House of Representatives

Taxation Laws Amendment Bill (No. 5) 1990

Taxation Laws Amendment Act (No. 5) 1990

Explanatory Memorandum

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


The main features of this Bill are as follows:

Contributions to obtain priority of access in commercial child care centres (Clauses 3, 4 and 5)

Subsection 47(8) of the Fringe Benefits Tax Assessment Act 1986 exempts from fringe benefits tax certain contributions made by employers (or associates of the employer) to child care centres to obtain priority of access for the children of employees. But for the exemption, such contributions would be taxable as residual fringe benefits.

The amendment proposed by clause 4 will extend the existing exemption to contributions by employers to certain commercial child care centres.

The amendment will, by clause 5 of the Bill, apply in respect of a benefit provided on or after 1 January 1991.

Capital gains tax - involuntary disposal (Clauses 15 and 16)

Clause 15 proposes a number of amendments to section 160ZZK of the Income Tax Assessment Act 1936. That section provides a form of "roll-over relief" (i.e. deferral of tax on accrued gains or the retention of Capital Gains Tax exempt status for original assets acquired before 20 September 1985) where a taxpayer acquires a replacement asset, or repairs or restores an asset, after receiving compensation for the loss, destruction, damage or compulsory acquisition of an original asset. The proposed amendments relate to the retention of pre-20 September 1985 status for replacement assets purchased following the loss or destruction of, or damage to, an original asset as a consequence of a natural disaster.

The Bill will give effect to the decision, announced in the 1990-91 Budget, to modify roll-over relief available where an original asset acquired prior to 20 September 1985 is disposed of involuntarily.

The amendments will apply where an original asset acquired before 20 September 1985 is lost or destroyed directly as the result of a natural disaster. Presently, in such circumstances, a replacement asset will be taken to have been acquired before 20 September 1985 (and therefore remain CGT-exempt) provided that its cost does not exceed 120% of the market value of the destroyed asset at the time of its destruction.

The amendment will remove this limitation only in respect of assets which replace assets destroyed as a consequence of a natural disaster. The 120% limitation will continue to apply to assets which are involuntarily lost, destroyed or disposed of under any other circumstances.

An alternative requirement in relation to assets lost etc., following a natural disaster will be that the replacement asset is "substantially the same" as the destroyed asset. Whether or not a replacement asset is substantially the same as an original asset will be determined having regard to the location, size, value, composition, utility and quality of the replacement asset when compared with the original. This requirement is being introduced to ensure that taxpayers do not retain CGT-exempt status for an asset which is not objectively a "replacement asset".

The amendment will apply to assets acquired in replacement of original assets which were lost or destroyed as a consequence of a natural disaster occurring on or after 28 December 1989, which was the date of the Newcastle earthquake.

Principal Residence Exemption (Clauses 16 and 28(6))

The Bill will amend Division 18 of Part IIIA of the Income Tax Assessment Act 1936, which contains the rules for exempting a taxpayer's sole or principal residence from the capital gains and capital losses provisions. The amendments relate to the availability of the principal residence exemption (PRE) for periods in which taxpayers cease to occupy a dwelling as their sole or principal residence. Subject to the satisfaction of certain conditions, taxpayers may be able to retain the tax exempt status of the dwelling in these circumstances.

Under the existing law, a taxpayer must elect that a dwelling is to be treated as the sole or principal residence for a period of temporary absence. Further, the dwelling must again become the taxpayer's sole or principal residence within a period of four years after it temporarily ceased to be the sole or principal residence to be eligible for the PRE for that period of absence.

The Bill will give effect to the Budget announcement made on 21 August 1990 that the PRE is to apply for an unlimited period during an absence, provided the dwelling is not used to produce income. Where the dwelling is used to produce income during an absence, a taxpayer will be able to maintain the PRE for up to six years. For periods in excess of six years in which the taxpayer continues to be absent and the dwelling is used for income producing purposes, the PRE will not be available. A further change is that it will no longer be necessary for the taxpayer to reoccupy the dwelling prior to disposal for the PRE to be available during the absence.

The amendments will be back-dated to apply to assessments in respect of the 1986 and subsequent years of income.

Eligible termination payments - excessive component (Clauses 8, 9 and 28(3))

This Bill will amend the provisions of the Income Tax Assessment Act 1936 which deal with the excessive component of an eligible termination payment (ETP).

Under the existing law, ETPs can have six possible components. One of those components is the "excessive component" which arises when benefits in excess of a taxpayer's reasonable benefit limit (RBL) are received. The excessive component is included in the taxpayer's assessable income and is taxed at the taxpayer's marginal rate.

The Insurance and Superannuation Commissioner is responsible for determining whether a benefit is in excess of a taxpayer's RBL. If a taxpayer receives a superannuation pension or annuity that is excessive, the Commissioner must advise or request the payer of the benefit to commute to a lump sum the excessive amount of the pension or annuity. The commuted amount is treated as an ETP consisting solely of an excessive component.

Under the existing law, such an ETP can be rolled over. However, nothing in the law prevents it from being taxed when rolled over. This is contrary to the purpose of rolling over an ETP which is to defer the tax on the ETP until it is withdrawn from the rollover institution. Although it may be consistent to not tax an ETP arising on the commutation of the excessive amount of a pension or annuity at the time it is rolled over, such a measure could give rise to substantial compliance and administrative costs due to the recalculation of the components of the ETP rolled over. In order to avoid such costs, the amendments proposed by this Bill will prevent the rollover of an ETP arising on commutation of the excessive amount of a pension or annuity. In addition, the Bill will amend the Income Tax Assessment Act 1936 to ensure that the amount of such an ETP cannot be reduced by the unused undeducted purchase price of the commuted pension or annuity.

The existing income tax law contains certain rules for reducing the excessive component of an ETP by the amount of any non-qualifying component. These rules provide that where there is both an excessive component and a non-qualifying component in relation to an ETP, the excessive component is reduced (to nil, if necessary) by the amount of the non-qualifying component. These rules are based on an assumption that the non-qualifying component of an ETP is included in the calculation of a taxpayer's RBL and therefore the excessive component and the non-qualifying component may cover the same part of the ETP.

As a consequence of amendments to the Occupational Superannuation Standards Regulations, the non-qualifying component is excluded from the calculation of a taxpayer's RBL and therefore the excessive component and non-qualifying component will never cover the same part of an ETP. This Bill will repeal the provisions in the income tax law which reduce the excessive component of an ETP by the non-qualifying component.

These amendments will apply to ETPs made on or after 1 July 1990.

Deductions for personal superannuation contributions (Clauses 12, 13, 27 and 28(5))

This Bill will give effect to the proposal, announced in the 1989 Budget Statement, to increase the maximum amount of tax deductible superannuation contributions that may be made by a particular group of people. Under the existing law, there are two groups of people who qualify for tax deductions in respect of their contributions to superannuation funds to provide themselves with superannuation benefits.

The first group comprises people who do not get any superannuation support from anyone else, i.e., generally self-employed people and employees who do not belong to employer sponsored superannuation schemes. The second group is made up of people who get superannuation support from someone else (usually their employer) but only under so called "3% award superannuation arrangements". At present the limit on tax deductible contributions that may be made by people (eligible persons) in both groups is $3,000 in a year of income. This Bill will increase the limit for the first group from 1 July 1990. The new limit is to be the lesser of :

$3,000, plus 75% of contributions exceeding $3,000; and
the amount of contributions required to fund a benefit equal to the person's reasonable benefit limit (the maximum concessionally taxed benefit that a person can receive during the person's lifetime).

No change is proposed to the limit for the second group.

The Bill will also remove a discretion in the law that allows the Commissioner to treat someone as an eligible person for a year of income even though the person does not qualify as an eligible person for the full year of income.

Tax rebate for superannuation contributions by employees (Clauses 14 and 28(5))

This Bill will also give effect to the proposal, announced on 29 June 1990, to allow a tax rebate for superannuation contributions made by certain employees who do not qualify for tax deductions in respect of those contributions. The base rebate available is 25% of the superannuation contributions in a year of income. But the maximum amount of rebatable contributions is $3,000, which means the amount of rebate is limited to $750. The proposal applies to superannuation contributions made on or after 1 July 1990.

The rebate is intended for people who have superannuation support other than solely under a 3% award superannuation arrangement, where that superannuation support is, in broad terms, not more than $1,600 in a year. To identify this group of people, the Bill will introduce the concept of an "eligible scheme". A person will have to be a member of an eligible scheme in order to qualify for a rebate. An eligible scheme may consist of an individual member of a superannuation scheme or a group of members where the trustee or administrator of the scheme determines that the amount of superannuation support in a year for that person, or the average support for members of the group, does not exceed $1,600.

Another criterion for getting a rebate is that the person's assessable income in the year of income is not bigger than a threshold specified in the law. A person whose assessable income is not more than $25,000 will qualify for the maximum rebate. For each dollar of assessable income over $25,000, the maximum amount of rebatable contributions will be reduced by fifty cents. This means that the rebate cuts out at an assessable income level of $31,000.

Provisional tax penalty (Clause 21, 22, 25, 28(8) and 32)

The Bill gives effect to a proposal announced in the 1990-91 Budget to impose additional tax, by way of penalty, where a taxpayer over-estimates the amount of tax instalment deductions from salary or wages in an application to vary provisional tax.

The proposed penalty will apply in respect of a variation of provisional tax payable by a taxpayer in respect of 1990-91 and all subsequent years of income where:

the existing provisional tax penalty, payable where a taxpayer under-estimates his or her taxable income in an application to vary, does not apply (i.e., the estimate of taxable income in the application to vary is not less than 90% of the actual taxable income for the year); and
in the preceding year, the taxpayer had tax payable on assessment of $3,000 or more and the tax instalments deducted from the salary or wages income were less by $3,000 or more than the tax that would have been assessed on that income, if it had been the only income derived during the year (i.e., the situation where in 1990-91 and subsequent income years provisional tax is to be imposed on salary or wages).

The trigger for the penalty is to be that a taxpayer, in an application to vary in respect of a year, has over-estimated by more than 10%, the tax instalment deductions actually made from salary or wages in the year. The penalty will apply in respect of "lump sum" and instalments of provisional tax.

The amount of the penalty is to be calculated as follows:

for lump sum provisional tax payers, 20% of the over-estimate of tax instalment deductions; and
for instalment payers, 20% per annum (for the "penalty period" as defined in subsection 221YA(1) of the Income Tax Assessment Act) of the shortfall in an instalment by virtue of the taxpayer's over-estimate of tax instalment deductions.

The proposed penalty is not to exceed the amount of penalty that would have applied had the existing penalty structure, where a taxpayer has under-estimated the actual taxable income by more than 90%, been triggered in respect of the provisional tax paid by the relevant taxpayer. This will ensure that a taxpayer will not be liable for penalty on an amount which is greater than the actual tax effect of the application to vary.

The Commissioner of Taxation will have the same power to remit any penalty (additional tax) as under the existing law. Therefore, where circumstances affect the tax instalment deductions made from the taxpayer's salary or wages during the year, and the taxpayer was not aware of the circumstances at the time the application to vary was furnished, the Commissioner may remit the whole or a part of the penalty.

A penalty applies in respect only of an application to vary furnished after the date of introduction of the Bill.

Gifts (Clauses 10 and 28(4))

The Bill will give effect to the proposal announced on 20 September 1990 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 Friends of the Duke of Edinburgh's Award in Australia Incorporated. In accordance with the announcement, gifts made to this incorporated body will qualify for deduction when made on or after 20 September 1990.

In addition, the Bill will amend the Act to extend the period of deductibility for gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited. Gifts to this body are deductible where the gift is for the purpose of the Australian Vietnam Forces National Memorial project. Under an existing provision, only gifts made on or after 1 July 1989 and on or before 30 June 1990 are allowable deductions. The Bill authorises an extension of the period of deductibility by six months, until 31 December 1990.

Exemption of pay and allowances of members of the Australian Defence Force on operational service (Clauses 7, 11, 28(2) and 29)

The pay and allowances earned by members of the Australian Defence Force (ADF), while on operational service in parts of the Middle East in response to Iraq's invasion of Kuwait, will be exempt from income tax.

An ADF member will be taken to be on operational service if the member, or the ADF unit to which the member is attached, is allotted for duty in the operational area in response to Iraq's invasion of Kuwait. The ADF member must also have served in the operational area during some part of that period.

The exemption will also apply to the pay and allowances of ADF personnel attached to units of the Armed Forces of the United Kingdom or the United States of America which are allotted for duty in the operational area in response to the invasion. Additionally, any member who was serving with those Forces in the operational area on 2 August 1990 (the date of the invasion) will also qualify for the concession.

The operational area will comprise :

Bahrain, Oman, Qatar, Saudi Arabia, the United Arab Emirates and Cyprus;
the sea areas of the Gulf of Suez, the Gulf of Aqaba, the Red Sea, the Gulf of Aden, the Persian Gulf and the Gulf of Oman;
certain parts of the Suez Canal and parts of the Arabian Sea and the Mediterranean Sea.

The exemption will apply to pay and allowances earned throughout the period of operational service, which may include periods of service outside the operational area. In general terms, operational service will commence at the time the ADF member leaves Australia and will continue until the time of return. However, these rules may vary according to the time when allotment occurs and the location of the member at that time.

Amendments to the Occupational Superannuation Standards Act 1987 (Clauses 34, 35 and 36)

This Bill will amend subsections 15E(1) and 15H(2) of the Occupational Superannuation Standards Act 1987.

Subsection 15H(2) currently provides that, for reasonable benefit limit purposes, a person may quote his or her tax file number to a payer when the payer makes an eligible termination payment or commences to pay a superannuation pension or annuity. A payer therefore cannot request a person to quote his or her tax file number until the payer has made the payment. In contrast, a person may request another person to quote, for PAYE purposes, his or her tax file number when the person becomes entitled to a payment which in most cases would be before the payment is actually made.

The proposed amendment will allow a payer to request a person to quote his or her tax file number at the time at which the person becomes entitled to receive the payment. This amendment will bring the timing of the quotation of the tax file number on Insurance and Superannuation Commission forms into line with the quotation of tax file numbers on Australian Taxation Office forms.

"Payer" is currently defined at subsection 15E(1) as an approved deposit fund, a superannuation fund, an employer, a life assurance company or a registered organisation that makes an eligible termination payment, a payment of a superannuation pension or a payment of an annuity. That is, a body does not become a payer until a payment has been made.

The proposed amendment to subsection 15H(2) necessitates a consequential amendment to the definition of payer under subsection 15E(1). The definition of payer will now be extended to a body which is liable to make an eligible termination payment or payments of a superannuation pension or annuity. A body can therefore become a payer before a payment is made but not before liability to make the payment arises.

Amendments relating to sex discrimination (Clauses 37, 38, 39 and Schedule)

This Bill will amend certain taxation laws administered by the Commissioner of Taxation so that they comply, as far as possible, with the policy of the Sex Discrimination Act 1984. That Act declares discrimination on the grounds of sex, marital status and pregnancy to be unlawful in a number of areas of community life.

Hitherto the taxation laws have been exempted from the operation of the Sex Discrimination Act by regulations made under that Act. The amendments made by this Bill will reduce the scope of the exemption provided in respect of the tax laws under those regulations. This is a result of the ongoing review process which is part of the Government's National Agenda for Women.

The Bill will insert a definition of "spouse", to include a de facto spouse, in the Income Tax Assessment Act 1936 (the Assessment Act) to apply generally throughout that Act. This will have the effect of removing discrimination between a legally married spouse and a de facto spouse where the latter would otherwise be treated as a single person. In many areas the Assessment Act already applies as if the term "spouse" includes a de facto spouse. The insertion of the definition will necessitate several consequential adjustments to other provisions of the Assessment Act and to the Medicare Levy Act 1986, the Fringe Benefits Tax Assessment Act 1986 and the Taxation (Unpaid Company Tax) Assessment Act 1982.

The Bill will also amend the Assessment Act to remedy other discriminatory features by :

ensuring that expenditure incurred or payments made by a taxpayer for the maintenance of his or her spouse will not automatically be non-deductible where the taxpayer lives separately and apart from the spouse;
removing the qualification of marital status from the trust provisions that deal with income or property subject to a power of revocation by the trustee. The qualification on the basis of age is to be adjusted to apply only for children under the age of 18 years;
ensuring that the application of the provisions that apply to tax certain unearned income of minors at the top marginal rate of personal tax will not be dependent on the marital status of the child; and
changing the rebate allowable in respect of a daughter wholly engaged in keeping house for a taxpayer to a rebate allowable in respect of a child doing the housekeeping, and removing any requirement that a taxpayer who claims such a rebate be widowed.

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

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