House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating M.P.)

MAIN FEATURES

The main features of the Bills are as follows -

TAXATION LAWS AMENDMENT BILL (NO. 2) 1987

Substantiation Requirements : Car rules (Clauses 14 to 22, 46 and 47)

Under the present law, certain substantiation requirements must be satisfied before deductions may be allowed for car expenses incurred by employees and self-employed people in using their cars for income producing purposes.

Under the present law car expenses may be claimed under one of a number of alternative methods. Where the business kilometres in a year exceed 5,000 one of the following 3 methods can be used:

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actual business expenses ("log book") method under which deductions are based on the business percentage of the actual car expenses. For this purpose documentary evidence (e.g., receipts) of those expenses and daily log books recording business trips must be maintained;

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1/3 of all actual business expenses method - under which a taxpayer is entitled to a deduction equal to 1/3 of all car expenses which must be evidenced by receipts, etc. A log book is not required under this method; and

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12% of the cost price of the car - this method does not require the maintenance of any documentary evidence or log books.

Where the business kilometres in a year are 5,000 or less a deduction is available either on the actual business or on the basis of a set rate of cents per business kilometre.

The amendments proposed by the Bill will -

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enable car fuel and oil expenses to be verified by a record of total kilometres travelled during the year rather than by actual receipts, etc;

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remove the requirement for substantiation records for cars which are unregistered throughout the whole year of income and used principally for business purposes; and

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relax the present log book requirements under the actual business expenses method of deduction.

The relaxed log book requirements will mean that it will no longer be necessary to record details of business trips throughout the whole year of income. Instead, taxpayers will be entitled to establish the percentage of business use of the car by making log book entries in a continuous twelve week log book period. Provided the actual percentage of business use does not vary substantially (i.e., by more than 10 percentage points) from that established by reference to the log book records, that established percentage continues to be the basis for deduction for the particular car or a car that replaces it. A detailed outline of the operation of the new rules is contained in the Introductory note to clauses 14 to 22 of the Bill.

Intercorporate dividend rebate (Clauses 10, 11, 23, 24, 30, 31 and 47)

Under section 46 of the Income Tax Assessment Act 1936 ("the Assessment Act") a rebate of tax is allowable on dividends included in the taxable income of a resident company which is a shareholder in a resident company from which the dividends were derived. The rebate effectively prevents the imposition of successive layers of tax at the corporate level as dividends pass from company to company before leaving the corporate sector.

Under the existing income tax law, deductions allowable to a shareholder in respect of income from dividends are deducted from gross dividends included in assessable income to ascertain the amount of dividends included in the shareholder's taxable income. It is this latter figure upon which the rebate is calculated.

This Bill will give effect to the proposal announced on 10 December 1986 to calculate the section 46 rebate on the basis of gross dividends received without setting off any associated expenses.

Under the present law, a life assurance company is entitled to the benefit of the section 46 intercorporate dividend rebate. However, the amount of dividends on which the rebate is calculated is reduced, by section 116AA of the Assessment Act, by a proportion of two special deductions that are allowable to life assurance companies for general management expenses and for calculated liabilities. Consistent with the proposal to allow the section 46 rebate on the basis of gross dividends received, section 116AA will be repealed by this Bill.

These measures will apply to dividends derived during the year of income commencing on 1 July 1987 and subsequent years of income.

Bonus shares (Clauses 9, 12, 13, 25, 35 and 47)

The Bill will also give effect to the proposal announced on 10 December 1986 to amend the income tax law to ensure that certain dividends that are satisfied by the issue of bonus shares are treated for income tax purposes in the same way as other dividends.

Under the present law, dividends paid wholly and exclusively out of, broadly, profits from the revaluation or sale of assets not acquired for the purpose of resale at a profit and satisfied by the issue of non-redeemable bonus shares are exempt from income tax. Dividends paid out of profits arising from the issue at a premium of certain convertible notes and also satisfied by the issue of such shares are similarly exempt from tax.

The amendments proposed by this Bill will remove these exemptions, and the relevant dividends will be subject to income tax and to the provisions of the imputation system in the same way as any other dividends.

As a related matter, there is to be a removal of the exclusion from paid-up capital, which presently applies on liquidation of a company, of the paid-up value of bonus shares issued by the company in satisfaction of dividends paid out of profits from the revaluation of assets not acquired for the purposes of resale at a profit. This will ensure that the relevant shares are included in the paid up capital of the issuing company and are thus treated as a return of capital on liquidation. In addition, the exemption from withholding tax of dividends satisfied by the issue of bonus shares to which the amendment discussed above applies is also to be removed.

These changes will have effect in respect of relevant bonus shares issued after 30 June 1987.

Modified application of the Act in relation to certain unit trusts (Clauses 36 and 43)

These amendments will ensure that the imputation arrangements of Part IIIAA of the Assessment Act - as proposed to be inserted in that Act by clause 14 of the Taxation Laws Amendment (Company Distributions) Bill 1987 - apply to corporate unit trusts and public trading trusts which, in accordance with Divisions 6B and 6C respectively of Part III of the Assessment Act, are treated as companies for income tax purposes. Trusts treated in this way are referred to as prescribed trust estates.

In basic terms the amendments proposed will ensure that the provisions of the new Part IIIAA will operate, in substantially the same way as they operate for companies, to impute or allocate tax paid by the trustee of a corporate unit trust or public trading trust as a credit to individual resident unitholders. Such unitholders will be assessed on the total amount of unit trust dividends and the imputation credit, but will be entitled to a rebate of tax equal to the imputation credit. Unit trust dividends with imputation credits attached to them will be treated as "franked" unit trust dividends. Where franked unit trust dividends pass from a prescribed trust estate to a resident company, or to the trustee of a corporate unit trust or public trading trust, the attached imputation credit will be effectively transferred to the recipient company or trust thus enabling that company or trust to frank a similar amount of dividends or unit trust dividends paid to its shareholders or unitholders.

The extent to which unit trust dividends paid by the trustee of a prescribed trust estate on and after 1 July 1987 are franked will be determined by the amount of tax paid or payable by the trustee as trustee of a corporate unit trust or public trading trust in accordance with Divisions 6B and 6C on its net income of the 1986-87 and subsequent income years, and the amount of dividends or unit trust dividends received by the trust which are themselves franked. The general rule is that a prescribed trust estate that is a resident unit trust will be required to frank the unit trust dividends it pays to the extent of the surplus balance in its franking account at the time of payment, taking into account any future unit trust dividends that the trustee is committed to pay.

If a trustee of a prescribed trust estate over-franks a unit trust dividend and it turns out that its franking debits for the franking year exceed its franking credits so that a franking deficit exists at the end of the year, the trustee will be required to make a payment of franking deficit tax shortly after the close of the year. Franking deficit tax so payable will be offset against tax (on net income of the corporate unit trust or public trading trust of the 1986-87 or any later income year) that becomes due under an assessment or amended assessment raised after the end of the year in which the franking deficit arose.

At the time of paying a unit trust dividend, a trustee of a prescribed trust estate will be required to make a declaration of the extent to which the unit trust dividend is to be franked. All unit trust dividends which are paid as part of the one distribution will be required to be franked to the extent declared. A franking declaration cannot be varied or revoked and will be required to be lodged by the trustee of a prescribed trust estate, together with an annual reconciliation of its franking account, by the end of the month following the end of the franking year where franking deficit tax is payable or with annual income tax returns in other cases.

Trustees of prescribed trust estates will be required to provide unitholders with a statement giving amongst other things, details of the franked amount of unit trust dividends paid, the imputation credit attached to them and, in the case of a non-resident unitholder, the amount of any withholding tax deducted.

Receipt of franked dividends (Clauses 36, 37, 38 and 41)

Amendments to the income tax law contained in clause 14 of the Taxation Laws Amendment (Company Distributions) Bill 1987 will insert a new Part in the Assessment Act - Part IIIAA - to implement the imputation system of company tax. Proposed new sections 160APP and 160APQ of that Part provide that a resident company will be 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.

Related amendments proposed in this Bill will ensure that the whole or part of a franking credit under new section 160APP will not arise if the franked dividend is wholly or partly exempt income of the company by which it is derived, or where the shareholder is a life assurance company or registered organisation within the meaning of Division 8 or 8A respectively of Part III of the Assessment Act. In the case of a life assurance company, however, the franking credit will only be denied under the proposed amendment if the asset from which the dividend is derived was included in the insurance funds of the company at any time during the year of income of the company in which the franking credit would otherwise have arisen.

Further amendments contained in this Bill will apply in a similar way to limit the entitlement of life assurance companies and registered organisations to franking credits in respect of franked dividends received through partnerships or trusts. In general terms, a franking credit will not be available to a life assurance company if, at any time during the company's year of income during which the franking credit would otherwise have arisen, the asset which is attributable to the trust or partnership amount included as assessable income of the company was included in the insurance funds of the company. A registered organisation will not be entitled to franking credits in relation to franked dividends that it receives through a partnership or trust.

Private companies (Clauses 10, 26 to 29, 39, 40 and 42)

This Bill will implement the proposal which was announced on 10 December 1986 to abolish, subject to transitional rules, the additional tax payable under Division 7 on the undistributed income of private companies. Related provisions of section 46 are to be modified in conjunction with this measure.

The need to impose the additional tax where private companies fail to distribute the required minimum proportion of their after-tax income will, for the 1986-87 and later income years, be removed by the combined effect of the introduction (by the Taxation Laws Amendment (Company Distributions) Bill 1987) of a full imputation system of company taxation and the alignment (by the Income Tax Rates Amendment Bill 1987) of the company tax rate with the maximum marginal rate of personal income tax.

Amendments contained in this Bill will effectively terminate liability to undistributed profits tax under Division 7 in relation to the income of private companies of the 1986-87 and later income years. However, in order to protect the revenue from loss of personal income tax by arrangements designed to retain income of the 1985-86 and earlier income years in private company groups, the measures contained in the Bill will retain the practical operation of the undistributed profits tax in relation to income of those years.

To this end, special rules will apply so that undistributed profits tax will continue to apply in respect of the 1986-87 and later income years only in relation to dividends which are received by one private company from another private company and which, in broad terms -

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are made during a prescribed period of that other company in relation to the 1984-85 year of income or an earlier year;

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are authorised under section 105AA to be taken into account in satisfying the sufficient distribution requirements for any year of income of the company paying the dividends; or

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are taken into account in satisfying the sufficient distribution requirements of the 1985-86 income year or a later year of the company paying the dividends.

The amendments will also ensure that for the purposes of allowance of the section 46 intercorporate dividend rebate, private company dividends received by a private company in its 1986-87 or a later income year will include only those private company dividends of the kind outlined in the paragraph above.

Dividends paid by a private company after 30 June 1987 will only be able to be taken into account for Division 7 purposes to the extent to which they are unfranked under the new imputation arrangements. Accordingly, amendments are proposed to the imputation provisions of the proposed new Part IIIAA, being inserted in the Assessment Act by the Taxation Laws Amendment (Company Distributions) Bill 1987, to enable private companies to pay dividends after that date which are fully or partially unfranked for that purpose without incurring a franking debit. Safeguarding measures will be incorporated to address the situation where, broadly, unfranked dividends in excess of Division 7 requirements are paid under the provisions referred to.

Provisional tax on estimated income (Clause 44)

Under the existing income tax law, a taxpayer may apply for a variation of the amount of provisional tax that he or she has been called upon to pay. A taxpayer making such an application is required to provide an estimate of taxable income for the year in question, of the composition of that taxable income, and of the rebates or credits to which he or she will be entitled for the year. Provisional tax is then recalculated on the basis of those estimates.

The amendments being made by the Bill will enable a taxpayer to make estimates for this purpose in respect of the new franking rebates under the imputation measures, and have those estimates taken into account in recalculating his or her provisional tax.

These provisions will apply in relation to the ascertainment of provisional tax payable in respect of the 1987-88 and later income years.

Tax concessions in respect of Australian films (Clauses 32 to 34 and 47)

The Bill will amend Division 10BA of the Assessment Act - which deals with the special tax concessions for investments in Australian films - to give guidance as to how films that have a significant non-Australian content are to be treated.

Under the existing provisions of Division 10BA, a deduction at the rate of 120% in respect of capital moneys expended in, or as a contribution to, the production of an Australian film is allowable only where the Minister for Arts, Heritage and Environment has issued a certificate stating that the film (or proposed film) is a qualifying Australian film. To be a qualifying Australian film, a film must have a significant Australian content and, in determining whether a film has such a content, the Minister must have regard to the matters specified in section 124ZAD of the Act.

Although a film may have a significant Australian content, it may be that it also has a significant non-Australian content in terms of such matters as its subject matter, the place where it was made and the source of moneys used in its making. In such a case, the Minister has, in accordance with the legislative intention, applied weight to the relevant matters to determine whether, in effect, the film's Australian content is more or less significant than its non-Australian content. That approach has, however, been criticised by the Federal Court, which held that the Minister could not refrain from issuing a certificate in respect of an otherwise eligible film on the basis that it has a significant non-Australian content.

The Bill will amend Division 10BA to specifically provide that, notwithstanding that a film has a significant Australian content, the Minister may treat the film as not being a qualifying Australian film where the Minister is satisfied that it also has a significant non-Australian content. The amendment will apply in respect of applications for certificates that are received after 6 May 1987.

Reasonable assistance (Clause 62 and Schedule 4)

The access provisions of the various taxation laws give the Commissioner of Taxation and authorised officers powers of access to, inter alia, buildings and documents. However, in a case involving one of those provisions, the Full High Court held that there was no obligation on persons to provide positive assistance to make access effective. Amendments of the sales tax law in 1985 introduced a reasonable assistance requirement. The fringe benefits tax law also specifically requires persons to provide reasonable assistance. However, less recent provisions, including the access provisions of the income tax law, remain deficient in this respect.

In order to overcome the deficiency, the Bill will amend the access provisions of the income tax and other taxation laws so that, consistent with more recent access provisions, persons will be required to provide all reasonable facilities and assistance to make effective the existing rights of access.

Pay-as-you-earn provisions (Clause 62 and Schedule 4)

The Bill will amend the pay-as-you-earn (PAYE) provisions of the Assessment Act so that, consistent with the prescribed payments provisions of the Act, the information gathering powers of the Commissioner of Taxation and authorised officers are effective for the purpose of enforcing the obligations of employers under the PAYE provisions.

Under the existing income tax law, the Commissioner may require a person, by notice in writing, to attend and give evidence relating to the income or assessment of a person and to produce relevant books, documents and other papers. The requirement that the books, etc. relate to the income or assessment of a person means that the Commissioner cannot rely on the power to obtain information relating to a person's obligations under the PAYE provisions. The Bill will remedy that deficiency.

Debits to payment order accounts (Clause 56 and Schedule 1)

The Bill will give effect to the decision announced on 28 November 1986 to apply debits tax to debits made to payment order accounts with non-bank financial institutions (NBFIs) - that is, building societies, credit unions and other institutions prescribed for the purposes of the Financial Corporations Act 1974 - in the same way as it presently applies to debits made to cheque accounts with banks.

Payment orders are a new class of payment instrument, being created under Part VIII of the Cheques and Payment Orders Act 1986. Payment orders are similar to cheques and will be drawn on customers' accounts with NBFIs. Part VIII of the Cheques and Payment Orders Act 1986 is to come into operation on a date to be fixed by Proclamation (proposed to be 1 July 1987). The amendments being made by the Bill to bring debits to payment order accounts within the debits tax base are to come into operation at the same time.

Reflecting the broader scope of the debits tax legislation, the Bill will also change the short title of the Bank Account Debits Tax Administration Act 1982 to the Debits Tax Administration Act 1982.

Debits tax exemption for inter-financial institution accounts (Clauses 56 and 57 and Schedule 1)

Debits made to an account kept with a bank in the name of another bank that carries on banking business in Australia are exempt from debits tax under the existing law. In keeping with the proposed application of the tax to debits made to payment order accounts with non-bank financial institutions (NBFIs) in the same way as it applies to debits to cheque accounts with banks, the Bill will extend that exemption to inter-financial institution (i.e., banks and NBFIs) account debits.

Avoidance of debits tax and related matters (Clauses 56 and 57 and Schedule 1)

The Bill will remove potential avenues for avoidance of debits tax.

Under the existing law, an institution that carries on only limited banking operations may nevertheless qualify as a "bank" for debits tax purposes and thereby be exempt in respect of debits to all its accounts. The revenue could be at risk if such an institution offered customers a third party cheque facility - that is, an arrangement under which the institution arranged with a bank for the institution's customers to make payments from their accounts with the institution by way of cheques drawn on the bank, but funded from an account the institution holds with the bank on the basis that the institution will debit the customers' accounts in respect of the cheques.

Accordingly, the Bill will limit the exemption for debits to inter-financial institution accounts (see earlier notes) to cases where -

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the business carried on by the account-holding institution in Australia consists wholly or principally of banking business or all debits made or to be made to the account are in connection with banking business carried on by the institution; and

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the debit is not in connection with a third party cheque facility.

Another possible avenue of avoidance that the Bill will counter flows from the fact that, under the existing law, debits tax is imposed on debits made to accounts on which cheques can be drawn and not on the instrument or transaction underlying the debit. Institutions could limit liability to tax by aggregating into one debit various payments of cheques and other transactions in relation to an account. The Bill will ensure that a debit that would otherwise be a single debit and is made to an account in respect of two or more account transactions is treated as consisting of separate debits in relation to each of those transactions.

The Bill also deals with debits to accounts kept in Australia but expressed in foreign currency. The administrative practice of the Commissioner of Taxation has been to determine tax on debits to these accounts by applying the rate of tax applicable to the Australian currency equivalent of the debit. The Bill will give legislative support to this practice.

ACT tax on insurance business (Clauses 3 to 7)

The Bill will give effect to the proposal announced on 24 December 1986 to exempt from the ACT tax on ACT-related insurance business premiums received by an insurer for the insurance of goods carried in international trade and of vessels and aircraft engaged in international trade. The exemption is to apply in respect of insurance effected by an insurer on or after 1 January 1987.

ACT pay-roll tax (Clauses 49 to 53)

The Bill will amend the Pay-roll Tax (Territories) Assessment Act 1971 to exempt from ACT pay-roll tax wages paid or payable to first year apprentices and trainees employed under the Australian Traineeship System. The exemption will extend to the wages of ACT apprentices, as well as - by regulations proposed to be made for the purpose - to the wages of State and Northern Territory apprentices that would otherwise be subject to ACT pay-roll tax.

The Australian Traineeship System is a new form of structured vocational training for young people seeking to enter the workforce. It is additional to, and will complement, the higher education and apprenticeship systems.

The exemption will apply to relevant wages paid or payable on or after 1 July 1986. Resultant refunds of pay-roll tax overpaid in the 1986-87 financial year will be made following the annual reconciliation of wages and pay-roll tax after 30 June 1987.

Acting arrangements for Commissioner and Second Commissioners (Clauses 54 and 55)

The Bill will amend the Taxation Administration Act 1953 to enable the Prime Minister to appoint an Acting Commissioner or an Acting Second Commissioner of Taxation. At present such appointments must be made by the Governor-General. The Bill also provides for the Prime Minister to authorise the Treasurer to exercise that power on the Prime Minister's behalf. These measures reflect recent amendments of the Public Service Act to streamline the approval processes for the appointment of acting Secretaries of Departments.

Transfer of administrative responsibility for ACT stamp duties and taxes (Clauses 58 to 61 and Schedules 2 and 3)

Under the existing law, the Commissioner of Taxation has responsibility for the administration of stamp duty and tax (including pay-roll tax) laws in the Australian Capital Territory, including Jervis Bay, as well as of the various other Commonwealth taxation laws. The States and the Northern Territory have their own statutory officers responsible for the administration of their revenue laws.

As announced on 4 May 1987, responsibility for the administration of ACT stamp duties and taxes is to be transferred to another Commonwealth statutory officer to be known as the Commissioner for Australian Capital Territory Revenue Collections and this Bill will amend the following Acts to facilitate that transfer of responsibility -

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the Australian Capital Territory Stamp Duty Act 1969;

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the Australian Capital Territory Taxation (Administration) Act 1969;

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the Australian Capital Territory Tax (Cheques) Act 1969;

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the Australian Capital Territory Tax (Hire-purchase Business) Act 1969;

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the Australian Capital Territory Tax (Insurance Business) Act 1969;

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the Australian Capital Territory Tax (Life Insurance Business) Act 1981;

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the Australian Capital Territory Tax (Purchases of Marketable Securities) Act 1969;

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the Australian Capital Territory Tax (Sales of Marketable Securities) Act 1969;

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the Australian Capital Territory Tax (Transfers of Marketable Securities) Act 1986;

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the Australian Capital Territory Tax (Vehicle Registration) Act 1981;

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the Pay-roll Tax (Territories) Act 1971; and

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the Pay-roll Tax (Territories) Assessment Act 1971.

It is proposed that the transfer of administrative responsibility take effect on and from 1 July 1987. However, the Bill provides flexibility in the commencement of the relevant provisions to cover the possibility of delay in completing the transfer arrangements. The amendments being made by the Bill are, therefore, expressed to come into operation on a day to be fixed by Proclamation. If the transfer arrangements are completed by 1 July 1987, that day will be proclaimed for the commencement of the amendments.

The Bill will amend the above named Acts to -

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terminate the imposition of stamp duties and taxes under the Acts; and

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transfer responsibility for any outstanding functions of the Commissioner of Taxation under those Acts to the proposed Commissioner for Australian Capital Territory Revenue Collections.

To complete the transfer, several new ACT Ordinances will be made, effective from the date of transfer (proposed to be 1 July 1987). An ACT Ordinance, to be known as the Taxation Administration Ordinance 1987 will create the new statutory office of Commissioner for Australian Capital Territory Revenue Collections and that Commissioner will administer ACT stamp duties and taxes on and from the date of transfer. Other ACT Ordinances will impose and regulate the administration of the duties and taxes.

It is necessary to make the new ACT Ordinances, rather than effect the transfer of functions wholly by way of amendment of the existing Commonwealth Acts, because the powers and functions of the Commissioner for Australian Capital Territory Revenue Collections under the proposed ACT Taxation Administration Ordinance 1987, will also relate to other levies (such as the proposed Financial Institutions Duty to be introduced in the ACT on 1 July 1987) not presently covered by existing Commonwealth legislation. All machinery and similar provisions relevant to levies to be administered by the Commissioner for Australian Capital Territory Revenue Collections will be contained in that Ordinance.

Under the amendments to be made by the Bill, persons liable to pay ACT stamp duties and taxes, including pay-roll tax, will retain their rights and obligations under the existing Acts in respect of liabilities arising prior to the transfer date. This will include liability for payment of duty or tax, accruing or accrued additional duty or tax and penalties, as well as rights to refunds and objection and appeal rights. The only difference in the position of persons liable for ACT duties and taxes in respect of liabilities which accrued prior to the transfer date will be that their remaining rights and obligations under the existing Commonwealth Acts will be owed to, or by, as the case may be, the Commissioner for Australian Capital Territory Revenue Collections in place of the Commissioner of Taxation.

Liability to ACT stamp duties and taxes arising after the transfer date will be governed by the proposed new ACT Ordinances.

BANK ACCOUNT DEBITS TAX AMENDMENT BILL 1987

Abolition of higher rates of tax (Clauses 7 to 9)

This Bill will give effect to the 1986-87 Budget proposal to abolish - with effect on and from the date of introduction of a financial institutions duty in the Australian Capital Territory, including Jervis Bay - the higher rates of tax on debits made to cheque accounts kept with banks in the ACT. On abolition of those higher rates, the rates of bank account debits tax applicable in other parts of Australia, which are to remain unchanged, will apply in the ACT. Existing anti-avoidance provisions applicable where accounts are kept outside the ACT to avoid the higher rates of tax will also be removed by the Bill.

These amendments will apply to debits made on or after a date to be proclaimed. That date will be the date of introduction of the ACT financial institutions duty - proposed to be 1 July 1987.

Anti-avoidance measures (Clauses 6 and 9)

The Bill will also insert anti-avoidance provisions necessary as a consequence of the creation of the new payment instruments - known as payment orders - to be available to customers of non-bank financial institutions such as credit unions and building societies. Amendments of the Bank Account Debits Tax Administration Act 1982, being made by the accompanying Taxation Laws Amendment Bill (No. 2) 1987, will bring payment orders within the debits tax base. The anti-avoidance provisions mirror similar provisions applicable to cheque accounts kept outside Australia to avoid tax.

A more detailed explanation of the provisions of the Bills is contained in the following notes.