Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, MP)
The main features of these Bills are as follows:
This Bill will give effect to proposals, announced in the 1988 May Economic Statement, to withdraw certain concessions currently available to the gold mining industry. In particular, the amendments proposed by the Bill will terminate from 1 January 1991:
- the tax exemption of income from gold mining (paragraph 23(o) of the Income Tax Assessment Act 1936); and
- the exemption for income derived from the sale of gold by an eligible marketing company (section 23C).
The Bill includes transitional measures to allow notional deductions for certain capital expenditure (including deductions transferred to the purchaser of a mining right) incurred by gold miners prior to 1 January 1991 in order to determine actual deductions for such expenditure from that date so long as they are engaged in mining operations in the year in which deductions are claimed. Notional deductions will be computed broadly on the lines of the mining provisions (Divisions 10 and 10AAA). Apart from the specific write-off rates prescribed in Division 10 (currently a write-off over ten years), gold miners will be able to elect to utilise the 5/3 accelerated depreciation provisions over the period those provisions applied. Notional deductions for mining expenditure will be fully available in the income year in which the expenditure was incurred notwithstanding the amount of income (if any) received by the person in that year.
A separate transitional arrangement will apply in the case of exploration expenditure whereby expenditure incurred after 25 May 1988 will be able to be carried forward and deducted against income from 1 January 1991 for up to seven years after the year in which it is incurred. Consistent with the existing law, the amount of exploration expenditure carried forward in this way will be reduced in the event of a tax exempt sale of a mining right before 1 January 1991.
The tax exemption under paragraph 23(pa) for income from the sale of mining rights for gold (and other relevant minerals) by bona fide prospectors will be retained, subject to an amendment to confine the exemption to arm's length transactions (as is the case for other minerals). Other gold mining assets acquired after 19 September 1985 will be subject to capital gains tax in accordance with Part IIIA if disposed of on or after 1 January 1991.
The Bill will give effect to the 1988-89 Budget proposal to introduce a rebate of tax for certain income received in a lump sum in arrears on or after 1 July 1986.
The kinds of income that will qualify for the rebate include workers' and accident compensation payments, social security and repatriation pensions and benefits, Commonwealth educational and training allowances and, in very limited circumstances, salary or wages. The rebate will be allowable in respect of salary or wages where payment is received of an amount that accrued more than 12 months from the date payment was made or where payment is made to a person who is reinstated to employment after a period of suspension of amounts that accrued during the period of the suspension.
The income tax law operates to treat income from sources such as those listed above as assessable income of the year of income in which it is received. The Bill will not alter the existing law under which income, received as a lump sum in arrears, is included in the assessable income of the year in which it is received. It will, however, allow a rebate of tax in the assessment of the year of income in which the lump sum is received, provided certain conditions are satisfied, to limit the amount of tax payable on the income that accrued in earlier years. The tax payable on the income that accrued during the two most recent years before the year of receipt will be limited to the amount of tax that would have been payable on that income if it had been received in the year of income in which it accrued. Where the income accrued over a longer period the tax payable on amounts accrued in a year earlier than the two most recent years will be limited to a notional amount.
The rebate will not be allowable where the total amount of the income that accrued in years earlier than the year of receipt is less than 10 per cent of the taxable income of that year excluding the income that accrued in the earlier years, certain payments on termination of employment, an abnormal income amount under section 158L of the Income Tax Assessment Act 1936 and capital gains.
The rebate will be the amount by which the tax payable on the lump sum in the year in which it is received exceeds the sum of:
- the additional tax that would have been payable in the two most recent years before the year of receipt if amounts that accrued in those years had been included in the taxable incomes of those years; and
- where income accrued in years earlier than the two most recent years before the year of receipt, the product of the amounts that accrued in those earlier years and the average of the rates of tax on the income that accrued in the two most recent years. In calculating the average rates of tax on the arrears of the two most recent years, the relevant taxable income will be reduced by any income received in those years that accrued in earlier years and was eligible for the rebate, certain payments on termination of employment, abnormal income and capital gains.
The rebate will be available for lump sums received on or after 1 July 1986 and will not extend to any income the tax on which was taken into account in the making of an ex gratia payment by the Minister for Finance under the Audit Act.
The Income Tax Assessment Act will also be amended to authorise an amendment of the Income Tax Regulations to allow tax instalment deductions to be retained from the lump sum payments in arrears at the rate of 25.25 per cent.
The Bill will give effect to the 1988 May Economic Statement proposal to exclude from assessability under section 26AAC up to $200 of discounts on shares or rights acquired by an employee under certain ESAS, and to reduce the cost base of the shares or rights, for capital gains tax purposes, by the amount of discount that is excluded.
The effect of the amendment will be that discounts that satisfy the relevant criteria will not be assessed to the employee in the year in which the shares or rights are acquired but may be dealt with under the capital gains tax provisions on disposal of the shares.
The main requirements for the exclusion to apply will be:
- the shares are acquired or the rights are issued after 30 June 1988 (where shares are acquired as the result of the exercise of rights, the right must be acquired after 30 June 1988);
- the shares or rights are acquired under an ESAS that is open on a non-discriminatory basis to all full-time and permanent part-time employees with at least 12 months' service;
- any financial assistance provided in respect of the acquisition of shares or rights under an ESAS is available on a non-discriminatory basis;
- the terms of issue require the shares or rights to be held for a minimum of three years, unless an employee ceases employment within the three years;
- shares have the same voting rights as ordinary shares of the company; and
- the employer has not claimed a deduction in respect of expenditure incurred by the employer in relation to the acquisition of shares or rights under the ESAS.
Where the required conditions have been satisfied, the employee will be entitled to reduce part or all of the assessable discount up to a maximum of $200 per year. Valuation of the reduction amount and assessment of the discount will occur in the year in which the shares or rights are actually acquired by the employee.
The amount to be reduced will be limited to a maximum discount rate of 10 per cent and a maximum aggregate share value of $2,000 per year. The total reduction is then determined by multiplying the discount rate by the aggregate share value. Where not all of the discount is reduced because these limits are exceeded, the reduction will continue to apply, but the excess will be assessed under section 26AAC.
An employee may elect that the exclusion provisions not apply and for the discount to be assessed in full under section 26AAC. The effect of the election will be that the discount will not be assessed in the year in which the shares or rights are acquired, but will be assessed in the year when any restrictions on disposal of the shares cease.
The Bill will give effect to the proposal, announced in the 1988 May Economic Statement, to modify for early balancing companies the provisions dealing with the imputation of company tax. This modification is a consequence of the proposal, announced at the same time, to reduce the rate of company tax from 49 per cent to 39 per cent.
Under the existing law, imputation credits attached to franked dividends are determined by reference to the company tax rate for the financial year (the year of tax) in which the dividends are paid. For all practical purposes in this regard, the year of tax corresponds to the franking year of a company and, in turn, to the year of income of individual shareholders. Thus, franked dividends paid by a company in the 1988-89 year of tax when the company tax rate is 49 per cent will be franked by reference to that rate, that is, according to the formula
As part of this basic structure of the law, the situation is that a change in the company tax rate for a particular year of tax automatically adjusts the imputation credit attached to franked dividends paid in that year. This means that when the company tax rate is reduced to 39 per cent for the 1989-90 year of tax (payable on income of the 1988-89 income year), the imputation credit will be calculated according to the formula
In the case of early balancing companies - those that, with leave of the Commissioner, have adopted an accounting period ending on a date before 30 June in lieu of the financial year ending on the following 30 June - tax at the 39 per cent rate will be payable from a date earlier than 1 July 1989. The franking year of early balancing companies whose accounting periods end before 1 January commence on 1 January. Reflecting this situation, dividends paid by such companies on and after 1 January 1989 will be franked on the basis of the 39 per cent tax rate, that is, according to the formula
61 * ((49)/(51))
To avoid that inappropriate outcome, but without complex tracing rules for what is a transitional situation, the Bill adopts a simple approach of deeming dividends paid before 1 July 1989 by early balancing companies to be received, for the purposes of crediting to a franking account, on 1 July 1989 or, if the receiving company is also an early balancing company on the first day of its 1989-90 franking year. By this means, the dividend of $61 in the above example when ultimately passed on by the recipient company will carry the correct imputation credit of $39.
In the same way the amendments will also provide that where franked dividends paid by an early balancing company before 1 July 1989 are derived by a company through a partnership or trust, the franking credits arising to the company, as a partner or beneficiary, which will have been calculated by reference to the
A mechanism has been included to ensure that where the recipient company is actually reliant on the dividends to frank dividends it pays to its own shareholders and the above measure results in a franking deficit or an increase in a franking deficit at the end of the franking year, the incoming dividends are to be deemed to be received on the last day of the company's franking year. In such cases the amount credited to the franking account will not be $61 however, but $40 (
61 *((51)/(49)) *((39)/(61))
The Bill will implement a proposal, first announced on 20 November 1987, to limit the immediate deductibility of expenditure incurred on research and development activities. Such expenditure is deductible under section 73B of the Income Tax Assessment Act 1936 at a maximum rate of 150 per cent in the year in which the expenditure is incurred.
Research and development expenditure incurred in advance of the provision of services will, subject to certain exceptions, be written-off on a straight line basis over the eligible service period applicable to the expenditure. The eligible service period is the period commencing on the day on which the expenditure is incurred or the first day on which the services are provided, whichever is the later, and ending on the last day on which the services are provided. Research and development expenditure will be taken to be incurred in advance if the eligible service period ends more than 13 months after the day on which the expenditure is incurred.
The new rules will not apply to expenditure that is less than $1,000 or is required to be incurred by law.
Certain classes of expenditure will, however, receive preferred treatment. These comprise:
- expenditure incurred before 1 July 1988 to an approved research institute;
- expenditure incurred after 19 November 1987 to a research agency that is registered under section 39F of the Industry Research and Development Act 1986; and
- expenditure incurred by companies on projects of research and development in respect of which the companies are jointly registered under section 39P of that Act.
For expenditure of these kinds, if the eligible service period extends over two or more years, then the expenditure that would otherwise be taken by the new rules to be incurred throughout the second and any subsequent years will be advanced and spread uniformly over so much of the eligible service period as occurs in the preceding year of income.
The amendments will apply to expenditure incurred after 20 November 1987.
The Bill will give effect to the proposal, announced by the Treasurer in the 1988 May Economic Statement, to modify the special concessions available in respect of eligible investment in qualifying Australian films. The effect of the amendments will be to reduce to 100 per cent the rate of the deduction allowable for eligible capital moneys that are expended:
- in the case of moneys expended by way of contribution to the cost of producing a film - after 24 May 1988;
- in the case of moneys expended directly in producing a film - after 25 May 1988.
In limited circumstances, certain capital expenditure after these dates will continue to qualify for the existing higher rates of deduction. These cases will be:
- capital expenditure incurred in producing or contributing to the cost of producing a film, under a contract entered into at any time, where the film was underwritten before 25 May 1988 and:
- a copy of the underwriting agreement was lodged with the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories before 2 June 1988; and
- the moneys were deposited in the Australian Film Industry Trust Fund before 1 July 1988;
- capital expenditure incurred on a film, under a contract entered into before 25 May 1988, that was not underwritten before 25 May 1988, where the moneys were deposited in the Australian Film Industry Trust Fund before 9 June 1988;
- capital expenditure incurred on a film, under a contract entered into on or after 25 May 1988, that was not underwritten before 25 May 1988, provided that:
- the Secretary to the Department of the Arts, Sport, the Environment, Tourism and Territories certifies that the film was substantially in production before 25 May 1988; and
- the moneys were deposited in the Australian Film Industry Trust Fund before 9 June 1988.
The amendments will also have the effect that where expenditure qualifies for the 100 per cent rate of deduction there will be no exemption from income tax of any of the net revenue from a film.
The Bill will effect a minor amendment to the rules governing debt creation involving non-residents in Division 16G that is to be inserted in the Income Tax Assessment Act 1936 by clause 50 of the Taxation Laws Amendment Bill (No.4) 1988. It will remedy a technical deficiency that occurs because shares in a resident company held by a non-resident are not held 'for the purpose of producing assessable income'. Dividends paid to a non-resident are subject to withholding tax and are not technically assessable income of the non-resident although they bear tax by withholding. An acquisition of shares in a resident company, therefore, falls within the proposed subsection 159GZZF(4) exemption provided for assets not previously used to produce assessable income. This was not the intention of the exemption under that section.
This amendment will ensure that an exemption from Division 16G is not given to an acquisition from a non- resident of shares in a resident company. The amendment will apply to interest incurred after 3 November 1988 on an amount owing in connection with an acquisition of an asset after 3 November 1988. The provision will not apply to an acquisition under a contract entered into on or before that date.
The Bill will give effect to a proposal to extend those provisions of the Income Tax Assessment Act 1936 that authorise deductions for gifts of the value of $2 or more made to specified organisations to include the Australian National Gallery Foundation. Gifts made to the Australian National Gallery Foundation will qualify for deduction where they are made on or after 26 September 1988 - the date of incorporation of the Foundation.
The Bill will exempt from income tax certain payments made under the Defence Services Homes Scheme. The scheme provides low-interest mortgage loans to help veterans, some serving members of the defence forces and certain other people to acquire homes. Under arrangements that applied between 15 September 1987 and 9 December 1987 inclusive, some applicants for housing assistance received cash grants instead of loans and it is proposed that these be free of tax.
As a general rule, the taxation value of a loan fringe benefit or expense payment fringe benefit is reduced to the extent to which interest payable on the loan is, or would be, allowable as an income tax deduction of the employee. This rule is known as the 'otherwise deductible' rule.
The foreign tax credit system quarantines deductions against certain income from foreign sources (such as rent and interest), so that those deductions cannot be applied to reduce other income once the income from foreign sources has been fully offset. Amendments contained in the Taxation Laws Amendment Bill (No.3) 1988 to the fringe benefits tax law propose that the otherwise deductible rule will not apply to reduce the taxable value of an expense payment fringe benefit if that benefit relates to income from foreign sources that is governed by the quarantining rules of the foreign tax credit system.
This Bill will extend that constraint to situations where residual and property benefits are provided in relation to such income. For example, the constraint will apply, from the date of introduction of the Bill, where the employee charges the cost of services or goods - such as, labour and materials for repair to foreign rental property - direct to the employer's account.
Amendments contained in the Taxation Laws Amendment Bill (No. 3) 1988 to the FBT law propose the removal of the requirement for a crew member of an international flight to keep a travel diary and furnish it to his or her employer to support a reduction in the taxable value of an expense payment benefit. The amendments proposed by this Bill will extend this 'no diary' concession in relation to certain residual and property fringe benefits provided to crew members in connection with overseas travel. For example, it will apply to laundry services (residual fringe benefits) and meals (property fringe benefits) where the relevant expenditure is charged directly to the airline employer.
The Bill will amend the sales tax law to confirm that refunds of sales tax overpaid where the tax has been passed on to others are not available unless all persons to whom it was passed on have been recompensed.
Refund provisions in the Sales Tax Assessment Acts provide that, where a taxpayer has overpaid tax, the Commissioner may refund the overpaid tax as long as the taxpayer has not passed the tax on to another person or, if it has been passed on, it has been refunded by the taxpayer to that other person.
However, because tax is usually paid on the last wholesale sale, the benefit of the refund does not always accrue to the ultimate purchaser who bore the tax.
For example, a taxpayer might overpay sales tax in respect of sales to an associated company. The goods are then sold by the associated company to a third party for a price which includes the overpaid tax. Subsequently, the overpayment is discovered and the taxpayer applies for a refund. It is arguable that the taxpayer need do no more than refund the amount overpaid to its associated company, and that the benefit does not have to be passed on by the associated company to the third party who ultimately bore the tax.
The amendments proposed by these clauses will make clear that refunds in respect of sales tax overpaid are not available unless the benefit of the refund has been passed on to the ultimate purchaser who bore the tax.
The present wholesale sales tax system operates to tax all goods at the general rate of 20 per cent unless they are specified to be taxed at that rate, at a different rate or are exempt. There are five schedules of goods in the Sales Tax (Exemptions and Classifications) Act 1935 referred to in these notes as the Exemptions and Classifications Act - for this purpose.
The system's multiple tax rate structure (exempt, 10 per cent, 20 per cent, 30 per cent) and the various detailed descriptions of goods in the five Schedules to the Exemptions and Classifications Act cause problems in its application and administration.
The Bill, in conjunction with the Sales Tax (Exemptions and Classifications) Amendment Bill 1988 and the Sales Tax Assessment (No.1) Amendment Bill 1988, is designed to remove certain classification anomalies and inconsistencies.
Item 92 in the First Schedule to the Exemptions and Classifications Act exempts bags and sacks used for fertilizer or chaff or for marketing exempt goods.
Paper and plastic bags are to be taxed at the general rate of 20 per cent and this Bill will ensure that bags of a kind used by retailers to market goods are subject to the general rate of sales tax by excluding them from item 92.
Item 113 in the First Schedule to the Exemptions and Classifications Act exempts materials used by an unregistered taxpayer to manufacture exempt goods. Biscuit and ice cream mixes which are taxable at the 10 per cent rate are excluded from item 113.
Thick shake mixes are used in place of taxable ice cream mixes by retailers in the manufacture of ice cream for sale from retail premises. To ensure that the sales tax treatment of thick shake mixes is brought into line with ice cream mixes this Bill will exclude thick shake mixes from item 113.
In line with the sales tax treatment of pre-packaged biscuits and ice cream and eating utensils used by eat-in restaurants, all of which are taxable at the 10 per cent rate, containers and accessories used by retailers to market biscuits and ice cream manufactured on retail premises and other take-away food are also to be subject to sales tax at the 10 per cent rate.
The Bill will ensure that accessories to take-away food containers such as spoons, serviettes and refresher towels are taxable at the 10 per cent rate.
Amendment of the Income Tax Rates Act 1986
The Income Tax Rates Act 1986 is to be amended by this Bill to declare the rates of tax payable for the 1989-90 and subsequent financial years by companies and by trustees of corporate unit trusts and public trading trusts.
The Bill will give effect to the proposal announced in the 1988 May Economic Statement to reduce the company tax rate from 49 per cent to 39 per cent, to apply from the 1989-90 financial year.
The Bill will also declare the rate of tax payable for the 1988-89 and subsequent financial years by trustees assessed under subsection 98(3) of the Income Tax Assessment Act 1936 in respect of trust income of non- resident company beneficiaries of trust estates. Reflecting the company rate of tax to apply from the 1989-90 financial year (that is, in respect of company incomes for the 1988-89 and subsequent income years), the rate of tax payable by trustees to which subsection 98(3) applies is to be 39 per cent.
A more detailed explanation of the provisions of the Bills is contained in the following notes.