Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)
The main features of this Bill are as follows:
Since the introduction of the capital gains and capital losses provisions contained in Part IIIA of the Act, there has been considerable debate about the basis on which those provisions would apply on the disposal of what may be referred to as a "partnership asset".
This uncertainty has arisen because, in general law, a partnership is not a separate legal entity. However, to some extent, this position is modified for income tax purposes by Division 5 of Part III. This provides for a partner to include as assessable income his or her share of the net income of the partnership. In turn, the "net income" is broadly what would have been the taxable income of the partnership if it were a resident taxpayer. It is generally accepted that, as a consequence of this treatment, the term "taxpayer" when used in the Act includes a reference to a partnership.
In relation to the application of Part IIIA to partnerships, the Commissioner of Taxation issued a ruling on 22 June 1989, IT 2540, which sets out his views on how CGT liabilities are to be calculated on the disposal of partnership assets.
This approach is based on the premise that a partnership is not a separate legal entity and that legal title to partnership assets must therefore remain vested in the individual partners, even though any one of those individual partners may not have separate title to any specific asset. Because the assets are owned by the individual partners, it is to the individual partners that gains or losses accrue on the disposal of any of the partnership assets.
The purpose of the amendments is to remove any uncertainty relating to the treatment of partnership assets under the provisions of Part IIIA by making it clear that it is the individual partners who will account for capital gains and losses on disposals of partnership assets. The amendments are not intended to alter the manner in which Part IIIA applies to such assets and instead are designed merely to clarify the existing operation of the law.
The key amendments proposed by the Bill in relation to the capital gains tax treatment of partnership assets provide that:
- a partner's interest in a partnership asset will be treated as a separate asset for the purposes of Part IIIA; and
- in determining the "net income" of a partnership in accordance with Division 5 of Part III, the partnership will not be taken to be a "taxpayer" for the purposes of Part IIIA.
The combined effect of these amendments makes it absolutely clear that any capital gains tax consequences of the disposal of a partnership asset will be accounted for by the individual partners, and not the partnership.
A number of other significant amendments are proposed by the Bill to clarify the operation of Part IIIA in relation to the disposal of partnership assets. The existing "no double tax" provisions, subsection 160ZA(4), will be "mirrored" by a new provision which will apply where a gain accrues to an individual partner on the disposal of an interest in a partnership asset but, in respect of the disposal of that asset, an amount has also been included in the determination of the partnership's "net income" under section 90.
An amendment of similar effect is proposed to section 160ZK to enable the determination of the "reduced cost base" of a partner's interest in a partnership asset to take account of deductions allowable to the partnership in respect of the asset in calculating its net income.
The other significant amendment proposed relates to the availability of CGT rollover relief (the deferral of tax on accrued gains or the retention of the CGT - exempt status of an asset originally acquired before 20 September 1985) following the transfer of a partnership asset to a company wholly-owned by the partners. A new rollover provision will be inserted to ensure that CGT rollover relief will be available for such asset transfers.
Finally, the Bill proposes some consequential technical amendments. For the most part, they will remove references to "partnerships" which might imply that, for the purposes of Part IIIA, a partnership may "own" an asset.
Each of the amendments proposed in relation to the CGT treatment of partnership assets will apply to disposals of assets after the date of introduction of the Bill.
The Bill proposes a number of amendments to the CGT rollover provisions contained in section 160ZZO of the Act for transfers of assets between group companies. Broadly speaking, the existing rollover requirement that a transferee (the recipient) of an asset issue to the transferor shares or securities as consideration for the transfer will be removed. However, a transferred asset will now be deemed to have been disposed of at market value (or, where relevant, to have lost its pre 20 September 1985 and consequential CGT - exempt status), if the group relationship between the transferor and transferee subsequently ceases.
The CGT rollover provisions for transfers of assets between group companies originally included in Part IIIA (when the capital gains and capital losses provisions were first enacted in 1986) were capable of significant abuse. Companies could avoid CGT by first transferring a CGT-liable asset to a newly incorporated company (or shelf company) for shares, which under the general cost base rules of section 160ZH then assumed a cost base equal to the market value of the transferred asset. The shares could then be sold at that market value tax-free, notwithstanding the effective change in ownership of the transferred asset. To overcome these problems, section 160ZZO was amended and new section 160ZZOA inserted by the Taxation Laws Amendment Act 1990.
Broadly speaking, those amendments to section 160ZZO limited the availability of rollover relief to circumstances where the transferee company issues to the transferor shares or loans equal in value to that of the transferred asset. The cost base, indexed cost base or reduced cost base of such shares or loans are then the same as those of the transferred asset. The only exception to this requirement is where an asset is transferred in specie from a subsidiary to a parent company, in which case a precondition for the availability of a rollover is that no consideration is payable in respect of the asset's transfer. However, where such a rollover is obtained, the cost bases of shares or interests in the subsidiary are then reduced.
In response to some concerns expressed that the changes impose considerable compliance difficulties, the Bill proposes amendments (to apply to asset transfers from 7 December 1990) which will effectively see a return to section 160ZZO in its original form. That is, it will not be relevant in determining the availability of the rollover whether consideration is paid in respect of the asset transfer.
However, to ensure that the original anti-avoidance objectives are achieved, the proposed amendments will deem a post 19 September 1985 "rolled over" asset to have been disposed of at market value if the group relationship between the transferor and transferee companies subsequently ceases. A pre 20 September 1985 rolled over asset will lose its CGT exempt status by being deemed to have been acquired by the transferee at the date that the group relationship ceases. In both cases, the transferee will be deemed to reacquire the asset at its market value on that date.
An exception from the deemed disposal rule will be available where the reason for the group company relationship ceasing is the liquidation of the transferor company, on the reasoning that the real underlying ownership of the transferred assets would not have changed in such cases.
The Bill also proposes a number of amendments relating to record keeping requirements following the "rollover" of an asset pursuant to s.160ZZO (as proposed to be amended). For a period of 5 years after the cessation of the group relationship between transferor and transferee (the time of deemed disposal of the transferred asset), or from the time the asset is actually disposed of by the transferee, the transferee will be required to maintain records of the circumstances of the rollover and of the group relationship with the transferor. The penalty for failure to comply with this requirement will be $3000.
To ensure consistency with changes made by the Taxation Laws Amendment Act (No.5) 1989 to record keeping requirements contained elsewhere in the Act, the Bill also proposes other amendments to section 160ZZU to reduce the period of time for which records must be kept to 5 years, and to increase the penalty for non-compliance with the requirements of the section to $3000.
The Bill proposes some anti-avoidance amendments which will apply where assets are transferred for consideration which is less than their indexed cost base (or, in some cases, market value) between companies sharing 100 per cent common ownership. In these cases, cost base adjustments to shares held in (or, in some cases, loans made to) the transferor company will be made to ensure that no tax advantages (capital loss creation or capital gain reduction) arise in respect of those shares. However, so that the transfer of assets between commonly owned companies is tax-neutral, the Bill also proposes to increase the cost bases of shares in the transferee (recipient of the asset) in some circumstances. The proposed amendments will not apply where the transferee company gives consideration equal to or greater than the asset's indexed cost base (or, if lower, the asset's market value) rather than make the cost base adjustments that would be necessary if a lower consideration is paid.
The CGT-avoidance opportunities available to companies sharing 100 per cent common ownership which give rise to these amendments can be best illustrated by a simple example. Assume Coy. A owns two subsidiaries, Coy. X and Coy. Y. Assume that Coy. A has subscribed $1000 share capital to each of the subsidiaries which in turn have each acquired an asset at a cost of $1000. Assume then that Coy. X transfers its $1000 asset to Coy. Y for no consideration. Because the transaction is not at arm's-length, subsection 160ZD(2) would deem the disposal consideration to be the asset's market value ($1000) so that Coy. X would not realise a capital loss on the transfer.
The avoidance concerns arise at the nest layer of ownership. Because Coy. X no longer owns any assets, the shares in it owned by Coy. A are in turn worthless. However, as Coy A has a cost base of $1000 for those shares, it can trigger a $1000 capital loss on the disposal of the shares (eg. by liquidation or third- party sale of the Coy. X shell). Although the tax benefit is, to some extent, offset by an increased accrued gain on the shares in Coy. Y (now worth $2000 with a cost base of $1000), a significant avoidance opportunity is available because of the capacity to obtain a tax benefit for the "loss" on disposal of the Coy. X shares, notwithstanding that ownership by the group of underlying assets has not changed.
To overcome this problem, the Bill proposes to include a new, general, anti-avoidance provision in Part IIIA which will apply to disposals of assets occurring after 6 December 1990. This provision will potentially apply to all asset transfers between any companies sharing 100 per cent common ownership. A crucial condition for the application of the anti-avoidance provision will be that consideration paid on the asset's transfer is less than its indexed cost base. If consideration is paid equal to or greater than the asset's indexed cost base, the anti-avoidance provision would not apply. This is an important feature of the proposed amendments. It provides companies sharing common ownership with a simple means of avoiding the application of the new provisions. Alternatively, where the indexed cost base of an asset at the time of transfer is greater than its market value, companies only need to pay consideration equal to that market value to avoid the application of the provisions.
Where these new provisions do apply, the cost base, indexed cost base and reduced cost base of any shares (or other interests, i.e. loans) held either directly or indirectly in the transferor will be reduced. That reduction amount will be the difference between the actual consideration received (including the amount of any liabilities assumed by the transferor) and the amount of the asset's cost base, indexed cost base or reduced cost base, as the case may be. However, if the asset's market value is less than any of these amounts, the appropriate cost base reductions would be made by reference to the difference between the actual consideration and the market value. An exception to these rules may apply in limited cases where a company acquired assets prior to becoming a group company, and those assets had increased in value at the time that the company became a group company. In these cases, if necessary, the adjustment to the cost bases of shares (or loans) in the transferor could be made by reference to the difference between actual consideration paid for the asset's transfer and the cost base, indexed cost base or reduced cost base of those shares (or loans).
Where cost base adjustments are made to shares (or loans) in a transferor, a compensatory adjustment to shares (or loans) in the transferee may also be necessary in some circumstances. In the examples outlined, the cost base of A's shares in X would be reduced by $1000. However, to prevent double taxation, a matching increase of $1000 to the cost base of A's shares in Y would be needed.
The compensatory adjustments will normally be required only where the transferee and transferor companies are not in a holding company/subsidiary relationship i.e. adjustments would only be necessary where assets are transferred "sideways"' from one subsidiary company to another. For asset transfers "up the line" (i.e. from a subsidiary company to any holding company, whether direct or indirect), no adjustment to the cost base of shares in the transferee will be necessary, because that cost base amount should, in any case, already reflect the assets originally owned by the transferor.
Where compensatory adjustments are to be made to shares (or loans) in the transferee, the maximum cost base increase will be limited to the amount by which the cost base, indexed cost base or reduced cost base of directly held shares (or loans) in the transferor have been reduced.
Another matter to note concerns the determination of both the reduction and compensatory adjustments that are needed where a mix of both pre 20 September 1985 and post 19 September 1985 shares (or loans) in the transferor and transferee are involved. The cost base reduction will be made only to post 19 September 1985 shares or loans in the transferor, up to the amount of the cost base, indexed cost base or reduced cost base, as the case may be, of those shares or loans. Also, those adjustments will be proportionate to the extent to which the particular shares or loans are representative of the total value of the post 19 September 1985 shares or loans in the transferor. In addition, reduction adjustments will be made first to shares, and only to loans if thereafter required. The same principles will apply in determining the cost base reduction of both direct and indirect shares or loans in the transferor.
Similar rules will apply in determining the compensatory adjustment to direct and indirect shares held in the transferee following the transfer of an asset, in circumstances where cost base reductions are necessary. The compensatory adjustment will be limited to the amount by which the cost base, indexed cost base or reduced cost base of shares (or loans) held directly in the transferor are to be reduced. However, only "post" shares will be eligible for the adjustment, which in turn will be proportionate to the extent to which the particular shares are representative of the total value of shares held in the transferor.
The Bill will give effect to the measures announced in the 1990-91 Budget to:\
- cancel the franking surplus of mutual life assurance companies and government insurance offices at 21 August 1990 and deny them the right to maintain a franking account from that date; and
- reduce the franking credits arising to non-mutual life assurance companies from the beginning of the first franking year following introduction of the legislation into Parliament.
In addition, the Bill will provide for non-mutual life assurance companies to receive a franking credit for 20 per cent of the franked amount of dividends received on assets included in insurance funds.
Under the existing law all companies, including life assurance companies, that are sufficiently resident in a year of income derive franking credits on the happening of events that include the making of an initial or further payment of company tax, the receipt or notional receipt of a company tax assessment or an amended assessment increasing tax assessed and on the reduction of a foreign tax credit. Circumstances in which franking debits arise include those where company tax payments are applied in an assessment, tax liability is reduced by an amended assessment and there is an increase in a foreign tax credit.
Franking credits accrue to companies so that they can pass imputation credits on to shareholders in the form of franked dividends. It is a fundamental rule of the imputation system that a company paying a frankable dividend is required to frank that dividend to the extent. The surplus in the franking account on any particular day is the amount by which franking credits exceed franking debits.
Mutual life assurance companies and government insurance offices do not have shareholders to whom franked dividends can be paid and yet the existing law allows these companies to accumulate franking credits. This Bill will remedy this inappropriate outcome by:
- cancelling the franking surplus held by each mutual life assurance company and government insurance office at 21 August 1990; and
- denying these companies the right to maintain a franking account from 21 August 1990 by providing that they cannot derive franking credits and franking debits.
Non-mutual life assurance companies have shareholders as well as policyholders. The tax liabilities of these companies that give rise to franking credits include tax on income derived from assets included in their insurance funds (fund income). The ability of a non-mutual life assurance company to allocate this income to shareholders is governed by the Life Insurance Act 1945. For example, in the case of the surplus derived from policies entitled to share in surpluses, such companies may only distribute to shareholders 25 per cent of the amount of the surplus derived from those policies that is allocated to policyholders (ie. 20 per cent of the total surplus allocated).
The Bill will have the effect that from the commencement of a non-mutual life assurance company's first franking year following the introduction of the Bill into Parliament, the franking credits otherwise available will be reduced in the following circumstances:
- the making of an initial payment of tax (section 160APMA);
- the making of a further payment of tax (section 160APMB);
- the receipt of a company tax assessment (section 160APN);
- the notional receipt of a company tax assessment (section 160APNA);
- the receipt of an amended assessment increasing tax (section 160APR); and
- a reduction in foreign tax credit allowable (section 160APT).
The relevant reduction will be achieved by calculating a franking debit in relation to each franking credit. The franking debit will be determined by the application of a formula that calculates the debit to be 80 per cent of the franking credit that can be attributed to the tax on fund income. The tax on fund income is the difference between tax on taxable income and tax on the non-fund component of taxable income.
Where a franking credit arises in relation to an amended assessment increasing tax or a reduction in foreign tax credit, the franking debit will be 80 per cent of the difference between the increased tax or reduced foreign tax credit and the amount of the increase or reduction that can be attributed to non-fund income (i.e., the amount of the increased tax or reduced foreign tax credit that can be attributed to fund income).
At the time of making an initial or further payment of tax the amount of taxable income and the non-fund component of taxable income are unlikely to be readily available for the year of income to which the payment relates. The franking debit for these payments will therefore be calculated on the basis of the previous year's tax assessed and the tax on the non-fund component of taxable income for the previous year.
Just as franking credits arising to non-mutual life assurance companies are to be reduced by a related franking debit, franking credits will also reduce franking debits. The franking debits to be reduced are those arising in the following circumstances:
- the application of an initial payment of tax (section 160APYA);
- the application of further payments of tax (proposed section 160APYAA);
- the refund of a payment of tax (section 160APYB);
- the receipt of an amended company tax assessment reducing tax (section 160APZ); and
- the allowance of a foreign tax credit (section 160AQA).
The amount of the reducing franking credit will be calculated under formulae applying the same principles as those used to calculate the reducing franking debits. That is, the formulae will calculate 80 per cent of the franking debit attributable to the tax on fund income, being the difference between tax on taxable income and tax on the non-fund component of taxable income.
The reducing franking credit on the application or refund of initial and further payments of tax will also be calculated by reference to the previous year's tax liability. The amount thus calculated will therefore correspond to the reducing franking debit in respect of the franking credit that arose when the payments were made.
Under the existing law franked dividends received by a life assurance company, either directly or indirectly through a partnership or trust, from assets included in its insurance funds do not give rise to a franking credit. Such companies are treated for imputation purposes in the same way as individuals and are entitled to a franking rebate for franked dividends received. No intercorporate dividend rebate is allowable in respect of those dividends.
The Bill will amend the existing law by providing for a franking credit of 20 per cent of the franked amount of dividends paid on assets included in insurance funds that are received by a non-mutual life assurance company, either directly or indirectly through a partnership or trust. The proportion of 20 per cent is consistent with the limit on the proportion of the tax liability on fund income that will be able to generate franking credits. The increased franking credit will arise in respect of franked dividends received by the company from the beginning of its first franking year following the introduction of the Bill into Parliament.
Although a franking credit will arise for 20 per cent of the franked amount of dividends received by non-mutual life assurance companies, the company will still be entitled to a franking rebate for the whole amount of the franked dividend. The dividends will also continue to be ineligible for the intercorporate dividend rebate.
The Bill will provide for the tax treatment of various bereavement payments made under the Social Security Act 1947, the Veterans' Entitlements Act 1986 and the Seamen's War Pensions and Allowances Act 1940.
Prior to amendments made by the Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989, special temporary allowances and funeral benefits were payable in certain circumstances. The special temporary allowance was payable to a surviving pensioner by fortnightly instalments for 12 weeks following the death of his or her pensioner spouse. In that 12 week period, the surviving pensioner continued to receive the amount of pension that would have been payable if the spouse had not died. In addition, the surviving pensioner was paid an amount, called a special temporary allowance, equal to the pension that would have been payable to the deceased spouse if he or she had not died. A greater amount was paid if the amount that would have been payable to the surviving pensioner as an unmarried person was larger than the sum of the amounts that would have been payable to the surviving pensioner and the deceased spouse if he or she had not died.
The special temporary allowance and funeral benefit were not subject to tax. Eligibility to these payments, now known as bereavement payments, has been extended and this Bill provides for the tax treatment of the new payments.
Bereavement payments are generally made in a lump sum and because of the way in which they are calculated can be either larger or smaller than the total amount of the payments that they replace. This Bill proposes to amend the Principal Act, so that the tax treatment of payments received in respect of the 14 weeks (extended from the previous 12 weeks) bereavement period is broadly the same as that which would have applied if bereavement payments had not replaced the special temporary allowance and funeral benefit.
The Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989 also included changes so that there are now a number of new entitlements not previously covered by the former special temporary allowance.
In respect of the new entitlements, the additional pension payment that is paid following the death of a prescribed pensioner without a pensioner spouse, and the payment made to a third party in the situation where the death of the first deceased pensioner is not notified until after the spouse has also died, will be exempted from tax.
In addition, the continuation of carer's pension for 14 weeks after the death of the person (not being the carer's spouse) being cared for, will be exempt in certain circumstances where the recipient is under age pension age and assessable where the recipient is age pension age or over. Where sole parent's pension is continued for 14 weeks after the death of the only qualifying child such pension payments will continue to be assessable income. The Bill also proposes to exempt the bereavement payment made to a person who was in receipt of a child related payment. This bereavement payment is made in respect of the period of 14 weeks after the child's death.
These changes apply in relation to deaths occurring on or after 1 January 1990.
A bereavement payment is, for deaths occurring on or after 19 December 1989, payable under the Veterans' Entitlements Act 1986 to a disabled veteran's surviving spouse for a period of 12 weeks following the date of death. A similar payment is made to the surviving spouse of a disabled Australian mariner under the Seamen's War Pensions and Allowances Act 1940. This Bill proposes to exempt these bereavement payments from tax.
The Bill will authorise a change to the rules for deductibility of bad debts written off by banks and other financial institutions who carry on the business of the lending of money. No deduction is to be allowed for bad debts of a foreign branch of a money lender where income from the loan has not been included in the assessable income of the taxpayer because of the operation of the foreign branch profits exemption available under new foreign income measures for branches in comparable tax countries. This change will give effect to the 1990 Budget Statement concerning the matter.
Where only some of the income derived from a debt has been assessable -e.g., a debt has been transferred from a branch in a comparable tax country (a listed country) to a branch in a low tax country (an unlisted country) or Australia - the amendment provides for an apportionment approach. In general, the apportionment will operate on the basis of the ratio of the number of days the debt accrued assessable income to the number of days since the debt was created or acquired until it was written off. However, where the debt was acquired by the money lender from an associated party, the amount of the deduction will depend on the time during which the debt produced assessable income of the money lender and the total life of the loan. This special rule is to prevent tax avoidance.
The proposed amendments will apply in respect of new debts created or acquired after the earliest of the commencement of the taxpayer's 1990-1991 income year (including a substituted accounting period in lieu thereof) or 21 August 1990. A full deduction will continue to be allowable for bad debts arising in relation to existing loans that have generated assessable income, including in respect of debts created under a contract entered into before the taxpayer's commencement date and certain debts which have been rolled over or had their term extended.
For taxpayers generally, capital expenditure other than on plant or equipment used, or installed for use, in income production is generally not deductible. However, special deductions are available to taxpayers for capital expenditure incurred by them in connection with prescribed mining and petroleum activities. In short, unless expressly excluded, all capital expenditure incurred by a mine or well operator in carrying on prescribed mining or petroleum operations can be deducted or amortised.
These provisions are limited to activities within Australia (including for this purpose certain adjacent areas of its continental shelf). Before the introduction of the foreign tax credit system (FTCS), this was appropriate because foreign income was generally exempt from Australian tax. With the introduction in 1987 of the FTCS, however, the income of a foreign branch of an Australian company became taxable in Australia.
From 1990-91, under the new foreign income measures contained in the Taxation Laws Amendment (Foreign Income) Bill 1990, the mining income of Australian companies that is derived through a mine in a comparable tax country (a listed country) will be generally exempt from Australian tax. However, mining income derived through a mine in a low tax country (an unlisted country) will be taxed in Australia. Income derived from mining in an unlisted country by an Australian controlled foreign company resident in a listed country could also be taxed in Australia.
Although mining and petroleum companies are able to write off a wider range of capital expenditure (in relation to activities conducted within Australia) than other companies, this benefit is generally not intended to be concessional. Rather, it is directed at obtaining tax neutrality - the capital assets associated with a mine typically have little or no value after the mine ceases operation and it is, therefore, appropriate to allow write off. The same reasoning applies wherever mining activities that produce assessable income are carried on. Accordingly, there is no valid reason for restricting these deductions to mining activities performed in Australia. When deductibility is extended to foreign mining activities that produce assessable income, the foreign loss quarantining provisions of the FTCS will provide a sufficient measure of revenue protection by ensuring that Australian mining companies cannot set off foreign exploration costs against Australian source income.
Similar issues arise in connection with deductions available for industrial property (eg, patents, copyrights and designs) and for capital expenditure on certain buildings that generate assessable income.
This Bill will give effect to the proposal announced in the 1990-91 Budget to extend, from 7.30pm Eastern Standard Time (EST) on 21 August 1990, the deductions available under Division 10, 10AAA, 10AA, 10B and 10D of Part III of the Income Tax Assessment Act 1936 for capital expenditure in relation to mining, petroleum or mineral transport activities, industrial property and certain buildings to relevant expenditure incurred offshore in relation to such activities, industrial property and buildings which generate or are carried on, or used for the purpose of gaining or producing assessable income.
Division 10 gives recognition to the wasting nature of mineral deposits and quarries by allowing deductions for capital expenditure, some of which would not normally be deductible - generally over the life of the mine or quarry.
Some examples of allowable deductions are expenditure
- in preparing a site for mining operations;
- on buildings, other improvements and plant necessary for carrying on the operations;
- in providing water, light or power for use on, or access to or communications with, the site of mining operations;
- on housing and welfare facilities associated with general mining operations;
- on buildings or plant used in connection with the operation of a treatment plant; and
- in acquiring mining or prospecting rights.
The amendments proposed in this Bill will extend the scope of Division 10 to expenditure incurred after 7.30pm EST on 21 August 1990 on operations carried on by Australian residents out of Australia provided those operations are carried on for the purpose of gaining or producing assessable income.
Division 10AAA allows a deduction for expenditure of a capital nature incurred in connection with facilities used primarily and principally for the transport of minerals and quarry materials obtained from mining and quarrying operations.
Some examples of allowable deductions are expenditure:
- on the cost of an eligible railway, road, pipeline or other transport facility;
- an earthworks, bridges, tunnels necessary in the construction of the facility; and
- on port developments such as initial dredging and navigational aids.
The amendments proposed in this Bill will extend the scope of the Division to expenditure incurred on facilities located out of Australia provided those facilities are used for the purpose of generating assessable income.
Division 10AA provides a tax structure to the petroleum industry that is similar to that applicable to the mining industry. The special tax treatment applying to the petroleum industry enables most items of capital expenditure to be deducted over the estimated life of the oil well.
Some examples of allowable deductions are expenditure:
- on exploration and prospecting;
- acquiring a petroleum right;
- on cash bids for off-shore petroleum exploration permits;
- providing water, light or power for use on the site; and
- housing and welfare facilities.
The amendments proposed in this Bill will extend the scope of the Division to expenditure incurred after 7.30pm EST on 21 August 1990 by Australian residents in relation to operations out of Australia provided the operations are conducted for the purpose of producing assessable income.
Division 10B provides for the deduction of expenditure of a capital nature incurred on the development or purchase of an Australian patent, registered design or copyright (i.e., a unit of industrial property).
Australian films would generally qualify as such a unit of industrial property under Division 10B and the Division provides an alternative basis for claiming deductions to the more usual concessional treatment under Division 10BA.
The scope of the division is to be extended to allow deductions in relation to relevant expenditure incurred after 7.30pm EST on 21 August 1990 industrial property granted, registered or subsisting outside Australia that generate assessable income. However, the Bill does not extend the provisions relating to Australian films to non-Australian films.
Division 10D provides a special system of deductions for:
- capital expenditure incurred on the construction, extension, alteration or improvement of buildings in Australia which are used for the purpose of producing assessable income; and
- capital expenditure incurred on the construction, extension, alteration or improvement of buildings used for the purposes of carrying on research and development activities in Australia where the activities are for the purpose of producing assessable income.
As is the case with the other special deduction amendments proposed by this Bill, the scope of the Division is to be extended to include offshore expenditure incurred after 7.30pm EST on 21 August 1990 where the buildings are used for the purpose of producing assessable income or the research and development activities are carried on for the purpose of producing assessable income.
Certain payments made and benefits provided by a CFC that is a resident of an unlisted country that have the effect of making the profits of the CFC available for the use of its shareholders and their associates are to be deemed to be dividends paid by the CFC. Where a CFC paid a deemed dividend in a year of income of a taxpayer and the taxpayer's return of income is made on the basis that the deemed dividend was paid, the taxpayer will generally be entitled to the normal foreign tax credits or any exemption from tax in relation to that dividend. These credits and exemptions are to be denied where the return was not made on the basis that the payment was a deemed dividend but the deemed dividend was discovered subsequently, for example, on a tax audit.
The effect of the amendment will be to enable a taxpayer to generally qualify for foreign tax credits and any exemption that may be available in relation to a dividend where the taxpayer notifies the Commissioner of Taxation, within one year of the end of the year of income in which the deemed dividend was paid, that such dividend was paid.
The amendments will also correct a technical deficiency in the current provisions by stating explicitly that they will apply where the whole or any part of the deemed dividend is required to be included in the assessable income of a resident taxpayer or would have been required to be so included but for any exemption or exclusion provided in relation to a dividend.
The accruals tax measures refer to a system of taxation under which certain income of a controlled foreign company (CFC) may be included in the assessable income of resident taxpayers who hold substantial interests in that CFC.
The interests in the CFC may be held by resident taxpayers indirectly through entities in listed (comparable-tax) countries. Circumstances could arise where an item of income of the CFC that would be included in the assessable income of resident taxpayers may also be subject to tax in the listed country under its accruals tax measures as income of the listed country entity. The effect of this would be that income tax may be payable on that item of income by the listed country entity as well as by the resident taxpayer.
Presently, the accruals tax measures do not contain any provision for the grant of relief from double accruals taxation in these cases. The proposed amendments will provide relief by excluding from the assessable income of the resident taxpayer the income of the CFC that has been subject to tax in the listed country under its accruals tax measures. This exclusion will apply only where the resident taxpayer's interest in the CFC is held through a listed country entity and only in relation to the share of the income of the CFC that is attributable to that interest.
The exclusion from attributable income is in keeping with the general policy underlying the accruals tax system that the income of a CFC that has been subject to tax in a listed country at a level of tax generally comparable to that of Australia's will not be subject to Australian tax on a current basis.
Income derived by a CFC that is taxed in Australia by assessment is to be excluded from the calculation of the attributable income of the CFC. That income is also classified, under the accruals tax measures, as an exempting receipt. A non-portfolio dividend paid by a foreign company to a resident company out of exempting receipts are to be exempt from tax. These exemptions and exclusions are provided to avoid double Australian taxation of income that has been taxed by assessment on the normal basis in Australia.
Moreover, certain exempting receipts are not taken into account in determining whether a CFC passes the active income test.
As a general rule 10 per cent of premiums paid or payable to a non-resident insurer is treated as taxable income, unless the Commissioner is satisfied that the actual profit or loss made by the insurer can be calculated. Where the full information is available the insurer's taxable income would be calculated in the normal way.
A person carrying on an insurance business in Australia may make an election and as a result be treated as an agent for the non- resident insurer in respect of reinsurance out of Australia. Where an election has been made, the liability to tax will generally arise in respect of 10 per cent of the premiums paid or credited to the non-resident insurer.
The amendments to be made by this Bill will ensure that where an assessment is made treating 10 percent of the premiums as income, the premiums will not be treated as included in assessable income for Australian tax purposes. Accordingly, they will not be excluded from the calculation of attributable income or in applying the active income test and will not be treated as exempting receipts.
The following amendments to the taxation law relating to capital gains are necessary to ensure a continuity in the capital gains tax treatment of assets owned by a company or trust which changes its residence.
Under existing law, where a company, trust estate or a unit trust which is a resident of Australia becomes a resident of a listed or an unlisted country, all assets held at that time (other than taxable Australian assets and assets acquired before 20 September 1985) are taken to have been disposed of on the change of residence for consideration equal to the market value of the assets. This deemed disposal gives rise to a tax liability on the accrued capital gain.
Where a company changes residence from Australia to a listed or unlisted country and is a CFC following the change of residence, modifications to the capital gains tax provisions - as they are to apply in the calculation of attributable income - are required in respect of the disposal of assets (other than taxable Australia assets) by the CFC. Without amendment, assets owned by the company before the change of residence may be subject to double capital gains taxation. The proposed amendments will determine a cost base for assets owned by the company on a change of residence and deem all assets of a company (other than taxable Australian assets) to have been acquired on the date of change of residence. This will remove the possibility for double taxation and give assets other than taxable Australian assets a cost base for the purpose of the calculation of attributable income.
Corresponding amendments are proposed for resident trusts that become non-resident.
Subsection 160M(12) applies where a non-resident taxpayer becomes a resident of Australia. The subsection deems the taxpayer to have acquired at the time of change of residence all the assets owned by the taxpayer at that time, other than taxable Australian assets and assets acquired prior to 20 September 1985. The effect of subsection 160M(12) is that the part of any capital gain on the assets deemed acquired that accrues after the taxpayer becomes an Australian resident is made subject to Australian tax.
Where a company that is a CFC ceases to be a resident of an unlisted country or listed country and becomes a resident of Australia the provisions that deem a company to have acquired its assets for market value at the residence change time are not to apply. Consequently, the capital gains tax provisions, without the modifications provided by the accruals tax measures, will apply to disposals by the company of all post 19 September 1985 assets. This would result in the exclusion from capital gains tax of gains on all assets which were acquired by the CFC prior to 20 September 1985, even though the CFC would have been liable to tax on gains that relate to the assets it held on 30 June 1990 and that accrued since 30 June 1990 had it not changed its residence. At the same time, it would bring into the tax net the gains made by the company after the date of acquisition of the post-19 September 1985 assets even though only the gains that arose after 30 June 1990 would have been taken into account had the company not changed its residence. These results were unintended where the assets are not taxable Australian assets.
The amendments in the Bill will have the effect that where a CFC becomes a resident of Australia after 30 June 1990, and subsequently disposes of an asset which at 30 June 1990 was not a taxable Australian asset the company will be taken to have acquired the asset on 30 June 1990 for capital gains tax purposes.
Where a CFC resident in a listed country, which does not tax capital gains, realises a capital gain, the gain may be included in its attributable income as designated concession income. However, if prior to disposing of its assets the CFC changes residence to another listed country which provides a new cost base to the company on the change of residence the whole of the gain might arguably be regarded as having been subject to tax. If that view were accepted the gain would be exempt from Australian tax, even though only the gain that arose after the change of residence was in fact taxed by the second listed country.
To avoid this result the Bill will make amendments that will apply where a CFC changes residence from a listed country which does not impose capital gains tax to another listed country which imposes capital gains tax only on the capital gain calculated from the time the company became a resident. In this case the difference between the cost base to the CFC of the asset and the market value at the residence change time is to be taken as not subject to tax in any listed country. Australian tax will then be payable on the untaxed portion. Similarly, where a non-resident trust changes residence to such a listed country, that part of the gain realised which has not been subject to capital gains tax is to be taken as not subject to tax in any listed country.
Where a CFC changes residence from an unlisted to a listed country an amount is to be included in the assessable income of the attributable taxpayer in the year of income in which the residence-change time occurs. That amount is the amount that would be available for distribution at the residence-change time if all the CFC's assets were disposed of for their market value.
Where the CFC has assets other than taxable Australian assets a compensating adjustment will be made to the consideration paid in respect of the subsequent actual disposal of such assets for Part IIIA capital gains purposes in the calculation of attributable income. However, no adjustment is currently provided for the subsequent disposal of taxable Australian assets of a CFC in respect of which an amount has been included in the assessable income of attributable taxpayers. The gain on any such asset may, therefore, be subject to double taxation - initially in calculating an amount to be included in assessable income as a result of the change of residence and then on the actual disposal of the asset.
The amendment proposed in the Bill will provide compensating adjustments for taxable Australian assets owned by a CFC at the time of change of residence which are subsequently disposed of by the CFC. This will remove the possibility of double taxation.
With effect from the year of income commencing on 1 July 1990, certain profits derived by an Australian company from business carried on in a listed country at or through a permanent establishment of the company in that country are to be exempted from tax. The exemption can apply to a capital gain as well. However, the current law does not prevent a company from offsetting corresponding foreign source capital losses against other taxable capital gains.
The Bill will deny the use of a foreign source capital loss in circumstances where, if it had instead been foreign source capital gain, the gain would be exempt from Australia tax.
The Bill will also effect technical changes, to provide certainty about the time at which the tests for the exemption from tax of branch profits are to be met.
In addition, these amendments will eliminate avenues for avoidance of Australian capital gains tax by ensuring that the capital gains tax exemption to be provided by section 23AH will only apply if the assets disposed of have been subject to full capital gains tax in the country where the branch is located.
Under the accruals tax measures, resident taxpayers who have specified interests in a CFC (attributable taxpayers) may have certain amounts included in their assessable income in respect of those interests. These amounts relate broadly to -
- the income and profits of the CFC of a particular period;
- the accumulated income, profits and accrued gains at the time of a change of residence of the CFC from an unlisted country to a listed (comparable-tax) country; and
- the payment of a dividend or deemed dividend by a CFC that is a resident of an unlisted country to a CFC that is a resident of a listed country.
Each of these measures could be avoided by using the same method. Basically, the method involves ensuring that:
- the attributable taxpayer in respect of a CFC in respect of which an amount is attributed is an Australian partnership or an Australian trust, so that the amount attributed is included in the net income of the partnership or trust; and
- another CFC (or a controlled foreign trust (CFT)) is a partner in the Australian partnership or a beneficiary of the Australian trust, either directly or indirectly through one or more Australian partnerships or trusts, or a combination of these.
The result is that an amount may not be taxed to a resident even though a resident has an indirect interest in the first CFC.
This avoidance opportunity is to be closed by ensuring that the amount that accrues to the benefit of the CFT or CFC and is not taxed in Australia is attributed to the attributable taxpayers of the CFT or the CFC, as the case may be.
The accruals tax legislation also contains transitional measures to ensure that dividend payments and changes of residence in the period from 1 July 1989 to the commencement of the substantive provisions are dealt with on the same basis as under the substantive provisions. The anti-avoidance provision is also to apply to these transitional measures.
Interest paid by a company on certain convertible notes is not an allowable deduction in calculating the assessable income of a taxpayer.
With the introduction of the accruals tax measures, it will be necessary to calculate the income of a CFC that is to be attributed to resident taxpayers by applying the provisions of the domestic law to the CFC as if it were a resident. In order to avoid retrospectivity, the Bill will provide that interest paid on convertible notes issued before 1 July 1990 will be deductible in calculating the attributable income of a CFC.
The provision to allow an interest deduction on notes issued before 1 July 1990 is also to apply to notes issued after that date where the arrangement to issue the notes was entered into prior to 1 July 1990. As a safeguard, the notes are to be grandfathered only if they are issued before 1 July 1992. The purpose of this is to limit the exemption to those arrangements that can be considered to be "in place".
A sunset clause has also been included so that the grandfathering is discontinued after a period of approximately 10 years. It is expected that CFCs will re-arrange their finances in this period to comply with the law relating to the deductibility of interest on convertible notes. This will ensure that perpetual notes are not indefinitely placed outside the provisions that disallow these interest payments.
Anti-avoidance measures have been included to ensure that the grandfathering is removed where changes to the terms of the notes have resulted in a new loan being made.
Under the Foreign Income Bill it is proposed to replace the existing sections that deal with the quarantining of deductions incurred in the production of foreign income and the creation and carry forward of foreign losses. The corresponding new provisions in the Foreign Income Bill will, amongst other things, remove the per country/per source basis for the quarantining.
The existing foreign loss provisions are referred to in the Fringe Benefits Tax Assessment Act 1986 ("the FBT Act") and are relevant in determining the amount of the reduction, under the "otherwise deductible rule", of what would be the taxable value of the fringe benefit. The "otherwise deductible rule" provides, broadly, that the taxable value of a fringe benefit is to be reduced where the amount of the fringe benefit, had it been incurred by the recipient of the fringe benefit, would have been an allowable deduction of the recipient. However, the reduction in the taxable value of the benefit does not occur to the extent that the deduction would fall within the foreign loss quarantining provisions.
Because of the replacement by the Foreign Income Bill of the foreign loss provisions, the terms used in the FBT Act do not align with the proposed new provisions.
The FBT Act is to be amended to ensure that the references to terms used in the existing provisions are changed to align with the terms used in the proposed new provisions. This will ensure that there is no doubt that the otherwise deductible rule is to operate to exclude deductions that are potentially quarantined under the new loss quarantining provisions.
The Bill amends the Income Tax Rates Act 1986 to give effect to an agreement reached between the Government and the ACTU to replace the first wage adjustment under Accord Mark VI with personal tax cuts. With effect from 1 January 1991, the Bill will reduce the lowest marginal rate of tax, applying in the income range $5,401 to $20,700, from 21 per cent to 20 per cent.
The general rates to be applicable to taxable incomes of resident individuals from 1 January 1991 are as follows:
|Parts of taxable income||Exceeding||But not exceeding||Proposed rate||$||$||%|
The change in the rate scale is effective from 1 January 1991 and as a consequence the above rates will first apply for the 1991-92 and subsequent income years. The Bill will declare new composite rates for residents in the income range $5,401 to $20,700 to apply on assessment in respect of the 1990-91 year of income as follows:
|Parts of taxable income||Exceeding||But not exceeding||Proposed rate||$||$||%|
|The balance of the rate scale for 1990-91 remains unaltered -|
There is no change to the rate scale applicable for non- residents.
The new rate scale for resident taxpayers, effective from 1 January 1991, incorporating the 20 per cent rate will be used to determine the tax instalment (PAYE) deductions to be made from the salary or wages of employees paid on or after 1 January 1991. The rate scale declared by the Taxation Laws Amendment (Rates and Provisional Tax) Act 1990 (Act No.87) for 1990-91, and not the scale as adjusted by this Bill will be used to calculate 1990-91 provisional tax.
As a consequence of a reduction in the 21 per cent personal tax rate to 20 per cent, this Bill will reduce the level of rebate of tax, allowable under section 159P of the Income Tax Assessment Act 1936 for payments of net medical expenses exceeding $1,000, from 21 per cent to 20 per cent, for the 1991-92 and subsequent income years. The level of the rebate for the 1990-91 income year will be 25 per cent.
The Bill will amend two sections of the Taxation Administration Act 1953 to ensure that certain information held for taxation purposes cannot be used by any persons inconsistently with Government policy.
Section 8XA is to be amended to overcome an unintended interpretation of the provision which extends the operation of the section beyond the protection required for the confidentiality of tax file number information. The section will be restricted in its operation to protect only those records in the possession of the Commissioner of Taxation. Section 8XB is to be amended to prohibit persons from using personal taxation information in a manner inconsistent with the Government's privacy aims.
A more detailed explanation of the provisions of the Bill is contained in the following Notes.