when made on death direct to persons who are not dependants, not to be taxed as eligible termination payments (i.e., payments by the former employer of a deceased person or from a superannuation fund or approved deposit fund of which the deceased person had been a member or depositor). The amendment will bring the law governing direct payments into line with that applying to payments of those kinds to the trustee of the estate of a deceased taxpayer, under which the payment is treated as an eligible termination payment except to the extent that dependants of the deceased will benefit from the estate.
The proposed amendment will ensure that death benefits paid direct to non-dependants are taxable by inserting new paragraphs in the definition of "eligible termination payment" to specifically deal with such payments. A complementary amendment is being made to the meaning of "dependant" for the purposes of the eligible termination payment provisions of the law so that a financially independent adult child of a taxpayer will not qualify as a dependant. The effect of the changes will be that the so-called "death benefits" exemption will be confined to payments made to or for the benefit of persons who are the spouse, former spouse or minor child of the deceased or who were actually financially dependent on the deceased person.
As announced on 12 January 1987, the proposed amendment has effect in relation to relevant payments made after 12 January 1987. By a related amendment, such payments made after the date of introduction of the Bill will not be permitted to be rolled over by way of the purchase of an annuity, as contributions to a superannuation fund or as deposits in an approved deposit fund.
The Bill will give effect to the proposal announced on 12 January 1987 to prescribe conditions to be met by annuity contracts that attract the tax concessions associated with the purchase of annuities with rolled-over eligible termination payments, i.e., deferral of tax on the eligible termination payment and tax exemption for the annuity issuer on the income derived from the relevant annuity business. The new conditions apply to annuities purchased after 12 January 1987. An associated amendment of the definition of the term "dependant", to exclude from the definition adult children of a person who are not financially dependent on the person, will restrict the range of persons for whom residual benefits may be provided under a roll-over annuity contract.
The new eligibility conditions for roll-over annuities are principally concerned with the timing and amount of annuity payments. The purpose of the amendments is to prevent unreasonable deferment of annuity income and the tax thereon, having regard to the availability of the tax concessions just mentioned. Because the amendments will permit deferment of the commencement of an annuity income stream until the annuitant reaches the age of 65, the new conditions are directed at ensuring that a satisfactory income stream flows after that age is reached. The central condition under the new arrangements is that the Commissioner of Taxation must be satisfied that the annuity contract does not permit unreasonable deferment of annuity income during the period after the annuitant reaches 65 (or after the time when the purchaser of the annuity would have reached 65 had he or she not died). Among other things the Commissioner will be required to have regard to the pattern in which any guaranteed (or fixed) components of annual payments will be made, and also the time or times at which any bonus (or supplementary) payments may be made - and their amounts - having regard to the amounts of income derived by the issuer on which the bonuses are based, and the timing of the derivation of that income .
Having regard to the policy just outlined, it would be expected that guaranteed annuity payments after age 65 would not increase at an annual rate that exceeded that required to protect the purchasing power of the annuity. Also having regard to that policy, it would be expected that any bonus components of annual payments would reflect a consistent relationship between the amount of that bonus and the income of the annuity issuer by reference to which the bonus was calculated. It would also be expected that annuity bonuses, or supplements, if any, would be declared annually. The Commissioner will also be required to consider any other matters that are relevant to his being satisfied that the annuity contract does not permit unreasonable deferral of income.
Associated amendments will require that the annuity contract does not permit any residual capital value payable after the purchaser's 65th birthday to exceed the purchase price, nor the sum of any commutation payments payable after age 65 and during any term certain period for which the annuity is payable to exceed the purchase price (reduced in the case of commutation payments by amounts that have been excluded for tax purposes from payments of the annuity). Roll-over immediate annuities purchased after the date of introduction of the Bill will also be required to be purchased wholly with rolled-over eligible termination payments - as are roll-over deferred annuities under the existing law.
Income derived by life assurance companies, friendly societies, trade unions and other registered employee associations from their immediate annuity business is exempt from tax on the basis that the income will be taxed in the hands of the annuitant when paid out in annuity payments. The Bill will introduce conditions to be met by contracts in respect of immediate annuities that are not purchased wholly with rolled-over eligible termination payments if that tax exemption is to be obtained. The conditions, except for the "age 65" requirements, will be the same as those described above that will apply to roll-over annuities. The amendment is to apply to relevant immediate annuities purchased after the date of introduction of the Bill.
Under the existing law, payments of the residual capital value of deferred annuities purchased with rolled-over eligible termination payments are taxed as eligible termination payments. This Bill will give effect to the 12 January 1987 proposal to exempt such payments from tax where the residual capital value payment is made to a dependant on the death of the annuitant during the deferment phase of the annuity, i.e., before the annuity commences to be payable. As announced, the amendment applies to payments under deferred annuity contracts purchased after that date.
This Bill will give effect to the proposal announced on 12 January 1987 to disallow the roll-over of (and so not defer tax on) certain eligible termination payments made on death to persons other than the widow or widower of the deceased person. This amendment affects payments on commutation of, or of the residual capital value of, an annuity purchased with rolled-over eligible termination payments, where the payment is made after the death of the person to whom the annuity was payable. The amendment applies to residual capital value payments made after 12 January 1987 and commutation payments made after the date of introduction of the Bill. As mentioned earlier, the Bill will also disallow the roll-over of eligible termination payments made on death to persons who are not dependants of the deceased. That amendment will apply to relevant payments made after the date of introduction of this Bill.
An amendment being made by this Bill will ensure that the payment of an eligible termination payment to a superannuation fund by way of roll-over does not qualify for the tax deduction (annual maximum S1,500) allowed to taxpayers who do not have the superannuation support of an employer or some other person. Without the amendment it could be argued that the taxpayer would be entitled to the benefit of the tax deduction as well as deferral of tax on the rolled-over eligible termination payment. That was never intended. The proposed amendment was announced on 12 January 1987 and applies to roll-over payments made after that date.
This Bill will also ensure that de facto spouses will be treated in the same way as legal spouses for the purposes of the eligible termination payment provisions. The effect is that they will automatically qualify as dependants for the purposes of the provisions and will not be affected by the restriction on roll-over rights being introduced by this Bill that will apply to certain eligible termination payments made on death to persons other than the widow or widower of the deceased person.
The Bill will give effect to two proposals, announced on 20 November 1987, to limit the special concessions for expenditure on scientific research and on other qualifying research and development activities.
The first of the announced proposals will remove the accelerated write-off for expenditure on the construction or acquisition of buildings that are used exclusively for the purposes of either scientific research (section 73A of the Principal Act) or other qualifying research and development activities (section 73B of that Act). At present, expenditure of this kind can be written off over 3 years under those sections provided that:
- in the case of buildings for use for scientific research - in each of those years:
- · .
- the person incurring the expenditure is carrying on a business for the purpose of producing assessable income; and
- · .
- the building is used only for scientific research purposes related to the carrying on of that business; and
- in the case of buildings used for qualifying research and development activities:
- · .
- the expenditure is incurred by a body corporate incorporated in Australia and registered with the Industry Research and Development Board;
- · .
- the expenditure is incurred under a contract entered into after 30 June 1985 and before 1 July 1991 (the deduction period) or, where the building is constructed by the eligible company, the construction commences during the deduction period; and
- · .
- the building commences to be used by the eligible company during the deduction period, and for a consecutive period of five years, exclusively for the purpose of the carrying on by, or on behalf of, the company of research and development activities.
The removal of these concessions will not apply in respect of expenditure incurred on a building that was constructed or acquired under a contract entered into on or before 20 November 1987 or, where the building is constructed by the eligible company, if construction commenced on or before that date. In these cases, the relevant concession will apply provided that on 20 November 1987 the person incurring the expenditure intended that the building would be used in circumstances where, if the concession had not been removed, the expenditure would have been eligible for the special 3 year write-off.
The second of the announced proposals will amend the special concession for research and development expenditure so that the development of computer software that is not for sale, rent, hire, licence or lease to 2 or more persons who are not associates of the developer will be excluded from the definition of "research and development activities" in section 73B of the Principal Act. At present, only the development of computer software that is not for sale, rent, hire or lease to another person is excluded. The intention of this exclusion is that expenditure incurred in the development of computer software required only for "in-house" purposes should not be deductible.
The Bill will give effect to an announcement on 17 November 1987 to amend the provisions to be inserted in the income tax law by the Taxation Laws Amendment Bill (No.4) 1987 to allow a company (referred to as a "shelf company "), which is introduced into a company group in a year of income, to satisfy the 100% common ownership test necessary to establish a group relationship between companies in the year of income. The existence of a group relationship between companies enables the transfer between those companies of losses incurred in deriving income (section 80G), of excess rental property loan interest (section 82KZF), of excess foreign tax credits (section 160AFE) and of net capital losses (section 160ZP), and the rollover of an asset between companies for capital gains purposes (section 160ZZO).
The measures contained in this Bill will back-date the operative dates of the proposed shelf company provisions to the time at which each of the grouping provisions was first made available. The respective provisions of the Taxation Laws Amendment Bill (No.4) 1987 only provide for them to apply in relation to shelf companies acquired in the 1986-87 year of income or a subsequent year of income.
The provisions in section 80G dealing with a shelf company are therefore to apply for 1984-85 or a subsequent year of income and, as they apply in relation to section 82KZF, for the 1985-86 and 1986-87 income years. Those in sections 160ZP and 160ZZO are to apply for 1985-86 or a subsequent year of income. The provisions in section 160AFE will apply in relation to 1987-88 or a subsequent year of income.
Another change proposed by this Bill will extend the operation of the shelf company provisions of the Taxation Laws Amendment Bill (No.4) 1987 - which are only to apply where a shelf company is acquired by the transfer of its existing shares to the new corporate shareholders to a company acquired by another company (or companies) by way of the issue of shares to the new shareholders in association with the redemption of the original subscriber shares. This change will also apply from the income year in which each of the grouping provisions was first made available.
The Bill will implement the proposal announced on 21 January 1987 to extend the coverage of the income tax law to income derived by non-residents from activities conducted in the offshore areas of Australia and its Island Territories. For consistency with the recent sea installations legislative package, these amendments will apply from 15 October 1987, not 21 January 1987 as previously announced. The proposed amendments will extend the scope of the activities covered to include 'environment related activities' within the meaning of the Sea Installations Act 1987. Very broadly, these are activities related to tourism, recreation, the carrying on of a business, or the exploitation of the sea's natural resources. The offshore areas covered have been redefined and extended but are generally those areas over which Australia exercises, or is entitled to exercise, jurisdiction.
As a consequence of these amendments, the current exemptions from Australian income tax, available under Division 1A of Part III of the Principal Act to residents of Norfolk Island and the Cocos (Keeling) Islands, will be extended to include income earned in the offshore areas around those Islands.
Further, the Bill will correct a technical deficiency in the existing law to affirm Australia's income tax coverage of income derived in the offshore areas from mineral exploration and exploitation. Associated provisions in section 160ACA relating to rebates for call moneys paid on shares in a petroleum mining company and used for the purpose of petroleum exploration, prospecting or mining will also be amended to correct a technical deficiency.
Finally, the reference, appearing in the Schedule to the Sea Installations Act 1987, to the Income Tax Assessment Act 1936, will be repealed. With the enactment of this Bill, that reference will no longer be necessary to expand Australia's income tax jurisdiction over the relevant offshore areas.
The Bill will remedy an unintended consequence of the changes in the taxation of dividends paid to non-residents which were associated with the introduction of the imputation system of company taxation. An effect of those changes was that the unfranked portion of all dividends derived on or after 1 July 1987 by non-resident life assurance companies carrying on business in Australia through a permanent establishment in Australia became liable to withholding tax.
Prior to 1 July 1987 dividend income derived by such non-resident life assurance companies was generally subject to tax by assessment, but the dividend income attributable to superannuation and certain life assurance policies was excluded from assessable income.
This Bill will restore the exemption from income tax that previously applied to the dividends derived by those companies to the extent that the dividends are attributable to superannuation and certain life assurance policies. The exemption will apply to the unfranked portion of such dividends paid by resident companies on or after 1 July 1987.
Under the existing income tax law, bonuses - and other amounts in the nature of bonuses - received by a taxpayer during the first 10 years of a policy of life assurance issued after 7 December 1983 (or during the first 4 years of policies issued after 27 August 1982 and before 8 December 1983) are generally included in the taxpayer's assessable income and a rebate of tax equal to (currently) 29% of that amount is allowed. The rebate of tax is designed to broadly compensate for the tax paid by the life assurance company (in respect of its investment income) or by the friendly society (in respect of its life assurance business) that issued the policy.
State government insurance offices are, because of their status as public authorities for income tax purposes, exempt from income tax and the underlying reason for the allowance of the rebate does not apply in their case. However, in return for the New South Wales, Queensland and South Australian Governments agreeing to reimburse the Commonwealth for their respective shares of the estimated Commonwealth revenue forgone, the Taxation Laws Amendment Act (No.4) 1985 amended the Income Tax Assessment Act 1936 to extend the operation of the rebate provisions to assessable amounts received under life assurance policies issued by the Government Insurance Office of New South Wales, the State Government Insurance Office (Queensland)(now Suncorp Insurance and Finance) and the South Australian State Government Insurance Commission. The Income Tax Assessment Act 1936 was further amended by the Taxation Laws Amendment Act (No.4) 1986 to extend the rebate to assessable amounts received under life assurance policies issued by the State Insurance Office of Victoria following agreement by the Victorian Government to reimburse the Commonwealth for the estimated Commonwealth revenue forgone by allowing the rebate to holders of policies issued by that Office. This Bill proposes the further extension of those provisions to assessable amounts received under life assurance policies issued by the State Government Insurance Corporation of Western Australia. The Western Australian Government has agreed to reimburse the Commonwealth for the estimated Commonwealth revenue forgone by allowing the rebate in that State.
The Bill will make two amendments of the provisions governing the service of provisional tax instalment notices. The changes will permit notices to be served with due dates that fall after the end of the year of income for which the instalment is payable and ensure that, where an instalment notice fails to specify a due date for payment or specifies a due date that does not comply with the law, the notice will be treated as if it had specified a date in accordance with the law. The first amendment will ensure that delays in issuing income tax assessments will not prevent the collection of the following year's final instalment of provisional tax. The second will guarantee the validity of notices that, for example, are served late or, through set off for example, have no amount payable.
The Bill will make it easier for some taxpayers to comply with the new thin capitalisation rules to be introduced into the Principal Act by the Taxation Laws Amendment Act (No.4) 1987 by extending, to 31 January 1988, the end of the "transitional year" for those taxpayers with approved substituted accounting periods ending after 30 November 1987 but not later than 30 January 1988 in lieu of 30 June 1988. The "transitional year" is, broadly, the period given to taxpayers affected by the thin capitalisation rules to adjust their debt/equity ratio so as to avoid, or minimise, the impact of those rules on their interest deduction claims.
In the absence of such an amendment, some taxpayers with accounting periods ending in December 1987 would have had little more than a month after the introduction of the Taxation Laws Amendment Bill (No.4) 1987 on 29 October 1987 to rectify any adverse debt/equity ratio position.
The change will give all affected taxpayers extra time to make any necessary adjustments, e.g., by arranging for the introduction of further equity, to preserve the tax deductibility of the whole, or a part, of their claims for interest incurred on foreign debt from non-arms length sources. The second accounting period for taxpayers affected by the proposed modification of the thin capitalisation rules will commence on 1 February 1988 and end with the close of their substituted accounting period in December 1988 or January 1989 in lieu of 30 June 1989.
The Bill will give full effect to the proposal, announced on 16 July 1987 in a joint statement by the Treasurer and the then Minister for Territories, to abolish from the date of announcement Australian Capital Territory stamp duty and tax on transfers of debentures. In the case of debentures transfered on registers kept outside the territory, abolition is to apply from 10 June 1986, the date when Australian Capital Territory tax became payable on registration, by a company incorporated in the ACT, of transfers of marketable securities listed in a register kept outside the Territory.
The proposal, which brings the Territory treatment of debenture transfers into line with that of the States, has already been given partial effect by the Australian Capital Territory Stamp Duties and Taxes Ordinance 1987.
The ordinance which came into effect on 1 August 1987 when responsibility for Australian Capital Territory stamp duty and taxes passed from the Commissioner of Taxation to the newly established Commissioner for Australian Capital Territory Revenue Collections, does not impose stamp duty and tax on transfers of debentures.
Before 1 August 1987 stamp duty and taxes in the Territory were imposed under Acts administered by the Commissioner of Taxation. This Bill will amend the Australian Capital Territory Taxation (Administration) Act 1969, to complement the effect of the Ordinance by abolishing stamp duty and tax on transfers of debentures between relevant dates of announcement and 1 August 1987. In the case of transfers of debentures, this means transfers made between 16 July and 31 July 1987 and, in the case of transfers of debentures listed in a register kept outside the Australian Capital Territory, transfers between 10 June 1986 and 31 July 1987.
This Bill will amend the Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 to repeal a machinery provision of the Sales Tax Assessment Act (No. 1) 1930 which is no longer operative following the transfer of jurisdiction in tax cases to the Federal Court.
This Bill will formally impose an income tax in respect of certain dealings by current and former offshore banking units. It complements proposed section 128NB to be inserted by the Taxation Laws Amendment Bill (No. 5) 1987 in the Income Tax Assessment Act 1936. That proposed section is part of the legislative measures designed to provide an interest withholding tax exemption for offshore borrowings by such units. It provides that an offshore banking unit will be liable to pay income tax, at a penal rate, where funds obtained with the benefit of the interest withholding tax exemption are applied by the unit in an unintended way. The income tax is to be based on the "lost withholding tax amount" determined by a formula provided in proposed section 128NA. The rate of tax is declared by this Bill to be 300% of the "lost withholding tax amount".
The tax is set at a penal rate to discourage offshore banking units from borrowing offshore free of interest withholding tax and then dealing with the borrowed funds in a manner which would erode Australia's withholding tax base, e.g., by lending to Australian residents.
A more detailed explanation of the provisions of the Bills is contained in the following notes.