Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)MAIN FEATURES
The main features of this Bill are as follows -
Thin Capitalisation Amendments
Amendments proposed in this Bill introduce amendments (announced 30 March 1989) to the thin capitalisation rules in Division 16F of Part III of the Income Tax Assessment Act 1936.
Nostro accounts (Clauses 9, 10, 11, and 31)
Certain amounts owing that relate to nostro account balances are to be excluded from the measurement of foreign debt and foreign equity of a taxpayer who qualifies as a "financial institution" in terms of section 159GZA of the Income Tax Assessment Act 1936.
Financial institutions maintain foreign currency denominated accounts with related foreign banks, termed nostro accounts, for the purpose of clearing international transactions. There may be a delay of a day or more between a deposit into a nostro account and settlement of the relevant debt. Sometimes, due to error, deposits may not be received on time, requiring an overdraft advance by the foreign bank to settle a third party debt.
Under the existing legislation, a credit balance in a financial institution's nostro account cannot be offset against an amount of foreign debt owing to a foreign controller or non-resident associates prior to settlement. Any overdraft advances on a nostro account, at interest, to settle a third party debt would be foreign debt. A credit balance in such an account at the end of a financial institution's income year will be an equity loan back, as an amount owing by a foreign controller to an Australian financial institution.
Under the proposed amendments, where deposits to, and overdrafts on, a nostro account, termed "nostro amounts" are cleared within 10 days, these amounts will be excluded from the measurement of foreign debt of a financial institution. That is, the foreign debt is treated as being settled where a deposit has been made and settlement takes place within 10 days. Where an overdraft is raised to settle a third party transaction this is likewise excluded from the calculation, if the overdraft is repaid within 10 days.
A credit balance in a nostro account, pending settlement, at the end of a financial institution's income year, will not be treated as an equity loan back provided settlement takes place within 10 days of deposit.
It will be a condition for that treatment that the nostro account must be used for the sole purpose of settling international transactions. The exemption is to apply from the 1987-88 year of income.
Vostro accounts (Clauses 9, 11 and 31)
Certain amounts owing that relate to vostro account balances are to be excluded from the measurement of foreign equity of a taxpayer who qualifies as a "financial institution" in terms of section l59GZA of the Income Tax Assessment Act 1936.
Offshore banks maintain Australian dollar accounts with resident financial institutions, called vostro accounts, for the purpose of settling international transactions. Settlement may not occur for a day or more after a deposit is made to a vostro account. An overdraft advance to settle third party debt may be required where, due to error, a deposit is not received on time.
Under the existing legislation, a related foreign bank's credit balance in a vostro account cannot be offset against an amount owing by it to the resident financial institution. If this occurs at the end of the financial institution's income year, its foreign equity in the resident financial institution will be reduced by the amount outstanding.
Under the proposed amendments, where deposits to, and overdrafts on, vostro accounts, termed "vostro amounts", are cleared within 10 days, these amounts will be excluded from the measurement of foreign equity, of a financial institution. That is, these debts are treated as being settled where a deposit has been made and settlement takes place within 10 days. Where an overdraft is advanced to settle a third party transaction this is likewise excluded from the calculation if the overdraft is repaid within 10 days.
This treatment will apply providing a vostro account is used for the sole purpose of settling international transactions. The exemption is to apply from the 1987-88 year of income.
Section 128F securities (Clauses 9, 11, 12 and 31)
This amendment will exclude from the thin capitalisation foreign equity calculation certain debentures issued overseas that attract the section 128F withholding tax exemption. The exclusion will be limited to circumstances where such debentures are held for short periods by a related non-resident entity as dealer, manager or underwriter for the purpose of distribution overseas.
Under the current law, the amount borrowed under those debentures is, in the hands of the associate dealer etc., "an amount owing" to the resident company by the associate, in terms of section 159GZG of the Income Tax Assessment Act 1936. If this amount owing is outstanding at the end of the company's year of income, the foreign equity will be reduced by that amount.
The definition of foreign equity in section l59GZG will be amended to provide a limited exclusion for debentures that qualify for the section 128F withholding tax exemption. The exclusion will only operate if the debentures are placed in the market within 30 days of issue.
The amendment is to apply from the 1987-88 year of income.
Exemption for short-term trade credit amount (Clauses 9, 11, 12 and 31)
The existing provisions for the measurement of "foreign equity" require that the equity be reduced by the balance outstanding at the end of the year of income on all amounts owing to a resident company, a trust, or a partnership by the foreign controller and non-resident associates, or by non-resident associates of a foreign investor.
The definition of foreign equity in section 159GZG of the Income Tax Assessment Act 1936 will be amended to exclude short-term trade credit arising from the export of goods or services. The credit period must not be more than 30 days from the date of invoice to qualify as short-term trade credit.
The amendment is to apply from the 1988-89 year of income.
Resident holding companies (Clauses 13 and 31)
This amendment provides that a resident foreign-owned holding company which partly owns a resident bank will, in certain circumstances, be treated as being offshore for the purpose of measuring the equity of the bank.
The existing thin capitalisation rules enable wholly-owned company groups to consolidate their group debt and their foreign equity for the purpose of the debt:equity ratio test. However, because a partly foreign-owned bank and its resident holding company do not qualify as a resident company group in terms of section 159GZI of the Income Tax Assessment Act 1936, those companies are unable to consolidate their group debt and their foreign equity for the purpose of the debt:equity ratio.
As a consequence, a partly foreign-owned bank with direct borrowings from its foreign parent and non-resident associates has foreign debt but no foreign equity. The net result, under the present law, is that no deduction would be allowed for the interest expense of the bank in relation to the foreign debt.
The proposed amendment will allow the holding company's equity in the resident bank to be treated as foreign equity. A precondition for the application of this amendment will be that the holding company does not have any interest bearing debt. The notional "foreign equity" of the resident bank will be reduced by any interest free debt owing by the holding company to its foreign controller or associates.
The amendment will apply from the 1987-88 year of income.
Alternative measurement of excess foreign debt (Clauses 14, 15, 16, 17, 18 and 31)
Sections 159GZS to 159GZX of the Income Tax Assessment Act 1936 operate to reduce the amount of the deduction that would otherwise be allowable for "foreign debt interest" of a resident company, a partnership, a trust estate or a foreign investor respectively, where the debt:equity ratio prescribed by Division 16F has been exceeded for the year of income.
Under the existing rules foreign debt for a year of income is measured as the greatest total of foreign debt at any time throughout the year of income.
The thin capitalisation rules will be amended to provide an alternative measurement of excess foreign debt. The alternative test will calculate excess foreign debt by applying a weighted average for those days of the year in which the permitted debt:equity ratio is exceeded.
Taxpayers will have the option to use the alternative method of measurement of foreign debt for each year of income. An election to adopt the alternative method may be made at the time of lodgment of the taxpayer's return of income or within such further time as the Commissioner of Taxation allows. Only one method of excess foreign debt measurement may be used for a year of income, or for a part year of income to which section 159GZR of the Income Tax Assessment Act 1936 applies.
Where a taxpayer fails to notify the Commissioner of Taxation of the method of measurement of excess foreign debt, the calculation will be made under the method currently set out in Subdivision C of Division 16F of the Income Tax Assessment Act 1936.
The amendment will apply from the 1988-89 year of income.
Gold mining transitional arrangements (Clauses 19, 20, 23 and 31)
The Bill will modify the application of the transitional arrangements for gold miners, contained in Division 16H of the Income Tax Assessment Act 1936 which removes their income tax exemption with effect from 1 January 1991. The transitional arrangements provide certain concessional relief to ease the impact of the removal of the exemption. The Bill will amend these arrangements to provide an alternative method to calculate residual eligible gold mining expenditure, extend the application of capital gains tax (CGT) transitional provisions and make provision for the treatment of trading stock.
The Bill proposes that, for the purposes of determining the residual eligible gold mining expenditure, a taxpayer be given an option, in respect of all eligible gold mining expenditure on the mining property, to use the actual number of years the mine has been in operation plus the estimate of the future life of the mine held at the end of the 1991 year of income. The existing transitional provisions will continue to enable a taxpayer to use the estimates of the mine life held in the relevant earlier years of income. This is consistent with the treatment accorded to such expenditure in the general mining provisions.
The Bill will also extend the general application of the CGT transitional arrangements to ensure that gold mining assets generally, other than certain exempt mining rights, qualify for the concessional treatment. This treatment allows gains to be determined prospectively from 1 January 1991 in respect of disposals of certain gold mining assets after 31 December 1990. The existing arrangements only apply in respect of certain eligible gold mining and eligible gold transport assets.
Consistent with the treatment of capital gains, the Bill also proposes an amendment which will calculate certain capital losses prospectively from 1 January 1991 where the disposal of the asset is subject to the CGT provisions, i.e. purchased after 19 September 1985 and disposed of on or after 1 January 1991.
To ensure that gold miners are able to calculate their net taxable income for the changeover year of income on a realistic basis, the Bill proposes amendments which will enable taxpayers to utilise the existing trading stock provisions. Gold miners will be able to bring stock on hand at the end of 31 December 1990 into account for the purposes of determining taxable income in a similar way as other taxpayers, either at cost, market or replacement value. The amendments will also ensure that these stock values are used :in the calculation of net exempt income for the part of the changeover year of income prior to 1 January 1991 so that it is consistent with the calculation of taxable income for the remaining period.
An anti-avoidance measure is also proposed which will apply in respect of the first year of income and will ensure that no manipulation of stock values occurs. Where the closing stock of the taxpayer includes an item which was brought into account at 1 January 1991, the value adopted at that date will be the value at which it is returned for closing stock purposes.
Imputation provisions (Clauses 24, 25, 26, 27, 29, 32, 33, 34 and 35)
This Bill will make amendments to the imputation system to remove some unintended consequences that arose from the introduction of a new system for collecting tax paid by companies, superannuation funds and similar entities on income derived during the 1989-90 and subsequent income years. These proposed amendments relate to the imputation system and consequently affect only companies and trusts that are treated as companies.
Under the new company tax collection system most companies are required to make an initial payment of tax of 85'% of their notional income (generally the taxable income of the previous year of income), or an estimate of the actual tax liability for the year of income, no later than 28 July following the end of the year. Companies that do not have to make an initial payment of tax are those whose tax liability is less than $1000 or that are eligible to elect to make a single payment of tax because their tax liability falls within certain limits. Modified rules apply for companies that have adopted substituted accounting periods which have the effect of aligning the dates on which tax payments, etc. are due to those applying companies that balance on 30 June.
Under the existing law where the company has a franking deficit tax liability and makes its initial payment of tax on the basis of its estimated tax liability, the liability to pay franking deficit tax to the extent of that initial payment is waived. Although a franking credit arises when the :initial payment of tax is made, no franking debit arises for the amount of that initial payment that is used to waive the franking deficit tax liability. Similarly, there is no provision for a franking debit to arise when an initial or subsequent payment of tax is refunded.
The existing law treats a subsequent payment of tax that is not a final payment as an initial payment for franking debit purposes. For franking credit purposes subsequent payments are treated as being quite separate from initial payments.
The amendments proposed by this Bill will result in franking debits arising when an initial payment of tax is applied to waive a liability for franking deficit tax and when an initial or subsequent payment of tax is refunded. These measures will apply from the day the Bill receives Royal Assent and any franking debits that would have arisen if the legislation had been in place earlier will arise on that day. Any companies that incurred a franking debit for underfranking as a consequence of anticipating these amendments taking effect will be compensated by way of a franking credit. Any such companies will suffer no disadvantage.
Other amendments proposed by this Bill will modify the way in which a franking debit arises when a subsequent payment of tax is applied, and will prevent an initial payment of tax made during the year to which the payment relates from giving rise to franking credits in that year. These franking credits will arise in the following franking year.
Quarrying (Clauses 8 and 31)
The Bill will effect a minor technical amendment to Subdivision B of Division 10 of the Income Tax Assessment Act 1936, which deals with quarrying operations, that was inserted in the Income Tax Assessment Act 1936 by section 22 of Taxation Laws Amendment Act (No. 2) 1990. It will clarify the treatment of unrecouped exploration and prospecting expenditure for quarrying where the mining right to which the expenditure relates is sold or is disposed of, etc.
The amendment will ensure that the excess unrecouped exploration and prospecting expenditure when the mining right: is disposed of is only reduced by the amount of income, if any, which was exempt from tax by paragraph 23(pa). Any remaining unrecouped exploration and prospecting expenditure in respect of that right may be carried forward for deduction in subsequent years against income from any source.
The amendment will apply to exploration and prospecting expenditure incurred on or after 16 August 1989 which is the date of effect of the original amendment extending the general mining provisions to include quarrying operations.
Rebates for residents of isolated areas (Clauses 7, 30 and 31)
The Bill will give effect to the proposal announced in the 1990-91 Budget to amend the income tax zone rebate arrangements, in response to a Review of Income Tax and Social Security Arrangements in Remote Areas.
Under the existing law, residents of the special area in Zone B are eligible f or a rebate in respect of a year of income of $938 plus 20% of the relevant rebate amount. ( The relevant rebate amount is calculated by reference to a taxpayer's dependants). This Bill proposes to increase the part of the zone rebate that is based on the rebates in respect of a taxpayer's dependants from 20% to 50% of the relevant rebate amount. This means that the level of rebate for residents of the special area in Zone B will be the same as that for residents of the special area in Zone A.
The Bill also proposes to include Lord Howe Island in Zone A. This means that due to its distance from the nearest population centre of 2,500 or more, it will be treated as being in the special area in Zone A. Further, Nhulunbuy in the Northern Territory is to be included in the special area in Zone A (currently it is in Zone A) and King Island, Tasmania and the Furneaux Group of islands, Tasmania are to be included in Zone B (currently these islands are not in a zone). These amendments mean that the residents of the relevant areas either become eligible for a zone rebate or for an increase in the amount of the zone rebate .
These changes will apply to assessments in respect of income of the 1990-91 and subsequent years of income.
Taxation treatment of profits and proceeds from the disposal of live stock due to contamination (Clauses 5 and 31)
The Bill will make a minor technical amendment to subsection 36AAA(24) to allow an election for a year of income to be made when live stock is disposed of rather than when destroyed.
Gifts (Clauses 6 and 31)
At present gifts to the Australian College of General Practitioners are allowable deductions for income tax purposes under the gift provisions of the Income Tax Assessment Act 1936 where the gifts are for the purpose of education or research in medical knowledge or science. Gifts to the Australian Sports Aid Foundation are also allowable deductions under the gift provisions of the Income Tax Assessment Act 1936.
The College changed its name on 23 June 1970 to the Royal Australian College of General Practitioners and the Foundation changed its name on 2 August 1989 to the Australian Sports Foundation. This Bill will amend the gift provisions so that gifts to the renamed organisations are deductible from the date on which they changed their names.
Simplified form of reference to "Year of income" (Clause 4)
This Bill will introduce a new form of reference to a particular "year of income" in the Income Tax Assessment Act 1936 intended to simplify the drafting process.
Initial payment of tax (Clause 28)
The Bill will amend collection provisions relating to companies and certain funds in the Income Tax Assessment Act 1936 to make it more clear that an initial payment of tax, due 28 days after the end of a year of income, is due and payable on the relevant day.
Amendment of the Taxation Laws Amendment Act (No. 2) 1990 (Clauses 37 and 38)
The Bill will also make an amendment to correct a drafting error that occurred when amending a definition in Taxation Laws Amendment Act (No. 2) 1990.
A more detailed explanation of the provisions of the Bill is contained in the following notes.