Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of this Bill are as follows:
Collection of tax on companies and trustees of certain funds (Clauses 33 to 36)
The Bill will amend the Income Tax Assessment Act 1936 (the "Assessment Act") to give effect to the 1989-90 Budget announcement of a new tax collection system for companies and trustees of certain funds to apply in respect of tax payable on income of the 1989-90 and subsequent income years. The Bill will also incorporate in the new system some further changes to the system as announced in the Budget following discussions with professional bodies.
At present, companies, and unit trusts taxed as companies, with a tax liability of $1,000 or more pay their tax in four instalments spread over the year following the income year. Others make just one payment.
All companies, unit trusts taxed as companies, superannuation funds and approved deposit funds (whether complying or non-complying) and pooled superannuation trusts will come within the scope of the new system.
Broadly, the Bill will provide for companies and funds with a tax liability of $20,000 or more to pay their tax in two instalments in the year following the relevant year of income. Companies and funds with a tax liability of less than $1,000 will make one payment, and all others will have the choice of those two systems.
The new arrangements are based on a self-assessment system.
Companies and funds will pay tax under one of three methods, each described in more detail below, depending on their level of tax liability:
- companies and funds which have a notional tax liability of $20,000 or more (and do not estimate their liability on income of the relevant year of income to be less than $20,000) will be required to make two payments of tax each year - the initial payment will be due on 15 July following the end of the income year, and will be an amount to equal 85 per cent of:
- the notional tax (i.e., the tax payable at the current year rate on the taxable income of the preceding income year); or
- the tax which the company or fund estimates is its total liability on income of the income year;
- the final payment will be due on 15 March, and will be the total actual tax liability for the year of income less the amount already paid;
- companies and funds which have a notional tax of more than $1,000 but less than $20,000, or have a notional tax of $20,000 or more but estimate their tax liability for the income year to be in the range $1,000 to $20,000, will be given the option of paying in the same way as entities referred to in the note above, or of making a single payment of the total actual tax liability for the income year on 15 December;
- all other taxable companies and funds will be required to make a single payment of their total actual tax liability for the income year on 15 March following the end of the income year, e.g., companies and funds:
- which have no notional tax (i.e., new companies and those previously non-taxable);
- the notional tax of which is less than $1,000; or
- the total actual liability of which, in respect of the year of income, is estimated to be less than $1,000.
The new arrangements will first affect payments made in the 1990-91 financial year (or substituted accounting period in the case of early balancing companies or funds) in respect of income of the 1989-90 income year. As described above, the possible payment dates are 15 July, 15 December and 15 March for companies and funds balancing on 30 June. For companies and funds with substituted accounting periods ending on or before 31 May in lieu of the following 30 June the possible payment dates are the 15th day of the first, sixth and ninth months after the end of the accounting period (subject to 15 January being the earliest required payment date). For late balancing companies the possible payment dates are within the same timeframe as for early balancing companies, except that there will be no payment due later than 15 June in the year following the year of income.
A company or fund that has made an initial payment of tax in respect of income of a year of income will be entitled to make a further estimate of its total tax liability for the year before it is required to make the final payment. If the initial payment was excessive on the basis of that further estimate the excess will be refunded. Consequently, a company or fund may make a further payment of tax at any time before the final payment where it considers that it has underestimated its initial payment liability.
Where a company or fund has made its initial payment of tax on the basis of its estimate of the income tax that will be payable, the Commissioner of Taxation will be authorised to adjust the estimate where he has reason to believe that the amount of income for the year will be greater or less. In addition, anti-avoidance provisions will operate to overcome any arrangement intended to relieve a company or fund from its liability to make an initial payment of tax.
The Bill will amend the provisions of the Assessment Act dealing with the requirements to furnish returns. Without changing their substance, the amendment will express those requirements more clearly and in language consistent with the Sex Discrimination Act 1984.
In an extension of the "self-assessment" system of determining tax liability that has applied since 1986, a company or fund will be required to furnish a return of income showing only limited details including its taxable income or net income, as the case requires, and the tax payable thereon. Certain information relevant for statistical or systems purposes will also be required. The taxpayer will be required to retain the papers supporting the calculation of taxable or net income.
A taxable company or fund will be required to furnish a return of income by the day on which the final payment of tax liability is due. The assessment will be deemed to have been made by the Commissioner of Taxation on that day, unless the return is lodged later, in which case the assessment will be deemed to have been made on the date of lodgment. The return will be deemed to be a notice of deemed assessment under the hand of the Commissioner served on the company or fund on the day, referred to above, when the assessment is deemed to have been made. This change applies to a return of income furnished by a company or fund for the 1989-90 and subsequent income years. The taxpayer's existing rights relating to an assessment will be retained.
The Assessment Act will be amended to adjust the time period within which an assessment of tax may be amended to increase or decrease a liability.
Section 170 of the Assessment Act enables the Commissioner of Taxation to amend an assessment at any time, subject to certain limits specified in the section. In particular, subsection 170(2) deals with amendments increasing a taxpayer's liability where there has not been a full and true disclosure of all material facts necessary for an assessment, and there has been an avoidance of tax. In such cases the Commissioner may amend the assessment :
- within 6 years of the date on which the tax became due and payable; or
- at any time where the Commissioner is of the opinion that fraud or evasion has occurred.
Other provisions authorise a credit or debit amendment where there has been a full and true disclosure of all material facts necessary for an assessment. In these cases, however, the amendment can be made only within three years of the date on which the tax became due and payable. The Commissioner may also amend an assessment at any time to apply specifically nominated provisions of the income tax law, e.g., anti-profit shifting and other anti-avoidance measures.
The concept of full and true disclosure previously enabled the Commissioner to make an assessment of a taxpayer's tax liability based on the information disclosed in the taxpayer's return. In the context of self-assessment of a taxpayer's liability the concept has reduced relevance.
The Bill will amend the Assessment Act and remove the full and true disclosure concept from the amendment provisions. At the same time, the period for the general power of amendment increasing liability, presently 6 years in the absence of full and true disclosure, will be reduced to 4 years.
These amendments are applicable for all taxpayers.
In summary, the Commissioner will be authorised to amend an assessment to increase a liability within 4 years from the date upon which the assessment became due and payable. To account for the proposed new system of self-assessment for certain companies and funds the 4 year application period for them will be measured from the date on which their assessments are deemed to have been made.
The period within which a credit amendment may be made will be increased from 3 years to 4 years. The existing powers to amend at any time where fraud or evasion exists or where certain anti-avoidance provisions of the Assessment Act apply, will be retained.
An associated change will allow the Commissioner to apply to the Federal Court of Australia for an extension of the new statutory 4 year period to amend an assessment to increase liability. The onus will be on the Commissioner, prior to the end of the 4 year period, to show that an extension of time is warranted. The period of any extension will be determined by the Court. The Bill will also authorise the Commissioner and the taxpayer to agree on an extension of time to amend an assessment to increase the liability of the taxpayer.
These changes to the powers of amendment will apply to all taxpayers, in relation to assessments for the 1989-90 and later income years that are made on or after the day on which the Bill receives the Royal Assent.
Consistent with the changes to the time limit for amending assessments, the Assessment Act will be amended so that records will be required to be kept for a period of 5 years after the completion of the transactions or acts to which they relate. This period will be subject to any subsequent extension by the Federal Court of Australia of the period allowed for amendment beyond the proposed statutory limit of 4 years. Currently, records must be kept for a period of 7 years.
The Bill also contains a definition of "record" and takes into account records held otherwise than in written form, e.g., on electronic media.
The maximum penalty on conviction for failure to comply with the new record keeping requirements will be updated to a fine of $3,000, increased from $2,000.
Where a taxpayer makes a claim for a foreign tax credit in respect of foreign tax paid on foreign income included in the taxpayer's assessable income, the Commissioner of Taxation is required to make a determination as to whether a credit is allowable and if so, the amount of the credit. Having made the determination, the Commissioner is then required to advise the taxpayer.
The Assessment Act will be amended so that a taxpayer will be authorised to self-determine the credit. As a result the Commissioner will no longer be required to make a determination of credit, or advise the taxpayer of the amount of the credit unless the taxpayer requests that the Commissioner do so. The determination by the taxpayer will be deemed to be a determination by the Commissioner. The law will be amended also so that, consistent with the taxpayer making the calculation of credit, the taxpayer may be liable for interest where by an amendment the amount of credit is reduced.
The relevant changes will apply to determination of credits in respect of tax for the 1989-90 and subsequent years of income.
The Bill will amend Part IIIAA of the Assessment Act dealing with franking of company dividends to accommodate changes to the method of tax collection and assessment of companies and certain unit trusts that are taxed as companies.
The proposed amendments of the Assessment Act will set down the method for calculating franking credits or debits arising from payments and refunds made under the new collection system by or to particular entities. They will ensure also that where a company or unit trust that is liable for Franking Deficit Tax (FDT) decides to make an initial payment of tax under the new collection system based on actual (rather than notional) tax liability on 15 July, it will be relieved from payment of the amount of FDT liability to the extent of the initial payment.
Changes complementary to those being made to the self-determination of foreign tax credits are being made within Part IIIAA to authorise the self-determination of the FDT liability to be offset against the company tax liability.
Deduction for costs in connection with ascertaining and meeting income tax obligations (Clauses 8, 28, 43, 46(2), 46(6), 46(10) and 47)
The Bill will give effect to the 1989-90 Budget proposal to allow deductions for expenditure incurred by taxpayers in connection with the management or administration of their income tax affairs.
There is no general deductibility for all taxpayers of expenditure they incur to meet their obligations under taxation laws. Losses and outgoings incurred by a taxpayer (including a business taxpayer) in ascertaining the taxpayer's income tax liability, disputing an assessment or determination of the Commissioner of Taxation or attending to matters arising from an Australian Taxation Office (ATO) audit of the taxpayer's affairs are not allowable deductions.
Under the existing income tax law a deduction is allowable for a payment to a registered tax agent (or a person exempt from registration) for the preparation of an income tax return. Amounts paid for other taxation advice or in connection with other tax matters are allowable deductions to the extent they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income, and to the extent they are not of capital or of a capital, private or domestic nature.
Examples of deductions allowable to business taxpayers for expenditure incurred in relation to taxation matters are costs associated with record-keeping, returns etc. for prescribed payments, PAYE tax, sales tax and fringe benefits tax. A taxpayer who is not conducting a business is entitled to tax-related deductions in very limited circumstances only, such as land tax for a rental property and other expenses related to the land tax assessment, e.g., costs of disputing the assessment.
The amendment proposed by clause 8 will, broadly, authorise a deduction for expenditure incurred by a taxpayer (irrespective of whether or not the taxpayer is carrying on a business) in respect of the management or administration of the income tax affairs of the taxpayer.
Allowable expenditure will include fees paid by a taxpayer to a registered tax agent (or a person exempt from registration) for professional advice in relation to the income tax affairs of the taxpayer, costs associated with disputing an assessment or determination made by the Commissioner, expenditure incurred in attending to an ATO audit and costs associated with tax planning.
A deduction will also be allowed for depreciation of property (such as a computer) to the extent the property is used by a taxpayer in ascertaining or meeting the taxpayer's income tax obligations.
No deduction will be available for costs associated with an offence against any law of the Commonwealth, a State or Territory or of a foreign country.
Clause 28 of the Bill will permit a taxpayer to include in the cost base, indexed cost base and reduced cost base for capital gains purposes fees paid to a registered tax agent (or a person exempt from registration) for professional advice concerning the impact of the income tax law on the acquisition or disposal of an asset. Fees paid for professional advice concerning the impact of taxes other than income tax (for example, stamp duty) on the acquisition or disposal of an asset will also be eligible to be included in each of the cost bases.
These amendments will apply to expenditure incurred on or after 1 July 1989.
The Bill will give effect to the announcement in the 1989-90 Budget that expenditure incurred by a life assurance company (excluding friendly societies and other registered organisations) in gaining the investment component of life insurance premium income (other than premium income from exempt policies) is to be an allowable deduction. Generally, life insurance premium income is not assessable income of the life assurance company so that, under the existing law, expenditure incurred in relation to such income is not allowable as a deduction. The amendment to allow tax deductions for expenditure incurred in gaining the investment component of premiums will result in tax treatment similar to that of other financial institutions.
The investment component of life insurance premium income is to be determined by deducting the risk component of that income. The risk component represents the cost of risk in respect of the policy and varies between different types of policies. In an insurance only policy such as term insurance, the entire premium would consist of risk component.
Deductions will be conditioned on the life assurance company obtaining a certificate from an actuary in relation to the ascertainment of the investment component. In addition, the deduction will not be allowed in respect of exempt policies. For life assurance companies other than State and Territory government insurance offices exempt policies are those policies which provide certain immediate annuities. For State and Territory government insurance offices, exempt policies are policies referable to non-superannuation life assurance business. Deductions are not to be allowable in respect of exempt policies because, unlike other policies, income derived from assets included in the insurance funds of a life assurance company that is referable to exempt policies is exempt from tax.
The new deduction will apply in respect of expenditure incurred on or after 1 January 1990.
This Bill will give effect to the 1989-90 Budget announcement to modify the dividend imputation arrangements to preclude dividends paid under share-based financing arrangements from being frankable dividends. Under share-based financing arrangements the character of dividends paid is such that they may reasonably be regarded as equivalent to the payment of interest on a loan.
The imputation arrangements use a system of franking dividends to relieve those dividends paid by Australian resident companies from personal income tax in the hands of resident shareholders to the extent that income tax has been paid at the company level. By virtue of the intercorporate dividend rebate franked dividends are also free of tax in the hands of resident company shareholders.
A variety of methods have been used by companies to direct or transfer imputation credits to particular companies or shareholders so as to obtain disproportionable taxation benefits. To overcome these arrangements such dividends are to be excluded from the definition of frankable dividends in the imputation provisions. This measure will apply to dividends paid on shares issued on or after 16 August 1989 or dividends paid under a financial arrangement entered into on or after that date.
The amendment effectively extends the scope of section 46D of the Assessment Act to deny the intercorporate dividend rebate in respect of all dividends paid under share-based financing schemes.
Fixed interest complying ADFs - exemption of income attributable to certain 25 May 1988 deposits (Clause 44 )
Under the recent package of superannuation tax measures that received Royal Assent on 30 June 1989, a portion of the investment income of certain qualifying approved deposit funds (ADFs) is exempt from tax. In broad terms, qualifying ADFs are complying ADFs that receive at least 90 per cent of their income from interest. The amount of an ADF's income that is treated as exempt depends on the proportion of the total amount standing to the credit of all depositors with the ADF (called the "aggregate current balance") at a particular time which is attributable to amounts on deposit for certain "eligible depositors" at 25 May 1988 (called the "aggregate of current 25 May balances").
Under transitional arrangements, if an amount was withdrawn from an ADF after 25 May 1988, it could nevertheless be included in the "aggregate of current 25 May balances" provided it was returned to the same ADF before 1 July 1989. This Bill proposes to change the 1 July 1989 deadline to 1 September 1989 so extending the benefits of the transitional arrangements.
The Bill proposes an amendment to correct a technical deficiency in Division 2 of Part IX of the Assessment Act, which deals with the taxable contributions to be included in the assessable income of a superannuation fund or approved deposit fund.
Under the existing law, the trustee of a complying superannuation fund can, with the consent of a contributor to that fund, elect to have an amount of the contributions made to the fund not treated as taxable contributions. The amount of contributions so treated is limited to ensure that where a complying superannuation fund elects to have such contributions effectively exempted from tax, this will be offset by an increase in tax on end benefits. The limit is an amount equal to the sum of the following:
- the total of amounts covered by notices, given by the trustee of the complying superannuation fund to a recipient of an eligible termination payment (ETP), which provide that a portion of the post-June 83 component of the ETP is an untaxed element (that is, the ETP is taxed at a higher rate in the recipient's hands);
- the portion of the pre-July 83 components of ETPs paid by the fund that corresponds to the proportion of the post-June 83 components of the ETPs represented by the notices in (i) above; and
- the total of amounts covered by notices, given by the trustee of the complying superannuation fund to a recipient of a superannuation pension, which provide that the recipient is not entitled to a superannuation pension rebate for a portion of the pension.
The amendments proposed by this Bill will exclude the pre-July 83 components of ETPs paid by a fund from the determination of the limit on the amount of contributions that the trustee of a fund can elect not to treat as assessable income (i.e., paragraph (ii) above will not apply in determining the exemption). The purpose of the amendments is to ensure that the trustees of fully funded superannuation schemes cannot avoid tax on contributions by use of the exemption which is intended to cover cases where the employer does not fund benefits until retirement.
The amendments are to apply in relation to contributions made on or after 1 July 1988.
Under the present law, when a building permit is issued in a home owner's name that person is taken to be an owner-builder for the purposes of the Prescribed Payment System and is subject to source deduction rules in the same way as a builder, rather than being liable only to report payments as a householder. The measures in the Bill will ensure that householders are not treated as owner-builders if they do not in fact assume the responsibilities of a builder in relation to a construction project.
This change will address a problem that has arisen because of the practice of some local councils to issue building permits in the name of a home owner regardless of who applies for the permit and carries out the construction work.
The Bill will give effect to the proposal announced on 8 August 1989 to extend those provisions of the Assessment Act that authorise deductions for gifts of the value of $2 or more to specified organisations. The proposal applies to certain public funds established and maintained exclusively for providing money for the acquisition, construction or maintenance of a building that provides residential accommodation for school students from rural areas. Gifts made to such a fund on or after 7 April 1989 will qualify for deduction.
Where a person withdraws an amount from an account opened in relation to a film in the Australian Film Industry Trust Fund, the law imposes a requirement on the person to make a deduction from that amount if it is not, upon withdrawal, to be dealt with in a prescribed manner. The amount withheld is to be remitted to the Commissioner of Taxation and is applied against tax due on an amended assessment withdrawing the deduction previously claimed for the excess contribution to the Trust Fund.
This amendment will adjust the rate of deduction to be applied in respect of investors, other than corporate investors to whom the refund is made. This rate is presently 49 per cent, the equivalent of the maximum rate in the personal tax scale.
The new rate of deduction will be 47 per cent, applicable for withdrawals from film accounts on or after 1 January 1990. The change is in accord with the reduction of the maximum rate in the personal tax scale to 47 per cent on and from that date.