House of Representatives

Taxation Laws Amendment Bill (No. 6) 1990

Taxation Laws Amendment Act 1991

Explanatory Memorandum

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

NOTES ON CLAUSES

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.6) 1990.

Clause 2: Commencement

Subject to subclauses 2(2), (3) and (4) the amending Act is by subclause 2(1) to commence on the day on which it receives the Royal Assent. But for this subclause, the Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, commence on the twenty-eighth day after the date of Assent.

What does subclause 2(2) do?

As an exception to the general commencement provision, subclause (2) specifies that certain of the amendments made by the Bill are to commence immediately after the time of commencement of the Taxation Laws Amendment (Foreign Income) Act 1990 ("the Foreign Income Act"). The amendments that to which this applies are as follows:

·
the amendments of the Income Tax Assessment Act 1936 to insert anti-avoidance rules for the attribution of an amount to a taxpayer (clause 77) and make consequent amendments in other areas (clauses 9, 33, 70(b) and 78);
·
Part 6 of the Bill, which will amend the Foreign Income Act to ensure that the anti-avoidance rule to be inserted by clause 77 of this Bill applies to deemed dividends attributed in the transitional period before the substantive operation of sections 456 to 459 of the ITAA

Why is there a different commencement?

Several of the amendments proposed in this Bill are consequent upon the measures proposed in the Taxation Laws Amendment (Foreign Income) Bill 1990 ("the Foreign Income Bill"). These amendments may be divided into two categories - those amendments that have application dates prescribed in this Bill and those amendments that do not. The amendments that fall into the second category rely on the application provisions in the Foreign Income Act. Therefore, to make it clear that these amendments are to apply as if, in effect, they were included in the original Foreign Income Act, they have been expressed to commence at the time that that Act commences. At the time of preparation of this Bill the Foreign Income Bill was still being considered by the Parliament. Therefore, these amendments are linked to the commencement of that Act by prescribing that they commence at the time that the Royal Assent is granted to that Act.

What does subclause 2(3) do?

By subclause 2(3) amendments proposed by clauses 36 and 40 to prevent mutual life assurance companies and SGIOs from obtaining franking credits or debits, and clause 82 which will cancel the franking surplus of all such companies at 21 August 1990, are to be taken to have come into operation on 21 August 1990.

What does subclause 2(4) do?

By subclause 2(4) the amendments to the medical expense rebate and the Income Tax Rates Act commence on 1 July 1991.

PART 2 - AMENDMENT OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

What does Part 2 do?

This Part will amend the Fringe Benefits Tax Assessment Act 1936 to replace the existing term "foreign source deduction" with the new term "foreign income deduction", and will insert a definition of the new term. The terms are used in the various "otherwise deductible" rules. The amendment is consequential upon the proposed replacement of section 160AFD of the Income Tax Assessment Act 1936 ("the ITAA").

What is the "otherwise deductible" rule?

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. For example, an interest free loan from an employer to an employee would result in a fringe benefit, the taxable value of which is the equivalent of the deemed rate of interest on the loan. However, if the loan was used to purchase an income producing asset, the taxable value would be reduced to the extent that a deduction would have been allowed had the employee incurred the deemed interest. This is intended to approximate the true tax advantage gained from the provision of the fringe benefit. However, to the extent that the deemed amount would have been a foreign source deduction, the reduction does not occur.

What is a foreign source deduction?

The existing subsection 136(1) of the Principal Act defines a "foreign source deduction" to be, broadly, a deduction that relates to income from a foreign source within the meaning of section 160AFD of the Act.

Why is the amendment necessary?

By the Taxation Laws Amendment (Foreign Income) Bill 1990, it is proposed that the existing sections 79D and 160AFD of the ITAA be replaced. These sections deal with the quarantining of deductions incurred in the production of foreign income and the creation and carry forward of foreign losses. The new sections 79D and 160AFD will, amongst other things, remove the per country/per source basis for quarantining. As a consequence of these amendments there will no longer be a special meaning to the term "foreign source", but rather the general rule for determining the source of income, profits or gains will be used. It is therefore necessary to align the terms used in the Principal Act with those defined in section 160AFD of the ITAA.

Clause 3: Principal Act

This clause facilitates references to the Fringe Benefits Tax Assessment Act 1986, in this Division referred to as the "Principal Act".

Clause 4: Reduction of taxable value - "otherwise deductible" rule

This clause will replace the existing term "foreign source deduction" in sections 19, 44 and 52 of the Principal Act - with the new term "foreign income deduction", to be defined in section 136 of the Principal Act (see notes on clause 6).

Clause 5: Reduction of taxable value - "otherwise deductible" rule

Like clause 4, clause 5 will replace the existing term "foreign source deduction" in section 24 of the Principal Act with the new term "foreign income deduction".

Clause 6: Interpretation

Section 136 of the Principal Act is a general interpretive provision and contains the definition of "foreign source deduction". This definition is to be replaced with a definition of "foreign income deduction", which will take the same meaning as it does in section 160AFD of the ITAA. Broadly, it will refer to a deduction that is referrable to "assessable foreign income", which is the taxpayer's assessable income from a foreign source, but does not include gains to the extent that they are included under Part IIIA of the ITAA.

Clause 7: Application of amendments

The amendments made by clauses 4, 5 and 6 will take effect for fringe benefits given during the recipients 1990-91 year of income, and any later year. In general, this means that benefits paid on or after 1 July 1990 will be affected. However, where the recipient has an income year other than one commencing on 1 July, the amendment will affect benefits paid after the beginning of the recipient's year of income that is used in lieu of the 1990-91 income year.

PART 3 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 8: Principal Act

This clause facilitates reference to the Income Tax Assessment Act 1936 which, in this Part, is referred to as "the Principal Act"'.

Clause 9: Foreign Income and Foreign Tax

This clause will amend the definitions of foreign income and foreign taxes in section 6AB of the Principal Act by inserting references to section 459A of the Principal Act. The amendments are a consequence of the insertion of that section (see notes on clause 77).

How are the definitions relevant?

The definitions of foreign income and foreign taxes are used primarily for the purposes of Division 18 of Part III of the Principal Act, which specifies the foreign tax credits which may be allowed against the Australian tax on foreign income. The definition of foreign income is also used to determine the quarantining of expenses relating to foreign income under section 79D and the reduction of foreign income by foreign losses of previous years of income under section 160AFD.

What is the effect of the references?

The insertion of the first reference to section 459A, into subsection 6AB(1), will ensure that the amount attributed under section 459A is treated as foreign income for the calculation of the average rate of Australian tax payable on foreign income under Division 18.

Further, it will ensure that where the taxpayer has incurred expenses in respect of the amount attributed under section 459A, those expenses will be quarantined to foreign income according to the rules in section 79D of the Principal Act. Any the excess is carried forward to reduce foreign income derived in a later year of income in accordance with section 160AFD (see further notes on clause 33).

Because of the anti-avoidance nature of the arrangements to which section 459A applies, even though the amount attributed under section 459A will be deemed to be foreign income, credit for foreign taxes paid on amounts attributed under section 459A will not be allowed. This is achieved by the insertion of the second reference to section 459A into paragraph 6AB(3A)(a). That paragraph operates to prevent foreign tax credits arising for foreign taxes paid on amounts that are deemed to be foreign income under any of sections 102AAZD or 456 to 459 except as specified in Division 18, which only provides for foreign tax credits in respect of amounts arising under section 456 to 458.

Clause 10: Exemption of certain pensions

INTRODUCTORY NOTE

Section 23AD of the Principal Act provides for the exemption from tax of certain pensions, benefits, allowances and payments.

This clause will make a number of amendments to section 23AD following amendments to the Social Security Act 1947, the Veterans' Entitlements Act 1986 and the Seamen's War Pensions and Allowances Act 1940. In particular, the tax exempt special temporary allowance and funeral benefit have been absorbed into a bereavement payment which is payable to -

·
the surviving member of a married pensioner couple;
·
a pensioner in receipt of carer's pension upon the death of the person being cared for by the pensioner;
·
a person in receipt of the sole parent's pension upon the death of the only qualifying child;
·
parents of a deceased dependent child who were paid additional pension, benefit or family allowance supplement in respect of that child; and
·
a person following the death of a single pensioner.

The broad scheme of section 23AD is that subsection 23AD(3) exempts from tax certain pensions, allowances or benefits paid under the relevant legislation other than those included within the term "excepted payment" (defined in subsection 23AD(1)). This term includes certain payments which are assessable irrespective of the age of the recipient, and other payments, specified in the definition of "excepted pension" in subsection 23AD(1), which are assessable only when the recipient is a "prescribed person" as defined in subsection 23AD(1), i.e., a man or woman of age pension age, a woman in receipt of a "wife's pension" as defined in subsection 23AD(1) whose husband is aged 65 or more, or a person in receipt of a "carer's pension" as defined in subsection 23AD(1) where the person being cared for is of age pension age.

By paragraph (a) of clause 10 a reference to section 68 of the Social Security Act 1947 is to be included in the term "excepted payment". Section 68 of that Act provides for a sole parent's pension to be paid for 14 weeks (subject to ongoing eligibility) after the death of the only qualifying child. Sole parent's pension is paid under Part V of the Social Security Act 1947 and forms part of the assessable income of the recipient. This amendment will provide that the payment of sole parent's pension during the bereavement period is an "excepted payment" and therefore assessable.

A technical amendment is made by paragraph (b) which will insert a reference to Schedule 1B of the Social Security Act 1947 in the definition of "excepted payment" in subsection 23AD(1). With effect from 1 March l989, schedule 1B provides for the payment of a class B widow's pension. Prior to amendments made by the Social Security Legislation Amendment Act 1988, a class B widow's pension was payable under Part V of the Social Security Act 1947 and was subject to tax as it fell within subparagraph (b)(i) of the definition of "excepted payment". Subsection 4(5) of the Social Security Legislation Amendment Act 1988 ensured that payments under Schedule 1B continued to be treated as payments under Part V (and hence assessable) for the purposes of the Principal Act.

Paragraph (c) proposes the omission of the present paragraph (g) of the definition of "excepted payment" in subsection 23AD(1) of the Principal Act. Paragraph (g) excluded payments of special temporary allowance made under subsection 65(7) of the Veterans' Entitlements Act 1986 from the definition of "excepted payment" in subsection 23AD(1). Section 65 of that Act was repealed with effect from 1 January 1990 by the Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989.

Paragraph (c) of clause 10 also proposes the insertion of new paragraph (g) in the definition of "excepted payment" in subsection 23AD(1). The effect of paragraph (g) is that payments made under subsection 57A(2) and subparagraph 57A(3)(b)(ii) of the Veterans' Entitlements Act 1986 to a pensioner following the death of their pensioner spouse are excluded from the definition of "excepted payment". It is proposed that the tax treatment of these payments be covered by new paragraphs 23AD(3)(p), (q), (r), (s) and (u) to be inserted by paragraph (n) of this clause (see later notes).

Paragraph (d) of clause 10 proposes to amend in two respects the definition of "excepted pension" in subsection 23AD(1). As noted earlier, "excepted pensions" are assessable when paid to "prescribed persons" (also defined in subsection 23AD(1)).

First, the reference to section 237 of the Social Security Act 1947 is to be omitted. Section 237, which provided for the payment of special temporary allowance, was repealed following the introduction from 1 January 1990 of a scheme of bereavement payments for a surviving spouse.

Secondly, paragraph (d) will include a reference to section 67 of the Social Security Act 1947 in the definition of "excepted pension". Section 67 provides for the payment of a pension for 14 weeks, to a person who was in receipt of a carer's pension, following the death of the person being cared for (not being the spouse of the carer). Including such payments within the definition of "excepted pension", means that the payments are assessable income if paid to a prescribed person, i.e. a person of age pension age. The amendment will ensure that the taxation treatment of the pension paid under section 67 of the Social Security Act is determined by reference to the recipient's age. That is, if the person is under age pension age then the pension is exempt from tax. This applies even if payments of carer's pension were assessable before the death of the person being cared for because that person was of age pension age. If the person is of age pension age the pension will be assessable.

Paragraph (e) proposes to amend paragraph (c) of the definition of "excepted pension" in subsection 23AD(1). Paragraph (c) deals with, among other matters, the payment of carer's service pension under the Veterans' Entitlements Act 1986. Where the person being cared for receives a pension by virtue of section 39 of that Act, the carer's service pension is an "excepted pension" and hence is assessable where either the carer or the person being cared for is of age pension age. The amendment proposed by paragraph (e) is consequential upon the insertion of section 57B in the Veterans' Entitlements Act by the Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989. Section 57B provides for the payment of a pension for 14 weeks, to a person who was in receipt of a carer's service pension, following the death of the person being cared for (not being the spouse of the carer). The amendment applies to payment of carer's service pension during the period of 14 weeks after the deceased veteran's death where the deceased veteran was permanently incapacitated for work. In these circumstances the pension is assessable if paid to a prescribed person, i.e. a person of age pension age. If the recipient is under age pension age, the pension is exempt from tax even if payments of the carer's service pension were assessable before the death of the person being cared for because that person was of age pension age.

Paragraph (f) inserts a definition of "age-pension age" in subsection 23AD(1) to mean 60 years in the case of a woman and 65 years in the case of a man. This definition is relevant for the purposes of new paragraphs 23AD(3)(e), (f), (p) and (q) to be inserted by paragraph (n) of this clause. Those paragraphs apply in respect of the bereavement payment to be made to the surviving pensioner of a pensioner couple.

Paragraph (g) will insert references to subsection 57A(2) and subparagraph 57A(3)(b)(ii) of the Veterans' Entitlements Act 1986 into paragraph 23AD(3)(a) of the Principal Act. As previously noted, subsection 23AD(3) exempts certain pensions from tax. In particular, subparagraph 23AD(3)(a) applies in relation to payments made under the Veterans' Entitlements Act 1986. The amendment proposed by paragraph (g) means that payments under subsection 57A(2) or subparagraph 57A(3)(b)(ii) of that Act will not be exempt by virtue of paragraph 23AD(3)(a). It is proposed that the tax treatment of these payments be covered by new paragraphs 23AD(3)(p), (q), (r), (s) and (u) to be inserted by paragraph (n) of this clause (see later notes).

Paragraph (h) proposes that paragraph 23AD(3)(aaa) of the Principal Act be omitted. Paragraph 23AD(3)(aaa) provided for the exemption of payments of special temporary allowance under section 65 of the Veterans' Entitlements Act 1986. Section 65 was repealed by the Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989 as part of the implementation of the new scheme of bereavement payments from 1 January 1990.

Paragraph (j) will amend paragraph 23AD(3)(c) of the Principal Act to alter the existing reference to subsection 365(2) of the Imperial Act known as the Income and Corporation Taxes Act 1970 (the "Taxes Act 1970") to subsection 315(2) of the Income and Corporation Taxes Act 1988 (the "Taxes Act 1988"). This amendment has been made necessary as a direct consequence of changes made to United Kingdom income tax law, which have resulted in a consolidation of various United Kingdom tax statutes into one new Act.

Paragraph 23AD(3)(c) of the Principal Act currently operates to exempt from Australian income tax, wounds and disability pensions of the kinds specified in subsection 365(2) of the Taxes Act 1970, provided that these pensions are not payments which, in the opinion of the Commissioner, are of a similar nature to excepted payments (as that term is defined in subsection 23AD(1) of the Principal Act).

Subsection 315(2) of the Taxes Act 1988 has exactly the same effect as the former subsection 365(2) of the Taxes Act 1970. Accordingly, the proposed amendment to paragraph 23AD(3)(c) of the Principal Act will ensure that any pensions paid on or after the date of commencement of the Taxes Act 1988 (i.e. generally 6 April 1988) will continue to be afforded the same treatment for Australian income tax purposes as would have been the case prior to that date when the former Taxes Act 1970 had general application.

Paragraph (k) proposes that payments made under subsection 66(2) or subparagraph 66(3)(b)(ii) of the Social Security Act be excluded from subparagraph 23AD(3)(d). This means that such payments will not be exempt from tax by virtue of subparagraph 23AD(3)(d). However, it is proposed that the tax treatment of these payments be covered by new paragraphs 23AD(3)(e), (f), (g), (h) and (k) to be inserted by paragraph (n) of this clause (see later notes).

By paragraph (n) of clause 10, paragraph 23AD(3)(e) of the Principal Act is to be omitted and replaced with new paragraphs 23AD(3)(e) to (z). These paragraphs relate to amendments made by the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989.

Prior to amendments made by the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989, a special temporary allowance was paid under section 237 of the Social Security Act to the survivor of a pensioner couple. This allowance was exempt from tax by paragraph 23AD(3)(e). Under the new arrangements, the surviving pensioner's entitlements are worked out with effect from the first available pension payday after notification of the death having regard to the fact that the surviving pensioner is an unmarried person. In certain circumstances, the surviving pensioner is also paid a lump sum calculated by reference to the sum of the amount that would have been payable to the surviving pensioner and the deceased pensioner if the deceased pensioner had not died less the amount that the surviving pensioner would have received as an unmarried person. The lump sum is based on a maximum of 7 pension pay days after the death of the deceased pensioner.

In effect, the surviving pensioner is entitled to receive an amount for 7 pension pay days equal to the amount that would have been payable to the couple if the spouse had not died. However, if the amount that would be payable to the surviving pensioner as an unmarried person is equal to, or more than, the amount that would have been payable to the couple if the deceased pensioner had not died, the surviving pensioner's entitlements are worked out having regard to the fact that he or she is an unmarried person.

In addition, bereavement payments are now payable in a number of situations not previously covered by the special temporary allowance. Proposed new paragraphs 23AD(3)(e), (f), (g), (h), (j), (k) and (m) relate to bereavement payments made under the Social Security Act 1947.

Paragraphs 23AD(3)(e), (f) and (g) apply in respect of payments made under paragraph 66(2)(a) of that Act. Paragraph 66(2)(a) provides for the payment to the surviving pensioner on each of the next 7 pension pay days after the deceased pensioner's death, of the amount that would have been payable to the surviving pensioner on the relevant pay day if the deceased pensioner had not died. Payments would usually be payable under this paragraph prior to the Department of Social Security becoming aware of the death of the deceased pensioner.

New paragraph 23AD(3)(e) exempts from tax the payment under paragraph 66(2)(a) of the Social Security Act 1947 on a particular pension pay day, if the taxpayer was not of age- pension age and the pension or allowance payable immediately before the death of the deceased pensioner was not an excepted payment. This situation would arise, for example, in respect of a pensioner who was in receipt of an exempt wife's pension because both the pensioner and the person's invalid pensioner spouse were below age pension age.

Paragraph 23AD(3)(f) applies to exempt from tax the payment under paragraph 66(2)(a) of the Social Security Act 1947 in certain circumstances. It applies where the pension was assessable to the surviving pensioner before the death of the spouse because the deceased pensioner had attained age-pension age. While the surviving pensioner has not attained age-pension age, payments under paragraph 66(2)(a) will be exempt. Paragraph 23AD(3)(f) would apply to a pensioner who was in receipt of an assessable wife's pension because the person's spouse was of age-pension age.

Part of the payment made under paragraph 66(2)(a) may also be exempt under proposed paragraph 23AD(3)(g). This applies to exempt that part of the paragraph 66(2)(a) amount that does not represent an excepted payment (as defined in subsection 23AD(1)). This is intended to cover amounts not subject to tax that are paid in addition to the basic pension entitlement, e.g. rent assistance and payments in respect of children.

New paragraph 23AD(3)(h) provides that the payment under paragraph 66(2)(b) of the Social Security Act 1947 is exempt from tax. This represents the amount payable to the surviving pensioner that would have been payable to the deceased pensioner had she or he not died. Usually these instalments of pension are paid prior to the notification of the death.

Proposed new paragraph 23AD(3)(i) applies to exempt from tax part of the payments made to a taxpayer to whom paragraph 66(3)(a) of the Social Security Act 1947 applies. The situation to which this provision applies will arise where the new single rate of pension paid to the survivor is equal to or more than the combined married rate of pension that would have been received if the deceased pensioner not died. The amendment only applies in relation to "excepted payments". Accordingly, other parts of the payments made to the surviving pensioner may be exempt under other provisions of subsection 23AD(3).

The effect of new paragraph 23AD(3)(j) is that the amount of payment received, on any one of the 7 pension paydays after the death, in excess of what the surviving person would have received if the deceased pensioner had not died, is exempt from tax. These amounts were previously paid as tax exempt special temporary allowance under section 237 of the Social Security Act 1947.

EXAMPLE 1

A pensioner couple each received $100 pension, all of which was assessable. Following the death of one of the couple, the surviving pensioner is entitled as an unmarried person, to a pension of $220, all of which would, except for new paragraph 23AD(3)(j), be assessable income.
Paragraph 23AD(3)(j) exempts $120 (i.e. $220 - $100).

EXAMPLE 2

A pensioner couple each received $100 assessable pension plus $20 rent assistance (not subject to tax by virtue of the operation of paragraph (d) of the definition of "excepted payment" in subsection 23AD(1)). Following the death of one of the couple, the surviving pensioner is entitled, as an unmarried person, to an assessable pension of $230 plus $40 rent assistance.
Paragraph 23AD(3)(j) exempts $130 (i.e. $230 - $100). The $40 rent assistance is also exempt by virtue of the operation of paragraph (d) of the definition of "excepted payment" in subsection 23AD(1).

Paragraph 66(3)(b) of the Social Security Act 1947 applies where, within 14 weeks of the death of the deceased pensioner, the Secretary of the Department of Social Security became aware, whether or not from the surviving pensioner, that the deceased pensioner had died. In particular, paragraph 66(3)(b) applies where the amount that would be payable to the surviving pensioner as an unmarried person is less than the amount that would have been payable to the surviving pensioner and the deceased pensioner, if the deceased pensioner had not died.

In these circumstances, the surviving pensioner's entitlements are calculated having regard to the fact that he or she is an unmarried person. In addition, a lump sum is payable to the surviving pensioner. The lump sum is calculated by the formula specified in subparagraph 66(3)(b)(ii) of the Social Security Act 1947. The lump sum represents the difference between what would have been payable to the deceased and surviving pensioners if the deceased pensioner had not died and what would have been payable to the surviving pensioner as an unmarried person.

New paragraph 23AD(3)(k) exempts from tax a certain amount of the lump sum paid under subparagraph 66(3)(b)(ii) of the Social Security Act 1947 and the excepted payments made to the surviving pensioner on the first available pension pay day after the Secretary becomes aware of the death and each subsequent pension pay day that is one of the 7 pension pay days after the death of the deceased pensioner. For example, if the first available pension payday is the 4th payday after the death of the deceased pensioner, proposed paragraph 23AD(3)(k) would apply in respect of the 4th, 5th, 6th and 7th pension pay days after the death.

The amount to be exempted is calculated by reference to the first available pension pay day and each subsequent pension pay day that is one of the 7 pension pay days after the death of the deceased pensioner.

For each of these pension pay days the exempt amount is calculated by the formula:

(Notional CMR) - (Notional NR)

Notional CMR means the sum of the amount that would have been payable to the taxpayer (i.e. the surviving pensioner) on the pension pay day if the deceased pensioner had not died as is not an excepted payment and the amount that would have been payable to the deceased pensioner if the deceased pensioner had not died.
Notional NR means the amount that would have been payable to the taxpayer as an unmarried person on the pension pay day as is not an excepted payment.

For each of the relevant pension pay days, the amounts that would have been payable need to be ascertained. For the amount that would have been payable to the taxpayer, the formula is concerned only with that part which is not an excepted payment (i.e. the exempt component).

The total exempt amount under paragraph 23AD(3)(k) is the sum of the amounts calculated under the formula for each of the relevant pension pay days.

EXAMPLE 1

Pensioner couple were in receipt of $200 each (all of which was an excepted payment).
The survivor's pension rate from the first available pension pay day is $300 (all of which is an excepted payment). In this example it is assume that the first available pension pay day is the first pay day after the death of the deceased pensioner. The lump sum bereavement payment under paragraph 66(3)(b)(ii) of the Social Security Act 1947 is:

((7) * ($200 + $200 - $300)) = ($700)

The amount calculated in accordance with the formula in subparagraph 23AD(3)(k)(iii) is $200. On the assumption that the same amounts are relevant for each of the 7 pension paydays, the total amount of the lump sum and pension to be exempt is $1,400. This means that the lump sum of $700 would be exempt plus $700 of the pension received by the surviving pensioner on the 7 pension paydays.

EXAMPLE 2

The same facts as in Example 1, except that the survivor's pension rate for the first available pension pay day is $150.
In these circumstances, the lump sum bereavement payment is:

((7) * ($200 + $200 - $150)) = ($1750).

The amount calculated in accordance with the formula in subparagraph 23AD(3)(k)(iii) is $200. On the assumption that the same amount is relevant for each of the 7 pension paydays, the total amount of the lump sum and pension to be exempt is $1,400. Effectively, this means that $350 of the lump sum is assessable.

EXAMPLE 3

Pensioner couple were in receipt of $250 each (including $20 tax exempt rent assistance). The survivor's pension rate for the first available pension pay day is $300 (including $40 tax exempt rent assistance). On the assumption that the first available pension pay day is the 3rd pension pay after the death of the deceased pensioner, the lump sum bereavement payment is:

((5) * ($250 + $250 - $300)) = ($1000)

The amount calculated under the formula in subparagraph 23AD(3)(k)(iii) is:

($20 + $250 - $40) = ($230).

Assuming these amounts are relevant for each of the 5 pension pay days, the amount to be exempt is $1,150. This means the lump sum of $1000 is exempt plus $150 of the assessable pension payments.
It should be noted that the $40 rent assistance received by the survivor would also be exempt from tax by virtue of the operation of paragraph (d) of the definition of excepted payment.
To summarise this situation, the surviving pensioner receives $1000 lump sum bereavement payment, $1,300 basic pension and $200 rent assistance. The amount exempt is $1,350 (i.e. $1,150 plus $200 rent assistance) and the assessable amount is $1,150.

Proposed new paragraph 23AD(3)(m) will exempt payments made under subsection 66(4) and sections 69 and 70 of the Social Security Act 1947.

Payments under subsection 66(4) of that Act are made in situations where the surviving pensioner dies within 14 weeks after the death of the deceased pensioner and the death of the first deceased pensioner was not notified before the death of the second pensioner. In this case, a lump sum amount in respect of the first deceased pensioner is payable to an appropriate person. This is to be exempt from tax.

Payments made under section 69 of the Social Security Act 1947 are made where a child dies and before the death of the child, a person was in receipt of certain child related payments. These payments include mother's guardian's allowance, family allowance supplement and additional pension. Payments under section 69 of the Social Security Act are to be exempt from tax.

On the death of a pensioner without a pensioner spouse, one extra pension payment will be made to an appropriate person by virtue of section 70 of the Social Security Act 1947. This is a new payment and by proposed paragraph 23AD(3)(m) will be exempt from tax.

Proposed new paragraphs 23AD(3)(p), (q), (r), (s), (t), (u), (w) and (y) relate to bereavement payments made under the Veterans' Entitlements Act 1986.

Prior to amendments made by the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989, a special temporary allowance was paid under section 65 of the Veterans' Entitlements Act 1986 to the survivor of a pensioner couple. This allowance was exempt from tax by paragraph 23AD(3)(aaa). Under the new arrangements, the surviving pensioner's entitlements are worked out with effect from the first available pension payday after notification of the death having regard to the fact that the surviving pensioner is an unmarried person. In certain circumstances, the surviving pensioner is also paid a lump sum calculated by reference to the sum of the amount that would have been payable to the surviving pensioner and the deceased pensioner if the deceased pensioner had not died less the amount that the surviving pensioner would have received as an unmarried person. The lump sum is based on a maximum of 7 pension pay days after the death of the deceased pensioner.

In effect, the surviving pensioner is entitled to receive an amount for 7 pension pay days equal to the amount that would have been payable to the couple if the spouse had not died. However if the amount that would be payable to the surviving pensioner as an unmarried person is equal to, or more than, the amount that would have been payable to the couple if the deceased pensioner had not died, the surviving pensioner's entitlements are worked out having regard to the fact that he or she is an unmarried person.

In addition, bereavement payments are now payable in a number of situations not previously covered by the special temporary allowance.

Paragraphs 23AD(3)(p), (q) and (r) apply in respect of payments made under paragraph 57A(2)(a) of the Veterans' Entitlements Act 1986. Paragraph 57A(2)(a) provides for the payment to the surviving pensioner on each of the next 7 pension pay days after the deceased pensioner's death, of the amount that would have been payable to the surviving pensioner on the relevant pay day if the deceased pensioner had not died. Payments would usually be payable under this paragraph prior to the Repatriation Commission becoming aware of the death of the deceased pensioner.

New paragraph 23AD(3)(p) exempts from tax the payment under paragraph 57A(2)(a) of the Veterans' Entitlements Act 1986 on a particular pension pay day, if the taxpayer was not of age- pension age and the pension or allowance payable immediately before the death of the deceased pensioner was not an excepted payment. This situation would arise, for example, in respect of a pensioner who was in receipt of an exempt wife's pension because both the pensioner and the person's invalid pensioner spouse were below age pension age.

Paragraph 23AD(3)(q) applies to exempt from tax the payment under paragraph 57A(2)(a) of the Veterans' Entitlements Act 1986 in certain circumstances. It applies where the pension was assessable to the surviving pensioner before the death of the spouse because the deceased pensioner had attained age-pension age. While the surviving pensioner has not attained age-pension age, payments under paragraph 57A(2)(a) will be exempt. Paragraph 23AD(3)(q) would apply to a pensioner who was in receipt of an assessable wife's pension because the person's invalid pensioner spouse was of age-pension age.

Part of the payment made under paragraph 57A(2)(a) may also be exempt under proposed paragraph 23AD(3)(r). This applies to exempt that part of the paragraph 57A(2)(a) amount that does not represent an excepted payment (as defined in subsection 23AD(1)). This is intended to cover amounts not subject to tax that are paid in addition to the basic pension entitlement, e.g. rent assistance and payments in respect of children.

New paragraph 23AD(3)(s) provides that the payment under paragraph 57A(2)(b) of the Veterans' Entitlements Act 1986 is exempt from tax. This represents the amount payable to the surviving pensioner that would have been payable to the deceased pensioner had she or he not died. Usually these instalments of pension are paid prior to the notification of the death.

Proposed new paragraph 23AD(3)(t) applies to exempt from tax part of the payments made to a taxpayer to whom paragraph 57A(3)(a) of the Veterans' Entitlements Act 1986 applies. The situation to which this provision applies will arise where the new single rate of pension paid to the survivor is equal to or more than the combined married rate of pension that would have been received if the deceased pensioner not died. The amendment only applies in relation to "excepted payments". Accordingly, other parts of the payments made to the surviving pensioner may be exempt under other provisions of subsection 23AD(3).

The effect of new paragraph 23AD(3)(t) is that the amount of payment received, on any one of the 7 pension paydays after the death, in excess of what the surviving person would have received if the deceased pensioner had not died, is exempt from tax. This provision is similar to new paragraph 23AD(3)(j) which applies to payments made under the Social Security Act 1947. See notes on that paragraph for examples of how it will operate.

Paragraph 57A(3)(b) of the Veterans' Entitlements Act 1986 applies where, within 14 weeks of the death of the deceased pensioner, the Repatriation Commission became aware, whether or not from the surviving pensioner, that the deceased pensioner had died. In particular, paragraph 57A(3)(b) applies where the amount that would be payable to the surviving pensioner as an unmarried person is less than the amount that would have been payable to the surviving pensioner and the deceased pensioner, if the deceased pensioner had not died.

In these circumstances, the surviving pensioner's entitlements are calculated having regard to the fact that he or she is an unmarried person. In addition, a lump sum is payable to the surviving pensioner. The lump sum is calculated by the formula specified in subparagraph 57A(3)(b)(ii) of the Veterans' Entitlements Act 1986. The lump sum represents the difference between what would have been payable to the deceased and surviving pensioners if the deceased pensioner had not died and what would have been payable to the surviving pensioner as an unmarried person.

New paragraph 23AD(3)(u) exempts from tax a certain amount of the lump sum paid under subparagraph 57A(3)(b)(ii) of the Veterans' Entitlements Act 1986 and the excepted payments made to the surviving pensioner on the first available pension pay day after the Commission becomes aware of the death and each subsequent pension pay day that is one of the 7 pension pay days after the death of the deceased pensioner. For example, if the first available pension payday is the 4th pay day after the death of the deceased pensioner, proposed paragraph 23AD(3)(u) would apply in respect of the 4th, 5th, 6th and 7th pension pay days after the death.

The amount to be exempted is calculated by reference to the first available pension pay day and each subsequent pension pay day that is one of the 7 pension pay days after the death of the deceased pensioner.

For each of these pension pay days the exempt amount is calculated by the formula:

(Notional CMR) - (Notional NR)

Notional CMR means the sum of the amount that would have been payable to the taxpayer (i.e. the surviving pensioner) on the pension pay day if the deceased pensioner had not died as is not an excepted payment and the amount that would have been payable to the deceased pensioner if the deceased pensioner had not died.
Notional NR means the amount that would have been payable to the taxpayer as an unmarried person on the pension pay day as is not an excepted payment.

For each of the relevant pension pay days, the amounts that would have been payable need to be ascertained. For the amount that would have been payable to the taxpayer, the formula is concerned only with that part which is not an excepted payment (i.e. the exempt component).

The total exempt amount under paragraph 23AD(3)(u) is the sum of the amounts calculated under the formula for each of the relevant pension pay days. This is a similar provision to new paragraph 23AD(3)(k) which applies to payments made under the Social Security Act 1947. See notes on that paragraph for examples of how it will operate.

Proposed new paragraph 23AD(3)(w) will exempt payments made under subsection 57A(4) and sections 57C and 57D of the Veterans' Entitlements Act 1986.

Payments under subsection 57A(4) of that Act are made in situations where the surviving pensioner dies within 14 weeks after the death of the deceased pensioner and the death of the first deceased pensioner was not notified before the death of the second pensioner. In this case, a lump sum amount in respect of the first deceased pensioner is payable to an appropriate person. This is to be exempt from tax.

Payments made under section 57C of the Veterans' Entitlements Act 1986 are made where a child dies and before the death of the child, a person was in receipt of certain child related payments. Payments under section 57C of that Act are to be exempt from tax.

On the death of a pensioner without a pensioner spouse, one extra pension payment will be made to an appropriate person by virtue of section 57D of the Veterans' Entitlements Act 1986. This is a new payment and by proposed paragraph 23AD(3)(w) this payment will be exempt.

By proposed new paragraph 23AD(3)(y) bereavement payments made under section 98A of the Veterans' Entitlements Act 1986 will be exempt from tax. This bereavement payment is made to the widow or widower of a deceased veteran who was in receipt of a disability pension paid under either Part II or Part IV of that Act.

New paragraph 23AD(3)(z) will exempt the bereavement payment made under section 24B of the Seamen's War Pensions and Allowances Act 1940. This payment is made to the widow or widower of a deceased Australian mariner who was in receipt of a disability pension paid under that Act.

Clause 11: Amendment of section 23AH : Exemption of foreign branch profits of Australian companies

Clause 11 will amend section 23AH of the Principal Act which is to be inserted by the Foreign Income Bill.

What does section 23AH do?

Proposed section 23AH, introduced by the Taxation Laws Amendment (Foreign Income) Bill 1990, will exclude from assessable income, with effect from the year of income commencing on 1 July 1990, profits derived by an Australian company from a business carried on in a listed country at or through a permanent establishment of the company in that country that have been comparably taxed in the listed country. The exemption can apply to a capital gain that would otherwise accrue to the company under the capital gains tax provisions of Part IIIA of the Principal Act.

Why are amendments to section 23AH required?

While section 23AH will operate to exempt from Australian capital gains tax a foreign branch capital gain that has been subject to tax in a listed country it does not exclude a foreign source capital loss in circumstances where it would be exempt if it were instead a capital gain. In the absence of any restriction, foreign source capital losses could be set off against taxable capital gains.

There is also some uncertainty about the time at which some of the tests in section 23AH are to be met.

What will the amendments do?

The main amendment to section 23AH will provide symmetry between the treatment of foreign source capital gains and foreign source capital losses by ensuring that a foreign capital loss cannot be used to reduce taxable capital gains of the resident company if, had the loss instead been a gain, it would have been exempt from Australian capital gains tax.

The other amendments to section 23AH are of a technical nature to add greater certainty as to the time at which the tests of section 23AH must be met in order to gain the benefit of the exemptions provided.

In addition, these amendments will eliminate avenues for avoidance of Australian capital gains tax by ensuring through specific timing requirements that the capital gains tax exemption provided by section 23AH only applies if the whole of the gain on disposal of an asset has been subject to tax in the country where the branch is located.

From what date will the amendments apply?

The amendments will apply in relation to asset disposals during the year of income commencing on 1 July 1990 or a subsequent year of income.

Timing Issues

The purpose of paragraphs (a), (b), (c) and (d) is to include a time element in relation to the use and subsequent disposal of an asset. Paragraphs (a) and (c) will amend paragraphs 23AH(6)(C) and (7)(c) by adding a requirement that at some time during a specified statutory period the relevant asset be used by the taxpayer or partnership for the purpose of producing foreign income from carrying on a business. The specified statutory period commences after the start of the year of income immediately before the year of income in which the asset is disposed of and ends at the time of the disposal.

Paragraphs (b) and (d) will replace paragraphs 23AH(6)(d) and (7)(d) to introduce a requirement that the asset must not be a taxable Australian asset at the time of disposal.

Exclusion of certain capital losses

To determine whether a particular capital loss is excluded from Part IIIA, subsection (8A) in effect asks three questions:

·
Is the taxpayer who disposed of the asset a company?
·
Did it incur a capital loss on the disposal?
·
If the disposal had resulted in a profit instead of a loss would the profit have been a foreign branch capital gain (and therefore exempt from Australian tax)?

If the answer to each of these questions is yes, subsection (8A) will apply to ensure that the foreign loss is not taken into account in applying Australia's capital gains provisions.

Exclusion of certain trust capital losses

Subsection (9A) covers cases where a trust incurs a capital loss on the disposal of an asset used in generating business income in a listed country. Its purpose is to ensure that a beneficiary does not obtain the benefit of a capital loss where, had a capital profit been made instead, no Australian tax would have been payable. Its effect is to add back into a beneficiary's assessable income any benefit obtained by the beneficiary by virtue of the loss reducing the beneficiary's share of the net income of the trust.

Clause 12: Distribution benefits - CFCs

What are deemed dividends and distribution benefits?

Certain payments made or benefits provided by a CFC to shareholders of the CFC or to associates of the shareholders that make the profits of the CFC available for their use will be treated by section 47A, to be inserted in the Principal Act by the Foreign Income Bill, as deemed dividends. A CFC will also be treated as paying a deemed dividend where another entity makes the payment or provides the benefit by arrangement with the CFC in return for consideration provided by the CFC. The payment or benefit provided by the CFC to a shareholder or an associate of the shareholder is referred to as a distribution payment. The consideration provided by the CFC to another entity under an arrangement whereby that other entity makes the payment or provides the benefit is also referred to as a distribution payment.

What is the effect of section 47A?

Section 47A will characterise a distribution payment as a dividend. Whether the whole or a part of the dividend will be included in the assessable income of a resident taxpayer would depend on the other provisions of the Principal Act. For example, section 458 (to be inserted by the Foreign Income Bill) will have the effect that certain dividends paid to a listed country CFC by a CFC that is a resident of an unlisted country are included in the assessable income of resident taxpayers who have attributable interests in both CFCs. Section 44 will include in the assessable income of resident taxpayers deemed dividends paid by a CFC to those taxpayers.

What are the foreign dividends that will be exempt from tax?

With effect from the commencement of the 1990-91 income year, an exemption from tax is to be provided under section 23AJ (to be inserted by the Foreign Income Bill) for dividends received by resident companies from companies resident in a listed (comparable-tax) country. The exemption will apply only where the recipient of the dividend is an Australian company which has a voting interest of at least 10 percent in the foreign company. A similar exemption is to be provided where a dividend is received by an Australian company from a company that is not a resident of a listed country out of certain profits of the company that have been taxed by assessment in Australia, or on a comparable basis in a listed country. Division 6 of Part X of the Principal Act (to be inserted by the Foreign Income Bill) will contain the mechanism to identify the part of the dividend that would be exempt from tax.

Section 23AI (to be inserted by the Foreign Income Bill) will exempt from tax a dividend received by a taxpayer out of income that has been previously attributed to the taxpayer under the accruals tax measures. Section 365 of the Principal Act (to be inserted by the Foreign Income Bill) identifies payments that could be treated as made out of previously attributed income and is instrumental to the grant of this exemption.

What is the role of Division 18 in relation to foreign dividends?

Division 18 of the Part III of the Principal Act (as amended by the Foreign Income Bill) will contain the mechanism for the provision of a credit against the Australian tax payable on foreign dividends for the foreign tax paid or deemed to have been paid on those dividends.

What is the effect of subsection 47A(2)?

Subsection 47A(2) will provide that where:

·
a distribution payment made by a CFC is to be treated as a dividend and included in the assessable income of a resident taxpayer; and
·
the taxpayer's return of income does not treat the distribution payment as a dividend,

the distribution payment would not be treated as a dividend for the purposes of Division 18 of Part III of the Principal Act, section 365 or Division 6 of Part X of that Act.

Under the accruals tax system, the question of whether a particular dividend that is paid by an unlisted country CFC is to be included in the assessable income of a resident taxpayer and the calculation of the amount of the foreign tax credits allowable in relation to a dividend depends on the taxpayer providing a proper account of the payment of each dividend and deemed dividend. Where, for example, the payment by the CFC of a deemed dividend is not disclosed by the taxpayer, subsequent actual dividends paid may be taken to have qualified for exemptions and credits for which they would not qualify had the deemed dividend been taken into account.

Section 47A will treat as deemed dividends certain benefits that are provided by a CFC that is a resident of a listed country. Subsection (2) of this section is intended to have the effect that where the taxpayer prepares the return of income for any year of income on the basis that the deemed dividend was paid that dividend will, subject to certain exceptions, qualify for foreign tax credits under Division 18 of the Principal Act and for any exemption from tax that may be available. If the return was not prepared on that basis, the credits and exemptions were to be denied.

What is the effect of paragraphs (a) and (b) of clause 12?

The amendments to be made by paragraphs (a) and (b) will correct a technical deficiency in proposed subsection 47(2) by making their application explicit 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. Without this correction, the current formulation presents a possible technical difficulty in relation to the applicability of those provisions to dividends that are to be exempt under sections 23AI or 23AJ or because of an exclusion consequent on section 365 or Division 6 of Part X.

What is the effect of paragraph (c) of clause 12

Subsection 47A(2) is also being amended to provide that a distribution payment made by a CFC to a shareholder will also be treated as a dividend for the purposes of Section 23AI or 23AJ, Division 18 of Part III of the Principal Act, section 365 or Division 6 of Part X where the taxpayer notifies the Commissioner of Taxation in writing within 12 months after the end of the year of income in which the payment was made.

What is the effect of paragraph (d) of clause 12

Paragraph (d) will insert new subsections (18A) and (18B) in section 47A. Subsection (18A) will enable an assessment to be made on a taxpayer on the basis that a particular deemed dividend is a dividend for all the purposes of the Principal Act. This would be of relevance, for example, where an assessment is made within the period of twelve months after the end of the year of income in which the distribution payment was made.

Where an attributable taxpayer does not treat a distribution payment made by a CFC in a year of income as a dividend in making the return of income for that year and does not notify the Commissioner of that payment within 12 months of the end of the year of income, subsection (18B) will enable the amendment of an assessment that was made applying the provisions subsection (18A). The amendment of the assessment will not be subject to the time limit on assessments set by section 170 of the Principal Act.

What is the date of effect of the amendment?

Section 47A (to be inserted by the Foreign Income Bill) is to apply to treat certain payments made and benefits provided by a CFC after 3 June 1990 as deemed dividends. The amendments to be made by this Bill to section 47A are also to apply in relation to deemed dividends paid after 3 June 1990 (subclause (6) of clause 79).

Clause 13: Bad debts

Clause 13, which is consequential on the insertion of new section 63D of the Principal Act proposed by clause 14, will amend section 63 of the Principal Act which provides a deduction for bad debts which are written off.

The clause will modify the application of subsection 63(3) which requires the inclusion in assessable income of a recovered debt amount for which a deduction has been allowed under section 63 or any other provision of the Principal Act.

Because of the operation of new section 63D (see notes on clause 14) only part of a debt written off may originally have been deductible. The amendment of subsection 63(3) will ensure that in such a case, the amount of a debt recovery included in assessable income under the subsection does not exceed the amount of the debt allowed as a deduction.

Clause 14: Bad debts of money-lenders not allowable deductions where attributable to listed country branches

The background to the amendment

Bad debts may be claimed as deductions under either of two provisions of the Income Tax Assessment Act. One is a specific provision dealing with bad debts, section 63, and the other is the general deduction provision, section 51.

Firstly, the specific provision itself sets out two bases for deducting bad debts. Pursuant to paragraph 63(1)(a), a debt which has, during the income year, been written off as a bad debt will be allowable as a deduction if it has already been brought to account as assessable income in any year. Pursuant to paragraph 23(1)(b), a bad debt will also be deductible if it is incurred in respect of money lent in the ordinary course of a money lending business.

Alternatively, a deduction may be allowable under the general deductions provision, subsection 51(1), where the bad debt is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income and it is not a capital loss or a loss of a capital, domestic or private nature.

It is relevant also that under the new foreign income measures proposed by the Taxation Laws Amendment (Foreign Income) Bill 1990 the foreign tax credit system will be modified. As a consequence, in most instances the income or profits of a resident company derived in carrying on a business at or through a permanent establishment (e.g. a branch) located in a comparable tax country (a listed country) will be exempt from Australian income tax.

What this amendment will do

Clause 14 will insert new section 63D in the Principal Act, in order to ensure that a deduction is not allowable for offshore debts of a branch of a money lender where the income of the branch is to be exempt from tax under the new foreign income measures. Where a debt is held for periods during which income derived from the debt is assessable and periods when it is exempt, a deduction will be limited to the periods during which income derived was assessable.

Subsection 63D(1) is the operative provision which limits the amount of a deduction otherwise allowable to a money lender in respect of the writing off of a bad debt under either section 51 or 63. The deduction otherwise allowable is to be apportioned on the basis of the proportion of time during which income from the loan would not, because of the operation of section 23AH, have been included in the assessable income of the taxpayer.

Section 23AH, which is one of the new foreign income measures, will exclude from assessable income profits derived by an Australian company from a business carried on in a comparable tax country (a listed country) at or through a permanent establishment of the company in that country, where those profits have been subject to tax in the listed country and are not eligible designated concession income. The expression "eligible designated concession income" is a key feature of the foreign income measures and is to be defined in section 317 of the Principal Act to mean, broadly, certain concessionally taxed income.

Generally, the effect of the apportionment provided for by section 63D is that it will be done on the basis of the ratio of the number of days that the debt was held with the purpose of producing or earning assessable income to the number of days from the origination of the debt (called the "debt holding period"). To determine the number of days that the debt was held with the purpose of producing or earning assessable income it is necessary to subtract the number of days that any income from the debt would not have been included in assessable income because of the operation of section 23AH (called the "listed country branch period").

Where the debt was purchased by the money lender from an associated party, however, the amount of the deduction will depend on the number of days the debt was held for the purpose of producing or earning assessable income and the total life of the loan.

This result is to be achieved by the use of a formula expressed as:

((Debt holding period) - (Listed country branch period)) / (Eligible debt term)

Where:

"Debt holding period" is effectively the number of days since the debt was created or acquired.
"Listed country branch period" is effectively the number of days any income derived by the taxpayer in respect of the debt would have been exempt by reason of the operation of section 23AH.
"Eligible debt term" means:

·
where the debt was acquired from an unrelated party - the number of days in the debt holding period; or
·
where the debt was acquired from an associate - the number of days between when the debt was first created (whether by the taxpayer or another person) and the day it was written off.

Subsection 63D(2) will ensure that any calculation in accordance with the above formula is concerned with the current holding of the debt by the taxpayer, except where the debt has been acquired from an associate. Accordingly, where a debt is acquired from a person other than an associate, the date that the debt was created or any previous acquisition by the taxpayer is to be disregarded.

SOME EXAMPLES OF THE NEW RULES

The following examples illustrate the operation of proposed section 63D.

Example 1 - DEBT ACQUIRED FROM AN UNRELATED PARTY

The foreign branch of a money-lender situated in a listed country acquires a debt from an unrelated party on 1 January 1991. The debt is held in the listed country where it earns interest until 31 December 1993. The debt is then transferred to a branch in an unlisted country where it earns interest. The debt is written off on 31 December 1994. If the value of the debt written off was $100,000 the deduction would be limited to approximately one- quarter calculated as follows:

((1461 - 1096) / (1461)) * ($100,000) = $24,983

Example 2 - DEBT ACQUIRED FROM AN ASSOCIATE

The foreign branch of a money-lender situated in a listed country acquires a debt from an associate on 1 January 1992. That debt was created by the associate on 1 January 1991. The debt is held in the listed country where it earns interest until 31 December 1994. The debt is then transferred to the money-lender's head office in Australia where it earns interest. The debt is written off on 31 December 1995. If the value of the debt written off was $100,000, the deduction would be limited to approximately, one-fifth calculated as follows:

((1461 - 1096) / 1826) * ($100,000)) = $19,989

Clauses 15 and 16

Introductory Note to Clauses 15 and 16

Division 6AAA of Part III of the Principal Act is proposed to be inserted into the Principal Act by the Foreign Income Bill. Broadly, the Division provides for inclusion of the "attributable income" of the trust in the assessable income of a resident, where that resident has, directly or indirectly, transferred certain property or services to a trust estate. Clauses 15 and 16 will modify the calculation of that attributable income.

What is attributable income of a trust estate?

The attributable income of a trust estate is calculated in a similar way to the way net income is calculated under Division 6 of Part III of the Principal Act. However, only the amounts that have not been comparably taxed in a listed country or in Australia are taken into account. Like in the calculation of the attributable income of a CFC, the Principal Act is modified in its application to the trust.

Clause 15: Certain provisions to be disregarded in calculating attributable income

In calculating the attributable income of a trust sections 456 to 459 are ignored. Those sections attribute amounts to certain residents where the resident has direct or indirect interest in the attributable income of a CFC (see notes on clause 77). As is the case for the calculation of the attributable income of a CFC, in order to prevent double taxation, those sections are ignored in the calculation of the attributable income of a trust. Amounts may also be included in the assessable income of certain residents under section 459A, to be inserted by clause 77. Ignoring section 459A for the calculation of the attributable income of a trust will similarly prevent double taxation.

What calculations will the amendment affect?

The amendments will apply to all calculations of attributable income, whether before or after the commencement of this Bill (see further notes on subclause 2(2).

Clause 16: Insertion of section 102AAZBA

Section 102AAZBA to prevent double taxation where trusts leave Australia.

Clause 16 will insert section 102AAZBA into the Principal Act to modify the application of Part IIIA to prevent double taxation in the calculation of the attributable income of the trust estate, where there has been a change in residence of a trust (including a unit trust) from Australia to another country.

How could double taxation arise?

The problem arises in relation to trust assets acquired after 19 September 1985 that are not taxable Australian assets. Under subsections 160M(9) or (10) of the Principal Act, these assets are deemed to have been sold by the trust for their market value at the time the change of residence occurred. (Note: Assets acquired before the capital gains tax provisions became operative on 20 September 1985 are not subject to those provisions. Taxable Australian assets are subject to the capital gains provisions when disposed of, even where the person disposing of them is a non-resident.)

However, where a non-resident trust estate which was previously a resident trust estate or a resident unit trust is subject to Division 6AAA, a capital gain on the actual disposal of an asset (other than a taxable Australian asset) owned at the residence- change time may be taken into account in the calculation of attributable income of the non-resident trust estate.

Modified cost base to prevent double taxation

Broadly, proposed section 102AAZBA will prevent the possible double capital gains taxation that could have occurred where the calculation of attributable income under Division 6AAA (to be inserted by the Foreign Income Bill) took account of the original cost of the asset and the capital gain that accrued in the period the trust was an Australian resident. The relief from double taxation is achieved by using the market value of the asset at the residence-change time as the cost base of the asset for the purpose of determining the capital gain or loss to be taken into account in the calculation of the attributable income of the non- resident trust estate. In this way only the gain accruing during the period of non-residence is brought into attributable income.

For the purpose of applying section 102AAZBA and the modified accruals tax version of Part IIIA to calculate attributable income, paragraph 102AAZBA(a) disregards the assumption of residency in paragraph 102AAZB(b) (to be inserted by the Foreign Income Bill). The assumption of residency would otherwise negate the tax effect for capital gains tax purposes of actual change of residency. In other words, if this was not done, capital gains would have to be calculated as if the change of residency did not occur.

In what circumstances does section 102AAZBA apply?

A number of requirements must be satisfied before section 102AAZBA will apply to determine the cost base of an asset of the non-resident trust. The first requirement is that, in the income year for which the attributable income of the trust is to be calculated, or an earlier year, the trust ceased to be an Australian resident. There are three other requirements:

·
that the relevant asset (being one that was acquired after 19 September 1985 and was not a taxable Australian asset) was owned by the trust estate at the residence-change time (paragraph (b));
·
that the trust disposed of the asset during the attributable income year (paragraph (c)); and
·
that, because subsection 160M(9) or (10), the gain (or loss) that had accrued on the asset up to the time the trust ceased to be an Australian resident was taken into account in assessing Australian tax (paragraph (d)).

Modified CFC provisions to calculate accruals cost base and capital gains/losses for ex-Australian trusts

Where each of paragraphs 102AAZBA(a) to (d) are satisfied, sections 411 to 417 (to be inserted by the Foreign Income Bill), as modified by paragraphs 102AAZBA(e) to (j), are taken to apply for the purpose of determining a capital gain or loss to be taken into account in the calculation of the attributable income of the now non-resident trust.

The result of this process is that the market value of the asset at the residence-change time will be the cost base for calculating the capital gain or loss to be taken into account in determining the trust's attributable income for the relevant income year. Once again, it should be remembered that taxable Australian assets and assets acquired by the trust before 20 September 1985 are not taken into account in the calculation of the attributable income of a non-resident trust.

What provisions are used to calculate the accruals cost base?

Sections 411 to 417 of Part X determine the cost base of assets owned by a controlled foreign company (CFC) which are "30 June 1990 non-taxable Australian assets" as defined in section 406 of that Part. Broadly, these are assets which are owned by a CFC at the end of 30 June 1990 other than taxable Australian assets. Their purpose is to enable the calculation of capital gains or losses accruing since the commencement of the accruals measures on assets held by certain non-resident companies. As the purpose with trusts is to calculate the capital gain or loss accruing since the change of residence, sections 411 to 417 provide a framework that, with certain variations, enables this calculation to be done. Paragraphs (e) to (j) of section 102AAZBA set out the variations to sections 411 to 417 for determining the cost base of assets (other than taxable Australian assets and assets acquired before 20 September 1985) owned at the residence-change time which are subsequently disposed of by the non-resident trust estate.

How are CFC provisions modified to apply to ex-Australian trusts?

Paragraphs (e) to (j) of section 102AAZBA provide that sections 411 to 417 (inclusive) have effect for the purpose of calculating the attributable income of a non-resident trust estate under Subdivision D (paragraph (e)). For this purpose:

·
any reference in those sections to an eligible CFC is to be read as a reference to a trust estate (paragraph (f));
·
any reference in those sections to a 30 June non-taxable Australian asset is to be read as a reference to the asset - owned by the trust when it ceased to be a resident of Australia and subject at that time to Australia's capital gains provisions - that was disposed of after the trust became a non- resident (paragraph (g);
·
any reference in those sections relating to 30 June 1990 or 1 July 1990 is to be read as a reference relating respectively to the residence-change time of the trust or a time immediately after the residence-change time (paragraph (h); and
·
the specific provisions in sections 412, 414, 415, 416 and 417 to allow an asset cost base other than market value are omitted (paragraph (j)).

Clause 17: Interpretation

This clause will amend subsection 122(1) of the Principal Act by excluding the words "in Australia", wherever they occur, from the definitions of the terms "mining or prospecting right" and "prescribed mining operations".

Section 122 is an interpretative provision containing definitions of various expressions used in Subdivision A of Division 10 of Part III of the Principal Act. The subdivision provides for the writing-off of certain capital expenditure incurred in exploration or prospecting for minerals and in carrying on general mining operations in Australia.

The effect of the amendments proposed by clause 17 will be that these general mining provisions will now apply to operations carried on both in and out of Australia as long as those operations are carried on for the purpose of gaining or producing assessable income.

By the operation of clause 79 (see notes on that clause) the amendments effected by clause 17 will apply to relevant expenditure incurred by a taxpayer outside Australia after 7.30pm eastern standard time (EST) on 21 August 1990.

Clause 18: Exploration and prospecting expenditure

Clause 18 will amend section 122J of the Principal Act by excluding the words "in Australia" from subsection (1) and subparagraph (4D)(b)(i).

Section 122J is the operative provision that allows deductions for expenditure incurred during a year of income on exploration or prospecting on any mining tenements in Australia for minerals obtainable by prescribed mining operations.

The clause should be looked at in conjunction with clause 17. As explained in the notes on that clause, the general mining provisions will now apply to operations carried on outside Australia as long as the operations are conducted for the purpose of generating assessable income.

Clause 19: Interpretation

This clause will amend subsection 122JB(1) of the Principal Act by excluding the words "in Australia", wherever they occur, from the definitions of the terms "eligible quarrying operations" and "quarrying or prospecting right".

Section 122JB is an interpretative provision containing definitions of various expressions used in Subdivision B of Division 10 of Part III of the Principal Act. The subdivision provides for the writing-off of capital expenditure incurred in exploration or prospecting for quarry materials and in carrying on quarrying operations in Australia. The Subdivision mirrors Subdivision A (General Mining) subject to two exceptions. Development expenditure in respect of quarrying operations is deducted over the lesser of the life of the quarry or 20 years and expenditure on housing and welfare in respect of quarrying operations is not an allowable deduction.

The effect of the amendments proposed by clause 19 will be that the quarrying provisions, like the general mining provisions, will now apply to operations carried out both in and out of Australia as long as those operations are carried out for the purpose of gaining or producing assessable income.

This amendment will also apply to relevant expenditure incurred by a taxpayer outside Australia after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 20: Exploration and prospecting expenditure

This clause will amend section 122JF of the Principal Act by excluding the words "in Australia" from subsection (1) and subparagraph (7)(b)(i).

Section 122JF is similar in application to section 122J in the general mining provisions. It is the operative provision that allows an outright deduction for exploration and prospecting expenditure incurred in Australia for quarry materials.

The clause should be read in conjunction with clause 19. As explained in the notes on that clause, the provisions relating to quarrying will now apply in respect of such operations carried on outside Australia as long as the operations are conducted for the purpose of generating assessable income.

Clause 21: Application of Subdivision

Clause 21 will amend section 123A of the Principal Act by excluding the words "in Australia", wherever they occur, in subsections (1) and (1A).

Section 123A is an application provision which facilitates the operation of Subdivision A of Division 10AAA of Part III of the Principal Act. The Subdivision allows a deduction for expenditure of a capital nature incurred in connection with facilities used primarily and principally for the transport of minerals in Australia.

The effect of the amendments proposed by clause 21 will be that the transport of certain minerals provisions will now apply to operations carried on both in and out of Australia, as long as those operations are carried on for the purpose of gaining or producing assessable income.

By the operation of clause 79 (see notes on that clause), the amendment will apply to expenditure incurred by a taxpayer after 7.30pm EST on 21 August 1990.

Clause 22: Application of Subdivision

This clause will amend subsection 123BD(1) of the Principal Act by excluding the words "in Australia".

Section 123BD is an application provision which is very similar to section 123A of Subdivision A. It specifies the circumstances in which capital expenditure may qualify for deduction under Subdivision B of Division 10AAA of Part III of the Principal Act. The Subdivision allows a deduction for expenditure of a capital nature incurred in connection with facilities used primarily and principally for the transport of quarry materials obtained from quarrying operations.

The effect of the amendment proposed by clause 22 will be that the transport of quarry materials provisions will now apply to operations carried on both in and out of Australia as long as those operations are carried on for the purpose of gaining or producing assessable income.

This amendment will apply to relevant expenditure incurred by a taxpayer after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 23: Interpretation

This clause will amend subsection 124(1) of the Principal Act by excluding the words "in Australia" from the definition of the term "prescribed petroleum operations".

Section 124 is an interpretative provision containing definitions of various expressions used in Division 10AA of Part III of the Principal Act. The Division contains special provisions to allow deductions for:

·
certain capital expenditure incurred by taxpayers in carrying on petroleum mining operations in Australia; and
·
certain expenditure on exploration and prospecting for petroleum in Australia.

The effect of the amendment proposed by clause 23 will be that the prospecting and mining for petroleum provisions will now apply to operations carried on both in and out of Australia as long as those operations are carried out for the purpose of gaining or producing assessable income.

By the operation of clause 79 (see notes on that clause) the amendment will apply to relevant expenditure incurred by a taxpayer after 7.30pm EST on 21 August 1990.

Clause 24: Allowable capital expenditure in respect of cash bidding payments for exploration permits and production licences

Background note

Section 124ABA provides for the determination of the amount to be included as allowable capital expenditure of the taxpayer in respect of payments made to the Commonwealth under the cash bidding system introduced in 1985 for the award of offshore petroleum exploration permits in highly prospective areas. The section was inserted to ensure that Australian companies were not placed at a disadvantage compared with foreign based companies entitled to income tax deductions for the payments in their home countries.

The system of cash bidding is governed by the Petroleum (Submerged Lands) Act 1967.

Clause 24 will amend section 124ABA of the Principal Act by adding new subsection (7).

This new subsection will have the effect of extending the deduction allowed for cash bidding where a payment is made to a foreign government for exploration permits and production licences and the expenditure is incurred for the purpose of gaining or producing assessable income.

For such a payment to be taken to be allowable capital expenditure for the purposes of section 124ABA:

·
the regulations must declare a law of a foreign country to contain provisions equivalent to those of Divisions 2 and 3 of Part III of the Petroleum (Submerged Lands) Act 1967; and
·
the Commissioner must be satisfied, broadly, that if subsections 124ABA(1) to (6) inclusive had applied in relation to the foreign law in a similar way as they apply in relation to Divisions 2 and 3 of Part III of the Petroleum (Submerged Lands) Act 1967, the taxpayer would have been taken by section 124ABA to have incurred an eligible amount of capital expenditure.

By the operation of clause 79 (see notes on that clause), the amendment will apply to relevant expenditure incurred by a taxpayer outside Australia after 7.30pm EST on 21 August 1990.

Clause 25: Exploration and prospecting expenditure

Section 124AH of the Principal Act is the operative provision which authorises a deduction for expenditure on exploration or prospecting for petroleum in Australia. The section is similar in operation to sections 122J and 122JF, as they apply in relation to expenditure on exploration or prospecting for minerals and quarrying materials respectively.

This clause will amend section 124AH by excluding the words "in Australia" from subsection (1) and subparagraph (4C)(b)(i).

The clause should be read in conjunction with clause 23. As explained in the notes on that clause the prospecting and mining for petroleum provisions will now apply to operations carried on outside Australia as long as the operations are conducted for the purpose of generating assessable income.

Clause 26: Prospecting or mining by Contractors, Profit-Sharing Arrangements, etc.

Section 124AJ of the Principal Act deals with certain prospecting and mining for petroleum arrangements such as the use of contractors, profit-sharing and farm-outs and the assignment or sub-leasing of rights.

Clause 26 will amend section 124AJ to extend its scope to offshore operations by excluding the words "in Australia" from subsections (2) and (3).

By clause 79 (see notes on that clause), the amendment will apply to relevant expenditure incurred by a taxpayer outside Australia after 7.30pm EST on 21 August 1990.

Clause 27: Double deductions

This clause will amend subsection 124AN(2) of the Principal Act by excluding the words "in Australia".

The purpose of section 124AN is to prevent double deductions, by precluding an allowable deduction under any other provisions of the Principal Act for capital expenditure that is an allowable deduction under Division 10AA (the Petroleum provisions), except in respect of certain units of property that are used for the purpose of production of assessable income other than assessable income from petroleum activities.

The amendment proposed by clause 27 will extend the scope of section 124AN to exploring or prospecting outside Australia. This amendment will apply to relevant expenditure incurred after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 28: Interpretation

This clause will amend subsection 124K(1) of the Principal Act by excluding the definition of "unit of industrial property" and substituting a new definition.

Section 124K is an interpretative provision containing definitions of various expressions used in Division 10B of Part III of the Principal Act. The Division provides for the deduction of expenditure of a capital nature incurred on the development or purchase of an Australian patent, registered design or copyright, or in the purchase of a licence to use a patent, registered design or copyright (i.e. a unit of industrial property).

The new definition of "unit of industrial property" will include certain rights possessed by a person under a law of a foreign country that are equivalent to such rights possessed by a person under an Australian law.

The effect of the new definition will be to extend the scope of Division 10B to the owner of a foreign unit of industrial property provided the unit has been used for the purpose of producing assessable income in the year of income or a previous year of income.

It should be noted, however, that where the owner of a unit of property obtains a benefit from its use outside Australia, the Commissioner is given a discretion under section 124Z to reduce deductions, allowable under Division 10B, to reflect in effect that part of the relevant costs of the industrial property which is not applicable to the use of the right for the purposes of the generation of assessable income.

The amendment proposed by clause 28 will apply to relevant expenditure incurred after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 29: Interpretation

Clause 29 will amend subsection 124ZF(1) of the Principal Act by excluding the definition of "research and development activities" and substituting a new definition.

Section 124ZF is an interpretative provision containing definitions of various expressions used in Division 10D of Part III of the Principal Act. The Division provides a special system of tax 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 (R & D) activities in Australia where the activities are carried on in connection with a business conducted for the purpose of producing assessable income.

The present definition of "research and development activities" obtains its meaning in part from section 73B of the Principal Act. Under that section R & D activities must be carried on in Australia or in an external Territory. In broad terms, the new definition will extend the meaning of the term for the purposes of Division 10D to include R & D activities carried on overseas that would have been eligible R & D activities if they had been carried on in Australia.

The effect of the new definition will be to extend the scope of Division 10D to overseas buildings used for the purposes of carrying on R & D activities where the activities are carried on in connection with a business conducted for the purpose of producing assessable income.

This amendment will also apply to relevant expenditure incurred after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 30: Qualifying expenditure

Clause 30 will amend section 124ZG of the Principal Act by excluding the words "in Australia", wherever they occur, in paragraph (2A)(a).

The provisions of section 124ZG prescribe the qualifying expenditure which is the basis for the deduction allowable to a taxpayer under Division 10D. In that regard, paragraph (2A)(a) presently refers to expenditure incurred in relation to a building in Australia.

The clause should be read in conjunction with clause 29. As explained in the notes on that clause, it is proposed that Division 10D will now apply in relation to certain buildings located outside Australia as long as they generate assessable income. This clause is designed, therefore, to make the necessary change to paragraph (2A)(a) to ensure that this amendment will also apply to relevant expenditure incurred by a taxpayer outside Australia after 7.30pm EST on 21 August 1990 - see notes on clause 79.

Clause 31: Interpretation

This clause will remove reference to paragraph 122B(2)(c) in section 159GZZJ. Paragraph 122B(2)(c) was omitted by Act No. 107 of 1989.

Clause 32: Concessional rebate for medical expenses

The level of the rebate of tax which is allowable to taxpayers who pay net medical expenses exceeding $1,000 in a year of income is to be reduced to 20 per cent for 1991-92 and subsequent years.

By subsection 159P(3A) of the Principal Act the rebate for taxpayers who incur net medical expenses in excess of $1,000 is presently 25 per cent for 1990-91 and 21 per cent for 1991-92 and subsequent years.

This clause will amend subsection 159P(3A) by substituting 20 per cent for the 21 per cent rate, to apply for 1991-92 and all subsequent years of income. The rate for the 1990-91 year of income will remain at 25 per cent.

Clause 33: Passive Income

This clause will amend the definition of passive income in subsection 160AEA(1) to insert a reference to new section 459A. Section 160AEA is proposed to be inserted into the Principal Act by the Foreign Income Bill while section 459A is to be inserted by this Bill (see notes on clause 77).

What is passive income?

Broadly, the expression "passive income" encompasses those categories of income and gains that are generated by passive investments rather than by active business. The distinction was drawn, in general, according to the level of activity necessary to generate the income or gain and the propensity for the source of the income or gain to be easily shifted. The definition includes such amounts as interest not generated in a money lending business, dividends, rent and royalties. Also included are the amounts to be attributed under proposed sections 456 to 459 of the Principal Act and amounts attributed under the proposed transferor trust measures (paragraph 160AEA(1)(n)).

What is the definition used for?

The foreign tax credits allowable under section 160AF are calculated separately for each class of income. Under the Foreign Income Bill the proposed classes of income are passive income, income relating to offshore banking units, and other income. The definition in subsection 160AEA(1) is used to determine the amounts that fall within the passive income class of income for that calculation.

Further, subsection 160AEA(2) contains a definition of "modified passive income" which is based on the definition of passive income but excludes interest income. The definition of modified passive income (and therefore, indirectly, the definition of passive income) is used for the operation of the foreign loss quarantining provisions of the new section 79D. Broadly, that section will limit the deductions in respect of certain classes of assessable foreign income to the amount of the foreign income of each class. The expression is also relevant to the calculation of a foreign loss under the new section 160AFD, which is, broadly the excess, for each class of foreign income, that was disallowed under section 79D.

What is the effect of the amendment?

The amount attributed under section 459A is to be treated as foreign income by the amendment of section 6AB by this Bill (see notes on clause 9). The first effect of the amendment to the definition of passive income is that income attributed under section 459A (treated as passive income) will affect the calculation of the foreign tax credit for the passive class of income. Without this amendment it would affect the calculation of the credit in respect of the residual class of income.

The second effect will be that the amount attributed, and any expenses that may be related to it, will affect the amount quarantined under the modified passive class of assessable foreign income. Consequently, it will also affect the amount of the loss relating to that class to be carried forward to future years and used to reduce any assessable foreign income of that class. The amendment also ensures that only a foreign loss of a previous year of the modified passive class can reduce an amount attributed under section 459A.

Both effects are consistent with the treatment of amounts to be attributed under proposed sections 456 to 459.

What is the date of effect of the change?

There is no application provision for this clause in this Bill. As a result in effect, the changes will apply as if the definitions of passive income and, indirectly, modified passive income - both of which apply for a taxpayer's 1990-91 and subsequent years of income - were originally enacted in the amended form.

Clause 34: Interpretation

Clause 34 will amend section 160APA of the Principal Act which contains the definitions that apply for the purposes of Part IIIAA of the Principal Act.

Paragraph (a) will amend the definition of "applicable general company tax rate" to insert paragraph (aa). The term is used in Part IIIAA in connection with the terms "adjusted amount" and "general company tax rate" (defined in section 160APA) to specify the company tax rate imposed for a financial year that is used to convert a "basic amount" to a franking credit or a franking debit.

The effect of paragraph (aa) is that the applicable general company tax rate for calculating the adjusted amount of:

·
the reducing franking credits arising under sections 160APVA to 160APVE (inclusive) (see clause 39) in relation to a year of income (subparagraph (i)); and
·
reducing franking debits arising under sections 160AQCD to 160AQCH (inclusive) (see clause 42) in relation to a year of income (subparagraph (ii));

will be the general company tax rate for the year of tax that relates to the relevant year of income.

Paragraph (b) will insert the definitions of new terms into section 160APA. All these definitions are already used in Division 8 of Part III of the Principal Act and are self- explanatory.

Clause 35: Life assurance companies - application of rebates against components of taxable income

Clause 35 proposes the insertion of new section 160APHB into the Principal Act. This new section will set out the order in which rebates of tax (other than under section 46 or 46A) are to be applied against the components of taxable income of a life assurance company for the purposes of calculating the tax on a particular component.

Division 8 of Part III of the Principal Act provides for the taxable income of a life insurance company to be divided into four components. These components are:

·
the CS/RA component;
·
the AD/RLA component;
·
the NCS component; and
·
the non-fund component.

The taxable income of a life assurance company is allocated to these components for the purpose of imposing a particular rate of tax. There is no need to allocate rebates to particular components of taxable income for Division 8 purposes. However, in determining the amount of tax attributable to a particular component for the purposes of applying the formulae proposed for insertion into Part IIIAA by clauses 39 and 42 of this Bill, rebates are to be allocated to a particular component.

Subsection 160APHB(1) specifies the circumstances in which rebates are to be allocated to particular components of taxable income. These are:

·
in determining the amount of company tax assessed that is attributable to the non-fund component. The amount determined will be used in the formulae set out in subsections 160APVA(2), 160APVB(2), 160APVC(2), 160AQCD(2) and 160AQCE(2) and section 160AQCF (see clauses 39 and 42);
·
in determining the amount of an increase or reduction in company tax assessed that is attributable to the non-fund component. The amount determined will be used in the formulae set out in sections 160APVD and 160AQCG (see clauses 39 and 42); and
·
in determining the company's estimated tax liability that is attributable to the fund component of taxable income which is the aggregate of the CS/RA, AD/RLA and NCS components. This calculation is required for the purposes of paragraphs 160APYC(c) and 160AQJ(2)(e) and (f) (see clauses 41 and 43).

Subsection 160APHB(2) will allocate the rebates to a particular component of taxable income. In determining the amount of tax assessed, the increase or reduction in tax or the estimated tax liability attributable to a particular component rebates, other than those allowable under section 46 or 46A which can only relate to the non-fund component, are to be taken to be applied:

·
first, against components of taxable income other than the non- fund component (paragraph (a)); and
·
then against the non-fund component (paragraph (b)).

Clause 36: No credits of a mutual life assurance company or SGIO

Clause 36 will insert proposed section 160APKA into the Principal Act. Section 160APKA will operate to prevent a franking credit arising under any section where the company or life assurance company is a mutual life assurance company or an SGIO. An SGIO is defined in subsection 6(1) of the Principal Act. The effect of the section will be that any reference to a life assurance company in relation to a franking credit excludes a mutual life assurance company or an SGIO. By subclause 2(3) of the Bill section 160APKA is to have effect after 21 August 1990.

Clause 37: Receipt of franked dividends

Clause 37 will amend subsection 160APP(5) of the Principal Act to allow a life assurance company to receive a franking credit on the receipt of franked dividends paid on assets held in the company's insurance funds.

Generally speaking, section 160APP provides that a company receiving a franked dividend which is not exempt income of the company is entitled to a franking credit for the franked amount of the dividend. However, subsection 160APP(5) operates to deny a franking credit for franked dividends paid to a life assurance company, where the assets from which the dividends are derived are included in the insurance funds of the company at any time during the company's year of income in which the dividend was payable and prior to the time of payment of the dividend.

Amended subsection 160APP(5) will apply to allow a franking credit to a life assurance company. The subsection will provide that the franking credit otherwise arising under subsection 160APP(1) on the receipt of a franked dividend will be reduced by 80 per cent where the company is a life assurance company and the assets from which the franked dividend is derived are included in the insurance funds of the company. A franking credit will not be available to mutual life assurance companies and SGIOs because of the operation of proposed section 160APKA (see earlier notes).

By subclause 79(10) of the Bill the reduced franking credit will be available to life assurance companies in respect of franked dividends received from the beginning of the first franking year of the company following the introduction of this Bill.

Clause 38: Receipt of franked dividends through trusts and partnerships

Clause 38 proposes an amendment of subsection 160APQ(3) of the Principal Act to allow franking credits to arise to life assurance companies on the receipt of franked dividends that flow through trusts and partnerships in a manner similar to that proposed by clause 37.

Franking credits arise under subsection 160APQ(1) where a company is a beneficiary in a trust estate or a partner of a partnership that has received, directly or indirectly, franked dividends.

Existing subsection 160APQ(3) applies to deny a franking credit in relation to a trust amount or partnership amount if the assets of a life assurance company to which that amount is attributable were included in the insurance funds of the company at any time during the company's year of income prior to the time when the franking credit would otherwise arise.

Amended subsection 160APQ(3) will operate in a manner similar to proposed amended subsection 160APP(5) by allowing a franking credit. The franking credit that would otherwise arise under subsection 160APQ(1) will be reduced by 80 per cent. Again, proposed section 160APKA will prevent a franking credit arising to mutual life assurance companies and SGIOs, and the amendment will take effect from the beginning of the company's first franking year following the introduction of this Bill.

Clause 39: Insertion of new sections

Clause 39 will insert sections 160APVA, 160APVB, 160APVC, 160APVD and 160APVE into Part IIIAA of the Principal Act. These sections will provide for reducing franking credits to arise to life assurance companies when franking debits arise on the application or refund of an initial or further payment of tax, the receipt of an amended assessment reducing tax assessed and on the allowance of a foreign tax credit. These reducing franking credits correspond to the reducing franking debits that will arise under the sections proposed for insertion by clause 42 (see later notes).

The relevant reduction will be achieved by calculating a franking credit for each franking debit. The franking credit will be determined by the application of a formula that calculates the franking credit to be 80 per cent of the franking debit that is attributable to the tax on fund income. The tax on fund income is the difference between the tax on taxable income and the tax on the non-fund component of taxable income.

Section 160APVA : Life assurance companies - credit reducing section 160APYA debit

Section 160APVA will provide for a reducing franking credit to arise when an initial payment of tax that a company is required to make under section 221AP of the Principal Act is applied by the Commissioner.

By subsection 160APVA(1) a franking credit of an amount calculated under subsection (2) will arise on the day a franking debit arises to a life assurance company under section 160APYA for the application of an initial payment of tax that was made in relation to a year of income referred to as the current year of income.

New subsection 160APVA(2) sets out the formula to be applied in calculating the amount of the franking credit.

Section 160APVB : Life assurance companies - credit reducing section 160APYAA debit

Section 160APVB will provide for a reducing franking credit to arise to a life assurance company when a further payment of tax, referred to in subsection 221AR(7) of the Principal Act, that has been made by the company is applied by the Commissioner.

By subsection 160APVB(1) a franking credit of an amount calculated under subsection (2) will arise on the day a franking debit arises to a life assurance company under section 160APYAA (proposed for insertion into the Principal Act by Taxation Laws Amendment Bill (No.4) 1990) for the application of a further payment of tax.

New subsection 160APVB(2) sets out the formula to be applied in calculating the amount of the franking credit.

Section 160APYC : Life assurance companies - credit reducing section 160APYB debit

Section 160APVC will provide for a reducing franking credit to arise to a life assurance company when an initial or further payment of tax that has been made by the company is refunded.

By subsection 160APVC(1) a franking credit of an amount calculated under subsection (2) will arise on the day a franking debit arises to a life assurance company under section 160APYB as a result of receiving a refund of an initial or further payment of tax.

Subsection 160APVC(2) sets out the formula to be applied in calculating the amount of the franking credit.

Section 160APVD : Life assurance companies - credit reducing section 160APZ debit

Section 160APVD will provide for a franking credit to arise on the day a franking debit arises to a life assurance company under section 160APZ on the receipt of an amended assessment reducing tax. The amount of the franking debit will be calculated using the formula set out.

Section 160APVE : Life assurance companies - credit reducing section 160AQA debit

Section 160APVE will provide for a franking credit to arise on the day a franking debit arises to a life assurance company under section 160AQA because of the allowance of a foreign tax credit or the amount of foreign tax credit allowable is increased. The amount of the franking credit will be calculated using the formula set out.

Clause 40: No debits of a life assurance company

Clause 40 inserts into the Principal Act proposed section 160APWA which has an effect similar to section 160APKA (see earlier notes). It will operate to prevent any franking debit arising when the company is a mutual life assurance company or an SGIO. The effect of this provision is than any reference to a life assurance company in relation to a franking debit excludes a mutual life assurance company and an SGIO. By subclause 2(3) new section 160APKA is to have effect from 21 August 1990.

Clause 41: Waiver of franking deficit tax

Clause 41 will amend section 160APYC (proposed for insertion into the Principal Act by clause 27 of Taxation Laws Amendment Bill (No.4) 1990) to provide for the franking debit to arise to a life assurance company when an amount of a franking deficit tax liability has been waived because an initial payment of company tax has been made on the basis of the company's estimated tax liability.

Under proposed section 160APYC a franking debit will arise where a liability for franking deficit tax arising under subsection 160AQJ(1) has been waived because of the application of subsection 160AQJ(2). The franking debit arises under section 160APYC when a company has made an initial payment of tax under section 221AP on the basis of a written notice of the company's estimate of its tax payable for that year made under paragraph 221AQ(1)(a). The amount of the franking debit arising on the day the company makes the initial payment is based on the amount of franking deficit tax waived or, if this exceeds the amount of the initial payment, the debit is based on the amount of the initial payment.

Paragraph (a) of clause 41 will amend proposed paragraph 160APYC(a) to provide for a franking debit to arise when the whole amount of a life assurance company's liability for franking deficit tax is waived by the application of paragraph 160AQJ(2)(e) (see clause 43).

The franking deficit tax liability of a life assurance company will be waived by the operation of new paragraph 160AQJ(2)(e) (see later notes) where the amount of that liability is not greater than the reduced amount of the initial payment calculated using the formula set out.

Paragraph (b) of clause 41 is a drafting measure to facilitate the addition of paragraph (c) to section 160APYC.

Paragraph (c) will provide that if an amount of franking deficit tax has been waived by the application of new paragraph 160AQJ(2)(f) (see later notes), the franking debit to arise to the life assurance company is the adjusted amount of the franking deficit tax that is not greater than the reduced amount of the initial payment calculated using the formula set out.

Clause 42: Insertion of new sections

Clause 42 will insert sections 160AQCD, 160AQCE, 160AQCF, 160AQCG and 160AQCH into Part IIIAA of the Principal Act. These sections are the means by which the accumulation of franking credits by life assurance companies will be limited to the tax liability that relates to income that is potentially available for distribution to shareholders. This is achieved by these sections providing franking debits to effectively reduce franking credits arising to a life assurance company on the making of an initial or further payment of tax, the receipt or deemed receipt of an assessment or an amended assessment increasing tax and on the allowance of a foreign tax credit.

The effect of these sections is that a reducing franking debit will be calculated for each franking credit by the application of a formula. The franking debit calculated will be 80 per cent of the franking credit that is attributable to the tax on fund income. Tax on fund income is the difference between tax on taxable income and tax on the non-fund component of taxable income. Fund income is the income that is derived from assets included in the company's insurance funds.

Section 160AQCD : Life assurance companies - debit reducing section 160APMA credit

Section 160AQCD will provide for a reducing franking debit to arise when a life assurance company makes an initial payment of tax that is required to be made under section 221AP of the Principal Act.

Subsection 160AQCD(1) specifies that a franking debit of an amount calculated under subsection (2) will arise to a life assurance company on the day the company becomes entitled to a franking credit under section 160APMA for the making of an initial payment of tax.

Subsection 160AQCD(2) sets out the formula to be applied in calculating the amount of the franking debit.

Section 160AQCE : Life assurance companies - debit reducing section 160APMB credit

Section 160AQCE will provide for a reducing franking debit to arise when a life assurance company becomes entitled to a franking credit on the making of a further payment of tax referred to in subsection 221AR(7) of the Principal Act.

By subsection 160AQCE(1) a franking debit for an amount calculated under subsection (2) will arise on the day the life assurance company becomes entitled to a franking credit under section 160APMB for the making of a further payment of tax.

Subsection 160AQCE(2) set out the formula to be applied in calculating the amount of the franking debit.

Section 160AQCF : Life assurance companies - debit reducing section 160APN or 160APNA credit

Section 160AQCF will provide for a franking debit to arise when a life assurance company becomes entitled to a franking credit under section 160APN on the service of an original company tax assessment or under section 160APNA on the deemed service of an original company tax assessment. The amount of the franking debit will be calculated using the formula set out.

Section 160AQCG : Life assurance companies - debit reducing section 160APR credit

Section 160AQCG will provide for a franking debit to arise when a life assurance company becomes entitled to a franking credit under section 160APR because of the service of an amended company tax assessment increasing tax. The amount of the franking debit will be calculated using the formula set out.

Section 160AQCH : Life assurance companies - debit reducing section 160APT credit

Section 160AQCH will provide for a franking debit to arise when a life assurance company becomes entitled to a franking credit under section 160APT as a result of a reduction in an amount of foreign tax credit. The amount of the franking debit will be calculated using the formula set out.

Clause 43: Liability to franking deficit tax

Clause 43 proposes the amendment of section 160AQJ to provide a separate regime for waiving the franking deficit tax liabilities of life assurance companies on the making of an initial payment of tax based on the company's estimated tax liability.

Subsection 160AQJ(1) of the Principal Act provides that where a company has a deficit balance in its franking account at the end of a franking year it is liable to pay franking deficit tax. The franking deficit tax payable is calculated according to a formula and is the additional amount of company tax that the company would have paid if it had generated sufficient franking credits to frank its dividends to the extent it did.

Subsection 160AQJ(2) allows a company that has made an initial payment of tax under section 221AP on the basis of the amount of its estimated tax liability specified in a written notice in accordance with paragraph 221AQ(1)(a), to waive payment of the franking deficit tax to the extent that it does not exceed the amount of the initial payment.

In the case of life assurance companies the amount of the franking credit arising under section 160APMA for the making of the initial payment will also give rise to a reducing franking debit under proposed section 160AQCD of 80 per cent of the payment that can be attributed to the fund component.

Paragraph (a) of clause 43 will amend paragraphs 160AQJ(2)(c) and (d) to exclude the application of those paragraphs to life assurance companies.

Paragraph (b) is a drafting measure to enable a further paragraph to be inserted in subsection 160AQJ(2).

Paragraph (c) proposes the insertion of paragraphs (e) and (f) to subsection 160AQJ(2). These will apply to determine the amount of franking deficit liability of a life assurance company that may be waived where the initial payment of company tax is made on the basis of a written notice specifying the company's estimated tax liability.

New paragraph (e) will apply to waive the franking deficit tax liability of a life assurance company where the amount of the liability is not greater than the amount calculated under the formula. The amount of franking deficit tax waived by this paragraph will generate a franking debit under paragraph 160APYC(a) (see earlier notes).

New paragraph (f) will waive payment of an amount of the franking deficit tax liability where the amount of that liability exceeds the calculation using the formula. The amount to be waived will be that calculated by the formula. The amount of franking deficit tax waived by this paragraph will generate a franking debit under paragraph 160APYC(c) (see earlier notes).

Clause 44: Assets to which part applies

Clause 44 proposes an amendment to the definition of "asset" contained in section 160A, to make it clear that a partner's interest in a partnership asset will be treated as a separate asset for capital gains purposes.

Clause 45: Taxpayer

The amendment proposed to section 160C ensures that a partnership will not be taken to be a "taxpayer" for the purposes of Part IIIA. This amendment is complementary to the amendment made by clause 44 to the definition of "asset", their combined effect being to ensure that on the disposal of a partnership asset, the capital gains tax consequences of the asset's disposal will be accounted for by the individual partners, and not the partnership.

Clause 46: Associated Persons

Paragraph 160E(d) determines who is an "associate" of a taxpayer being a partnership. Because a partnership will not be treated as a "taxpayer" for the purposes of Part IIIA, this paragraph will be omitted.

Clause 47: Resident Trust Estates, Partnerships and Unit Trusts

Subsection 160H(2) defines the term "resident partnership". However, that concept would only be relevant if a partnership is treated as a "taxpayer" for Part IIIA purposes. Subsection 160H(2) will therefore be omitted.

Clause 48: Part Applies in Respect of Disposals of Assets

By subsection 160L(5), disposals of certain types of "assets of a partnership" are not subject to the application of Part IIIA. This subsection will be modified so that it applies to the disposal of an interest owned by a particular partner in the relevant partnership asset that has been disposed of.

Clause 49: What Constitutes a Disposal or Acquisition - section 160M

Consequential on the proposed deletion of subsection 160H(2), amendments to section 160M are necessary. Subsections (11) and (15) will be omitted as they apply only to "resident partnerships". References to "resident partnerships" in subsections (11A) and (11B) will also be omitted, as will references in those subsections to subsection (11).

New capital gains subsections 160M(12A), (12AA) and (12AB)

Paragraph (h) of clause 49 will amend section 160M by omitting subsection 160M(12A), to be inserted by the Foreign Income Bill, and inserting three new subsections - 160M(12A), (12AA) and (12AB).

Why are the amendments necessary?

Section 411, to be inserted by the Taxation Laws Amendment (Foreign Income) Bill 1990 ("the Foreign Income Bill"), has the effect that in applying the capital gains provisions when calculating a CFC's attributable income, all assets other than taxable Australian assets, owned by the CFC at 30 June 1990 are taken to have been acquired on 30 June 1990. Taxable Australian asset is defined in section 160T of the Principal Act.

The intention is to ensure that all capital gains accruing after 30 June 1990 on the assets of a CFC (other than taxable Australian assets) are subject to tax, regardless of when the assets were acquired. The only exception is where the gains have been subject to capital gains tax in a listed (comparable-tax) country (see clause 66).

Subsections 160M(12A), (12AA) and (12AB) ensure that where the attributable income of a CFC would include gains accrued from 30 June 1990 to the date of disposal of an asset other than a taxable Australian asset, that it acquired prior to 20 September 1985, the liability to Australian tax on these gains cannot be avoided by the CFC becoming an Australian resident before disposing of the asset.

At the same time, subsections 160M(12A), (12AA) and (12AB) will ensure that CFCs that become Australian residents after 30 June 1990 are not liable to tax on any capital gain which had accrued to the CFC in the period 20 September 1985 to 30 June 1990. This is done by ensuring that section 411 applies to deem the CFC's assets (other than taxable Australian assets) owned at 30 June 1990 to have been acquired on 30 June 1990. This amendment was necessary because those gains on post 19 September 1985 assets would have become taxable since, as proposed in the Foreign Income Bill, the provisions of section 160M(12) do not apply to a CFC that becomes an Australian resident.

What capital gains are made subject to tax in Australia by these amendments?

The effect of subsections 160M(12A), (12AA) and (12AB) is as follows. Where a CFC becomes an Australian resident after 30 June 1990 and later disposes of an asset (other than a taxable Australian asset) that it had when it became an Australian resident:

·
any gain that accrued in the period 30 June 1990 to the residence-change time that would have been included in the attributable income of the CFC if the asset had been disposed of at the residence-change time; and
·
any gain that accrued from the residence change time to the date of disposal of the asset, are subject to Australia's capital gains provisions.

Subsection 160M(12A)

New subsection 160M(12A) provides that where at a particular time, referred to as the "residence-change time", a company that is a CFC ceases to be a resident of a listed or an unlisted country and becomes a resident within the meaning of section 6 of the Principal Act, then subsection 160M(12) of the Principal Act is not to apply and subsections 160M(12AA) and 160M(12AB) are to apply to the company for the purpose of calculating the capital gains of the company that are to be liable to Australian tax. Subsection 160M(12) would otherwise have deemed the company to have acquired all assets (other than taxable Australian assets and assets acquired before 20 September 1985) owned at the residence-change time for a consideration equal to the market value of the asset at that time. This would have been contrary to continuity of treatment sought to be achieved in respect of the application of Part IIIA to a CFC which becomes a section 6 resident company.

Subsection 160M(12AA)

Where a company that is a CFC ceases to be a resident of a listed or an unlisted country and becomes a resident within the meaning of section 6, subsection 160M(12AA) applies sections 411 to 417 (to be inserted by the Foreign Income Bill) to the calculation of a capital gain on the disposal of an asset which was a 30 June 1990 non-taxable Australian asset prior to the CFC becoming a section 6 resident company. Sections 411 to 417 apply in relation to every 30 June 1990 non-taxable Australian asset and determine the date of acquisition and cost base of the assets for capital gains tax purposes as in the calculation of the attributable income of a CFC. Subsection 160(12AA) is expressed to be subject to subsection 160M(12AB).

Subsection 160M(12AB) - Capital gains exempt if comparably taxed.

Subsection 160M(12AB) excludes from Australian tax any capital gain relating to any period before the residence-change time if that gain was subject to tax in a listed country. Where a capital gain for the period up to the change of residence has been subject to tax in a listed country, sections 411 to 417 are to be applied in the calculation of taxable income of the company as they would apply in the calculation of the attributable income of a CFC. However, for the purpose of determining the cost base of the assets of the company, any reference in sections 411 to 417 relating to 30 June 1990 or 1 July 1990 is to be taken to be a reference to the residence-change time or a time immediately after the residence-change time. This will have the effect that the gains that accrued before the residence-change time will not be included in attributable income.

Consequential amendments to definitions in section 160M(12B)

Paragraph (j) of clause 49 will amend subsection 160M(12B) to be inserted by the Foreign Income Bill. Subsection 160M(12B) defines certain terms and is extended by paragraph (j) to cover subsections 160M(12A) to (12AB). Paragraphs (k) and (m) of clause 49 insert in subsection 160M(12B) the defined terms "30 June 1990 non-taxable Australian asset", "attributable income" and "subject to tax". These terms are used in subsections 160M(12AA) and (12AB) and are taken to have the same meaning as in Part X, to be inserted by the Foreign Income Bill.

Clause 50: Disposal of Taxable Australian Assets - 160T

Non-resident taxpayers are only liable to Australian tax on capital gains on the disposal of "taxable Australian assets", which are defined in section 160T. As a consequence of the removal of the concept of "resident partnership" in section 160H, it is necessary to omit paragraph 160T(e), which includes in the definition of a taxable Australian asset an interest in a resident partnership. Instead, non-resident partners will be directly liable to tax on interests owned in partnership assets which are taxable Australian assets.

Clause 51: Capital gains and capital losses

The amount of a capital gain or capital loss realised on the disposal of an asset is calculated in accordance with subsection 160Z(1). Normally, capital gains are calculated by reference to an asset's "indexed cost base", that is, amounts included in the asset's cost base are "indexed" to account for inflation. However, where an asset has been owned for less than 12 months at the time of disposal, subsection 160Z(3) requires capital gains to be calculated by reference to the asset's (unindexed) cost base, without any inflationary adjustment.

The application of subsection 160Z(3), however, is in turn modified by subsection 160Z(5), which provides that certain "deemed" acquisitions under other provisions of Part IIIA are to be ignored in determining whether an asset has been held for more than 12 months. Subsection 160Z(5) is to be amended to include references to new subparagraph 160ZZO(1)(g)(iv) and subsections 160ZZRE(2) and (3). Each of these new provisions will deem an asset to have been "acquired" in certain circumstances (following the "rollover" of an asset between group companies or where assets are transferred between commonly owned companies for actual consideration less than their indexed cost base). The amendment to subsection 160Z(5) ensures that such deemed acquisitions will not affect the application of subsection 160Z(3), which instead will only apply where a particular asset has in fact been owned for less than 12 months at the time of its disposal.

Clause 52: Reduction of Capital Gains in Certain Circumstances

Subsections 160ZA(1), (2) and (3) were inserted in Part IIIA to enable quarantined excess rental property loan interest (under the "negative gearing" provisions) to be offset against capital gains realised on disposal of rental properties. The negative gearing provisions ceased to apply from 1 July 1987 (by subsection 82KZD(1A) and subsections 160ZA(1), (2) and (3)) will therefore be omitted by clause 52.

Subsection 160ZA(4) of the Act applies on the disposal of an asset subject to the operation of Part IIIA where, in respect of the disposal, an amount is also included in the taxpayer's assessable income under another provision of the Act. Its broad effect is that a capital gain (for the purposes of Part IIIA) that accrued to the taxpayer on disposal of the asset may be reduced to reflect the inclusion of that other amount in the taxpayer's assessable income (except where the assessable amount represents the recoupment of previously allowed deductions).

As a result of the amendments proposed by this Bill, it will be made clear that individual partners (and not the partnership) will account for capital gains realised on the disposal of a partnership asset. Clause 52 will therefore insert new subsection 160ZA(5), which will apply where an assessable amount in respect of the disposal of a partnership asset is taken into account in determining the net income of the partnership (or a partnership loss) in accordance with Division 5 of Part III. In these cases, the proportion of the assessable amount, which is effectively taken into account in determining an individual partner's share of the partnership's net income (or loss), will reduce the amount of any capital gain realised by a partner on the disposal of an interest in a partnership asset. However, no such reduction will be made where the amount included in assessable income represents a recoupment of deductions previously allowed in respect of capital expenditure incurred in respect of the asset.

Clause 53: Consideration in respect of disposal

Subsection 160ZD(5) specifies the amount of consideration that a taxpayer is taken to have received on disposal of shares or an interest in a company, partnership or trust which owns personal use assets, where those assets have decreased in value. As a partnership will not be taken to own assets in its own right, paragraphs 160ZD(5)(a) and (c) will be amended to delete references to a "partnership".

Clause 54:

Section 160ZFB : Adjustment to consideration on actual disposal following a deemed disposal on change of residence by a CFC from unlisted to listed country.

Clause 54 will insert section 160ZFB in the Principal Act. Section 160ZFB will apply where a CFC that is a resident of an unlisted country becomes a resident of a listed country and later disposes of a taxable Australian asset that it had at the residence-change time.

Where a CFC has changed residence from an unlisted to a listed country on or after 1 July 1989, section 457 (to be inserted by the Foreign Income Bill) and paragraph 58(1)(d) of the Foreign Income Bill will operate to include an amount in the assessable income of the attributable taxpayer in respect of a notional disposal of all the CFC's assets at the residence-change time.

Where a CFC is taken to have notionally disposed of a taxable Australian asset at the time of change of residence, section 160ZFB will provide for an adjustment of the consideration on the actual disposal of that asset. The adjustment to the consideration is calculated using one or other of the methods in subsection (2) and (3), depending on whether there was a profit or loss on the notional disposal of the asset at the residence- change time.

If the deemed disposal of assets resulted in a notional increase in the CFC's distributable profits - and hence an increase in the assessable income of an attributable taxpayer - the consideration received on a subsequent actual disposal is reduced so as to avoid double taxation.

Alternatively, if the deemed disposal resulted in a notional reduction in the CFC's distributable profits, the consideration received on a later actual disposal is increased to reflect the actual profit or loss.

Clause 55: Reduction of amounts for purposes of reduced cost base

In calculating a capital loss on disposal of an asset, amounts otherwise included in the cost base which have been (or will be) allowed as deductions are effectively excluded from the calculation of that loss by section 160ZK.

Clause 55 proposes an amendment to section 160ZK, which will affect the calculation of a capital loss on the disposal of an asset being a partner's interest in a partnership asset. This amendment is intended merely to clarify (and not to change) the existing application of section 160ZK in such cases. It will ensure that deductions allowed (or allowable) to a partnership in respect of a partnership asset, which are taken into account in calculating the partnership's net income or the amount of a partnership loss (pursuant to Division 5 of Part III), will reduce the cost base of an individual partner's interest in that partnership asset for the purposes of calculating a capital loss on the subsequent disposal of that interest. However, any such reduction will only be made proportionate to the partner's interest in the net income (or loss) of the partnership, to reflect the amount of the deduction effectively allowed (or allowable) to the individual partner in respect of the asset.

Clause 56: Transfer of assets from company or trust to spouse upon breakdown of marriage

Section 160ZZMA provides a form of rollover relief (deferral of tax on accrued gains or retention of CGT-exempt status of pre 20 September 1985 assets) on the transfer of assets from a company or trust to a spouse, pursuant to a Australian Family Court (or a similar foreign court) order. The provisions also require cost base reductions to be made to both direct and indirect interests held in the company or trust, to reflect the reduction in their value as a consequence of the asset's transfer to the spouse. Subsection 160ZZMA(6) contemplates the ownership of underlying interests in a company or trust through an interposed partnership. By clause 56, those references to partnerships are to be deleted.

Clause 57: Transfer of asset to wholly-owned company

Clause 57 makes some technical amendments to the rollover provisions available for asset transfers to wholly-owned companies, consequential upon the proposed insertion of new section 160ZZNA by clause 58 (refer to notes below). New section 160ZZNA will now apply to transfers of a partner's interest in a partnership asset to a company wholly-owned by the partners, to determine eligibility for rollover relief for such interests in partnership assets. The amendment proposed by clause 57 ensures that section 160ZZN will have no application to such interests (see notes on clause 58).

Clause 58: Transfer of partnerships Assets to wholly-owned company

Section 160ZZN provides rollover relief (i.e. deferral of tax on accrued gains or retention of CGT-exempt status for pre 20 September 1985 assets) on the transfer of assets by a taxpayer (other than a company) to a wholly-owned company for consideration consisting only of shares or securities in that company. The section is also intended to apply on the transfer of partnership assets to a company, as specifically contemplated in paragraph 160ZZN(2)(ca) and subsection 160ZZN(6). (Those two provisions are being deleted by clause 57 of the Bill.)

Since the section was inserted in the Act, some uncertainty about its application has arisen. This is because the section contemplates that the transferor taxpayer is the partnership, yet rollover relief is provided to the individual partners who, following the transfer of assets, are shareholders in the transferee company.

In the context of the amendments now proposed to ensure that Part IIIA applies in respect of individual interests owned by partners in partnership assets, the Bill proposes the inclusion of new section 160ZZNA to apply specifically to transfers of partnership assets to companies wholly-owned by the partners.

Rollover relief on the transfer of partnership assets to a company will now be provided on the following basis, at the election of all of the partners:

·
the assets transferred must be "partnership assets", that is, assets owned by the partners of a partnership and used in the course of the partnership's business;
·
following the transfer of assets, partners must own shares in the company in the same proportions that they held their interests in the partnership assets before the transfer (and in the case of partners who are trustees, upon the same trust);
·
the market value of the shares issued by the company to the partners must be substantially the same as the market value of the transferred asset, reduced by the amount of any liabilities assumed by the company in respect of the transfer;
·
both the ex-partner transferring the interest in the partnership asset and the company must be residents of Australia (or where the partner is a trustee, the trust must either be a resident trust estate or a resident unit trust); alternatively, the rollover will be available provided that the transferred asset is a taxable Australian asset immediately after the transfer;
·
the dates of acquisition and cost bases of the transferred assets to the company will be determined by reference to the particular dates of acquisition and cost bases to the individual partners of their interests in the transferred assets; to the extent that partners held pre 20 September 1985 interests in the transferred assets, a proportion of those assets will be pre 20 September 1985 assets of the company; the cost bases of the post 19 September 1985 interests owned by individual partners will collectively form the cost base of the appropriate proportion of the transferred assets which are post 19 September 1985 assets of the company;
·
dates of acquisition and cost bases of shares in the company owned by the former partners will be determined by reference to the extent that interests in the transferred assets owned by each were pre 20 September 1985 or post 19 September 1985 assets; shares will be pre 20 Septem ber 1985 assets to the extent that the interests in the transferred partnership assets owned by the particular partner were pre 20 September 1985 assets; the cost bases of post 19 September 1985 shares will, correspondingly, be the total of the cost bases of post 19 September 1985 interests in the transferred assets; and
·
substitution of cost base for indexed cost base will be necessary where the company disposes of a transferred asset in respect of which an interest had been acquired by a partner within 12 months of the disposal (for that proportion of the total post 19 September 1985 interests represented by that particular interest); corresponding rules will apply on the disposal of shares by a former partner which represent post 19 September 1985 interests in transferred assets, to the extent that those interests had been acquired within 12 months of the disposal.

Clause 59: Transfer of assets between companies in the same group

Subject to the satisfaction of a number of pre-conditions, section 160ZZO applies where an asset is transferred from one "group company" to another. A "group relationship" exists where either one company is a subsidiary of the other or each is a subsidiary of the same holding company. By the combined effect of paragraph 160ZZO(1)(b) and subsection 160ZZO(3), that group relationship must be maintained between both transferor and transferee companies for the whole of the year of income in which the transfer occurs, or that part of the year during which both companies were in existence (i.e. the test is not "failed" only because one or other company either comes into existence or is dissolved during the year).

Section 160ZZO is a "rollover" provision, that is, the effect of its application is that either:

·
an asset acquired by a transferor before 20 September 1985 (and which is therefore CGT-exempt) is also deemed to have been acquired by the transferee before that date (paragraph 160ZZO(1)(e)); or
·
in other cases, the transferee is taken to have paid as consideration for the acquisition of the asset an amount equal to its indexed cost base or reduced cost base to the transferor, for the purposes of calculating a capital gain or capital loss on the asset's subsequent disposal (paragraph 160ZZO(1)(f)).

Because Part IIIA has no application to disposals of assets between group companies where rollover relief under section 160ZZO is obtained, neither a taxable capital gain nor allowable capital loss will be realised by the transferor as a result of the asset's transfer.

A number of other conditions which currently must be satisfied to obtain rollover relief pursuant to section 160ZZO will be omitted by the Bill. Those conditions, contained in existing paragraphs 160ZZO(1)(aa), (ab) and (ac), require the transferee of an asset to give to the transferor (as consideration in respect of the transfer) shares or securities equal in value to the asset's net market value. Further, no rollover relief is currently available if, at the time of the transfer, an allowable capital loss would have been realised on the asset's disposal (i.e. if the reduced cost base of the asset would have exceeded its market value). The Bill will also omit a number of other provisions, subsections 160ZZO(2A), (2B) and (2C), which determine the amount that a transferor company is taken to have paid as consideration for the acquisition of shares or securities that the transferee is presently required to issue. As the transferee will no longer be required to issue shares or securities, those provisions are no longer necessary.

Consequently, if the transferor of an asset receives shares or securities from the transferee as consideration for the transfer, the acquisition date and cost base of those shares or securities will, as a result of these amendments, be determined having regard to the general rules of Part IIIA. The acquisition date will therefore be determined under section 160U and would generally be either the date of any contract entered into in respect of the transfer, or the date of issue of the shares or securities. In addition, the transferor would generally be taken to have given consideration for the acquisition of the shares or securities equal to the market value of the transferred asset.

To ensure that the avoidance difficulties previously experienced with section 160ZZO (which are described in the main features section of this Explanatory Memorandum) do not recur, clause 59 will insert new paragraph 160ZZO(1)(g) which will apply where, following the transfer of an asset, the group relationship between transferor and transferee subsequently ceases. In these circumstances, the transferee will be deemed to have disposed of, and then reacquired, the transferred asset for consideration equal to its market value at that time.

For transferred assets originally acquired by the transferor before 20 September 1985 and also deemed to have been acquired by the transferee before that date by reason of the earlier rollover, this will mean that the asset's effective CGT-exempt status will be lost. Future gains on disposal of the asset will then be calculated by reference to the asset's market value at the time of cessation of the group relationship (referred to as the "cessation time").

For other assets, that is, those acquired after 19 September 1985, the transferee will become liable to tax on gains accrued up to the cessation time by reason of the asset's deemed disposal at market value.

This deemed disposal rule will achieve the same anti-avoidance objectives as the provisions now being omitted. The only circumstance where a disposal will not be taken to have occurred is where the group relationship ceases because of the dissolution of the transferor (i.e. at the time of cancellation of shares in the transferor following its liquidation or winding-up).

The other major change proposed by clause 59 is the inclusion of new subsection 160ZZO(3A), which determines the existence of the group relationship between transferor and transferee "at a particular time". Its effect is similar to that of existing subsection 160ZZO(3) which, however, only applies in relation to the year of income in which an asset is transferred. New subsection (3A) is necessary because of the new deemed disposal rules which will operate where the "group relationship" between transferor and transferee subsequently ceases. For those purposes, the continued existence of the group relationship up to the "cessation time" needs to be determined.

Amendments to section 160ZZU, which will be inserted by Clause 63 (refer to notes below), impose new record keeping requirements on the transferee following the transfer of an asset in respect of which section 160ZZO has applied. The transferee will now be required to maintain records of the existence of the group relationship with the transferor and the circumstances in which the asset was transferred. Those records must continue to be maintained for a period of 5 years from the time when either the asset is subsequently disposed of or the group relationship with the transferor ceases, whichever is the earlier. The penalty for failure to comply with this requirement will be $3000.

By subclause 79(11) (refer to notes below) the amendments proposed by clause 59 will apply to transfers of assets between group companies occurring on or after 7 December 1990.

Clause 60: Repeal of section 160ZZOA

Clause 60 proposes the repeal of section 160ZZOA, which was originally inserted by the Taxation Laws Amendment Act 1990. Because of requirements then introduced for the application of section 160ZZO (i.e. the issue of shares or securities as consideration in respect of the transfer of an asset within a company group), it was recognized that rollover relief would be denied to companies in the process of being wound-up, because such companies would not be able to acquire shares or securities in another company. Section 160ZZOA was therefore inserted to enable any subsidiary company to transfer assets to a holding company for no consideration; in effect, it provided an exception to the strict requirements of section 160ZZO. However, with the repeal of these requirements, section 160ZZOA is no longer necessary, and it will therefore not apply to any transfers of assets from a subsidiary to a holding company which take place on or after 7 December 1990 (by the effect of subclause 79(11), refer to notes below).

Clause 61: Transfer of Assets between Companies under Common Ownership.

Clause 61 will insert new Division 19A in Part IIIA of the Act. The Division is intended to prevent artificial timing advantages from arising where assets are transferred between companies sharing common ownership. In circumstances, if an asset acquired after 19 September 1985 is transferred for actual consideration less than its indexed cost base (or, if less, its market value), tax advantages can be obtained by the owner of shares in (or, in some cases, loans to) the transferor, as a result of the reduction in value of those shares (or loans) following the transfer of the asset.

To ensure that no such tax advantages arise, the Bill proposes that the cost bases of such shares (or loans) may be reduced having regard to the difference between any actual consideration paid or given in respect of the asset's transfer and its indexed cost base or reduced cost base (or, if less, the market value of the asset). However, consistent with the intention of the amendments to ensure that the consequences of such asset transfers are tax-neutral, it will be necessary in certain circumstances to make off-setting increases to the cost bases of shares in the transferee. These increases would normally be necessary only where assets are transferred from one subsidiary of a holding company to another. In other cases (e.g. on the transfer of an asset from a subsidiary to a holding company), part of the overall value of the transferee will already reflect the value of the transferred asset, because of the transferor's subsidiary status. Also, the amount of any cost base increases for shares in the transferee will generally be limited to the amount by which the cost bases of shares (or loans) held directly in the transferor have been reduced. By subclause 79(11), new Division 19A will apply to transfers of assets on or after 7 December 1990.

Section 160ZZRA - Interpretation

Division 19A will comprise new sections 160ZZRA to 160ZZRH inclusive. Sections 160ZZRA, 160ZZRB and 160ZZRC define a number of terms and concepts which are relevant to the application of the Division. As necessary, each of those terms and concepts are amplified in the following descriptions of the particular operational sections.

Application - Transfers of assets between companies under common ownership

By new section 160ZZRD, Division 19A will apply where an asset acquired after 19 September 1985 is transferred between two companies under common ownership, for consideration less than its indexed cost base (or, if less than that amount, its market value). The question of whether two companies are under common ownership is determined under new section 160ZZRB. Where a group company relationship exists between the transferor of the asset and the transferee within the meaning of section 160ZZO (i.e. each company is a subsidiary of the same holding company or one is the subsidiary of the other), the companies will be taken to be under common ownership.

However, by new paragraph 160ZZRB(b), two companies may also be under "common ownership", even though they are not "group companies" as defined. This will effectively be the case where the ultimate ownership of shares in each company is the same that is where total underlying share interests in the non-finance shares of both companies are held in the same proportions by the same natural persons. The terms "non-finance shares" and "total underlying share interests" are, in turn, defined in section 160ZZRA. The term "non-finance shares" means shares other than shares in respect of which dividends paid can be regarded as equivalent to the payment of interest on a loan. By effectively ignoring such shares in determining whether companies are under "common ownership", the provisions would still apply, for example, notwithstanding the issue of preference shares by either company to a bank or other financial institution where the preference dividends are calculated to provide a return equivalent to interest on loan funds.

The term "total underlying share interest" refers to the ultimate ownership of beneficial interests in the shares by natural persons, whether held directly or indirectly.

The new provisions will therefore have no application where the actual underlying ownership of the two companies is different. This is because a transfer of assets between two companies for reduced consideration would normally occur only where the two companies share a close relationship. However, if ownership of the two were not the same, the effect of such a transfer would be to reduce the value of those interests in the transferor owned by minority shareholders. If the transfer occurred without their consent, such minority shareholders would be entitled to seek remedies under the company law in respect of any prejudicial, oppressive or discriminatory conduct relating to the disposal of the company's assets for less than their true worth. If, on the other hand, some collateral agreement with the minority shareholders were negotiated to compensate them for their loss, the general anti-avoidance provisions of the Act may have application to prevent any tax benefits from arising to shareholders in the transferor as the result of a non-arm's length transfer of an asset. The potential application of the new provisions is limited therefore to asset transfers between companies sharing identical underlying ownership.

The other requirement for the application of new Division 19A, contained in new paragraph 160ZZRD(d), is that actual consideration in respect of the transfer of the asset is less than the lesser of the following amounts:

·
the indexed cost base of the asset, as determined at the time of the asset's transfer if the transfer constitutes a disposal for the purposes of Part IIIA;
·
where the transfer does not constitute such a disposal, the amount that would have been the asset's indexed cost base if the asset had been disposed of at the time of transfer - this provision would apply, for example, if rollover relief pursuant to section 160ZZO were obtained in respect of the transfer so as not to treat the transfer as a disposal of the asset for the purposes of Part IIIA; or
·
the market value of the asset at the time of the transfer.

However, these requirements will not apply in those cases where section 160ZZRF (refer to notes below) applies.

Section 160ZZRE - Shares in, and loans to, transferor - deemed disposal and re-acquisition

New section 160ZZRE is the principal operative provision of Division 19A which determines the amount by which the cost base, indexed cost base or reduced cost base of directly-held shares in (or loans to) the transferor will be reduced. However, the section will not apply in some limited cases where a transferred asset was acquired before the commencement of common ownership. In these cases, new section 160ZZRF will instead determine the amount of any cost base reductions to directly held shares or loans in the transferor. That section may also apply even where consideration in respect of an asset's transfer exceeds its indexed cost base to the transferor. In addition, new section 160ZZRG will apply in relation to all indirect shares or loans held in the transferor, where the transferred asset was acquired either before or after the time when the transferor and transferee came under common ownership.

The key features of proposed section 160ZZRE can be summarized as follows:

·
it will apply to directly held shares in (or loans to) the transferor acquired after 19 September 1985;
·
it will only apply where actual consideration in respect of the asset's transfer is less than the amount that would be its indexed cost base (or, if less, its market value) at the time of the transfer;
·
it will not apply in some circumstances where the transferred asset was acquired by the transferor before the transferor and transferee came under common ownership;
·
the section will apply to reduce the cost base, indexed cost base, or reduced cost base of the shares or loans, as the case may be, for the purposes of determining any capital gain or capital loss at the time of their subsequent disposal by the transferee; and
·
the reduction amount will be determined by reference to the difference between any actual consideration received in respect of an asset's transfer and its indexed cost base or reduced cost base (or, if less, the asset's market value) at that time.

Paragraphs 160ZZRE(2)(a) and (b) will apply in calculating the amounts by which the indexed cost base of any shares in the transferor are to be reduced. Technically, the paragraphs apply in respect of a particular share held by a taxpayer (called the "second taxpayer") in the transferor and deem that share to have been disposed of for consideration equal to its indexed cost base (so that neither a capital gain nor capital loss arises in respect of the deemed disposal) at the time of the transfer of the asset from the transferor to the transferee. The share is then deemed to have been reacquired at that time for consideration equal to its indexed cost base, reduced by an amount determined having regard to a formula described in the paragraph. It is the determination of this "share reduction amount" that is the key operative mechanism of the provision. The formula applies by reference to the difference between the actual consideration (if any) received by the transferor in respect of the transfer of the transferred asset to the transferee, and the amount of the indexed cost base of the transferred asset at the time of its transfer (or, if the transfer does not constitute a disposal for the purposes of Part IIIA, the amount that would have been the indexed cost base of the transferred asset if disposed of at the time of the transfer). Alternatively, if the market value of the transferred asset at the time of transfer is less than its indexed cost base, the potential reductions to the indexed cost base of the shares will be determined having regard to the difference between the actual consideration received and the transferred asset's market value.

The amount by which the indexed cost base of a particular share in the transferor is then effectively reduced is determined by reference to the value of that share as a proportion of the value of all the shares in the transferor acquired on or after 20 September 1985.

By applying this formula to each of the shares held in the transferor acquired on or after 20 September 1985, the sum of the reductions thereby made should be equal to the difference between the actual consideration in respect of the asset's transfer and its indexed cost base (or market value as appropriate).

If actual consideration in respect of the asset's transfer equal to (or greater) than its indexed cost base (or, if less, its market value) is given by the transferee to the transferor, these provisions will not, of course, apply (because of the effect of proposed section 160ZZRD). For the purposes of both section 160ZZRD and 160ZZRE, having regard to the general principles expressed in section 160ZH, consideration for the transfer may comprise the market value of property given by the transferee to the transferor, including the market value of any shares issued by the transferee in respect of the asset's transfer. "Consideration" would also include the market value of any loan undertakings made by the transferee to the transferor, having regard to the terms of the particular loan agreement made (e.g. as to interest rate, whether the loan is secured etc.).

Paragraph 160ZZRE(2)(c) will apply in a similar way to paragraph 160ZZRE(2)(b) in determining the reduced cost base of any shares held directly in the transferor, for the purposes of calculating any capital loss on their subsequent disposal. However, the amount by which the reduced cost base of a taxpayer's shares will effectively be reduced will be determined by reference to the reduced cost base of the transferred asset. If the market value of the transferred asset is less than its reduced cost base at the time of transfer, the reductions to the reduced cost base (if any) will be determined having regard to the difference between the actual consideration and the market value.

Subsection 160ZZRE(3) may apply, in some cases, to reduce the cost base, indexed cost base or reduced cost base of loans held directly in the transferor which were acquired on or after 20 September 1985. However, these cost base reductions to loans will only be made where either:

·
the indexed cost base or reduced cost base of any shares in the transferor is effectively reduced to "nil" by the application of either paragraph (2)(b) or (2)(c); or
·
no shares were held in the transferor that were acquired after 19 September 1985.

The amount by which the indexed cost base or reduced cost base of any loans held in the transferor may be reduced is determined by reference to the "total excess share reduction amount". For the purpose of calculating the reduction to the indexed cost base of a loan, that term refers to the amount of any "indexed share reduction amount" (determined by paragraph (b)) that was not applied in reducing the indexed cost base of shares in the transferor. In calculating the reduced cost base of a loan, the "total excess share reduction amount" is instead determined by reference to any part of the "reduced share reduction amount" (determined under paragraph (2)(c)) that was not applied to the reduction of the reduced cost base of the shares.

EXAMPLE

A. Co. owns two companies, B. Co. and Z. Co. It owns two $5 shares in B. Co. and has also lent $10 to B. Co. B. Co. in turn owns an asset which cost it $20. Both A. Co.'s shares and loan and B. Co.'s asset were acquired after 19 September 1985. Assume then that B. Co. transfers its asset to Z. Co. for no consideration. (This example will also assume that there have been neither CPI increases nor other increases in value since the date of acquisition of the respective assets, so that for a particular asset, the cost base, indexed cost base, reduced cost base and market value would all be the same amount).
Because B. Co. owns a post 19 September 1985 asset transferred to a company under common ownership for no consideration (i.e. less than both market value and indexed cost base), new Division 19A will apply to reduce the cost bases of A. Co.'s shares in, and loan to, B. Co.
The cost base reductions to A. Co.'s shares in B. Co. will be made pursuant to paragraphs 160ZZRE(2)(b) and (2)(c). The "indexed threshold amount" and "reduced threshold amount" in each case will be the same amount, $20, i.e. the amount of the indexed cost base and reduced cost base of the transferred asset.
The "indexed share reduction amount" and "reduced share reduction amount" for each of A. Co.'s shares in B. Co. would therefore be $10 i.e. half (the proportion of all the post 19 September 1985 shares represented by the particular share) of the difference between the indexed threshold amount and reduced threshold amount and the amount of actual consideration (nil) received by B. Co. on the asset's transfer to Z. Co. However, because the amount of the indexed cost base and reduced cost base of each share is only $5, both amounts would be reduced to "nil", so that subsection 160ZZRE(3) would apply in respect of A. Co.'s loan to B. Co. For the purposes of both paragraph (3)(d) (indexed cost base reduction) and paragraph (3)(e) (reduced cost base reduction), the "total excess share reduction amount" would be $10; i.e. the difference between the total share reduction amounts ($20) and the amount actually applied in making reductions to the cost bases of the shares ($10).
Paragraphs 160ZZRE(3)(d) and (e) would therefore reduce both the indexed cost base and reduced cost base of A. Co.'s loan to B. Co. to "nil".

In summary, the cost base reductions to loans will be determined by reference to the amount by which cost base reductions that could have been made to the cost bases of shares in the transferor exceeded the amount of the actual reductions. The reduction made in respect of a particular loan is then determined by reference to its value as a proportion of the total value of loans made to the transferor on or after 20 September 1985.

Subsection 160ZZRE(4) applies in determining the cost base of any directly held shares or loans in a transferor which are subsequently disposed of within 12 months of the time of their acquisition. In these cases, the cost base will be the amount that would have been determined by the application of subsections 160ZZRE(2) or (3), if references in those subsections to the indexed cost base of shares or loans were references to their (unindexed) cost base.

Section 160ZZRF - First asset acquired before transferor and transferee came under common ownership - shares in, and loans to, transferor -reductions in cost base etc.

Section 160ZZRF will apply to make cost base adjustments to directly held shares (acquired after 19 September 1985) in a transferor, in limited circumstances where the transferred asset was acquired by the transferor before coming under common ownership with the transferee. In most such cases, section 160ZZRE would continue to apply to effect the necessary cost base adjustments to the shares or loans, having regard to the indexed cost base or reduced cost base of the transferred asset. However, in some other cases, the anti-avoidance objectives of Division 19A would not be achieved if the cost base reductions were made on that basis where the market value of the assets of the transferor at the time that common ownership commenced (the "common ownership time") was significantly greater than their indexed cost base. In effect, whether or not section 160ZZRF applies in respect of shares or loans in a transferor will depend on the extent to which the value of the transferor's assets had increased prior to the common ownership time. An example of the circumstances where it would be reasonable for section 160ZZRF to make cost base adjustments is as follows:

EXAMPLE

X. Co. acquired an asset on 1/7/91 for $1000 (its sole asset). On 1/7/92 A. Co. buys all the shares in X. Co. for $2000; this is because X. Co.'s asset has increased in value to $2000. A. Co. therefore has a cost base of $2000 for its shares in X. Co., but X. Co's cost base for its asset remains $1000. If X. Co. transfers the asset for no consideration to Z. Co. (another subsidiary of A. Co.) the cost base of shares in X. Co., if section 16ZZRE applied, would be adjusted by reference to the cost base of the transferred asset. A. Co. would, therefore, be able to trigger a $1000 capital loss. However, section 160ZZRF will apply in these situations, so that cost base adjustments will be made by reference to the cost base of the shares held in the transferor company, rather than by reference to the cost base of the transferred asset. The cost base of A. Co.'s shares in X. Co. would therefore be reduced by $2000 i.e., the difference between the "nil" consideration received and the shares' cost base.

The key difference between section 160ZZRF and section 160ZZRE is that the cost base reduction under section 160ZZRF can be made by reference to an amount higher than the indexed cost base of the transferred asset that is by an amount up to the indexed cost base of the shares or loans. However, the section would usually apply only where a significant proportion (determined by reference to their proportionate value) of the assets acquired before the "common ownership time" were later disposed of for reduced consideration. In other cases, it would be more appropriate for the cost base adjustments to continue to be made by reference to section 160ZZRE.

However, if it appeared that section 160ZZRF could have application in respect of the transfer of an asset from one commonly-owned company to another, it would not be reasonable for any cost base reductions to be made if actual consideration equal to the asset's market value were paid in respect of the transfer. Therefore, if a company wished to ensure that no cost base adjustments pursuant to section 160ZZRF would be made on the transfer of an asset to another company sharing common ownership, it could do so by requiring the payment of actual consideration equal to the asset's market value at the transfer time.

Section 160ZZRG - Indirect equity or debt interests in transferor -reduction in cost base etc.

Section 160ZZRG is expressed in general terms to determine the amount by which cost base reductions are to be made to indirect shares or interests held in the transferor of an asset, in circumstances where either of sections 160ZZRE or 160ZZRF have applied to reduce the cost base of directly held shares or loans in the transferor. The cost base, indexed cost base or reduced cost base (as the case may be) of the indirect interest would then be reduced having regard to the total amount by which the cost base, indexed cost base or reduced cost base of shares or loans in the transferor had been reduced by the application of section 160ZZRE or 160ZZRF. Any reduction made would be made proportionate to the extent to which the particular indirect interest (referred to as either an "eligible equity interest" or an "eligible debt interest") in the transferor is representative of total interests in the transferor.

The intention of the section is to ensure that appropriate cost base adjustments can be made to any indirect interests held in the transferor (which were acquired after 19 September 1985) to reflect the reduction in their value following the transfer of an asset by the transferor to another company sharing common ownership. If it could not be demonstrated that an indirect interest was reduced in value as a result of the asset transfer (e.g., which may be the case for interests held in a company which was the "parent" of both the transferor and transferee), it would not be reasonable for any cost base adjustment to be made.

Section 160ZZRH - Equity interests in transferee - compensatory increase in cost base etc.

Section 160ZZRH will operate to increase the cost base of direct and indirect shares held in the transferee of an asset, where the value of the transferee has increased as a result of the asset's transfer from another commonly-owned company for reduced consideration. In these cases, the cost base, indexed cost base or reduced cost base of particular shares in the transferee acquired after 19 September 1985 may be increased by reference to the amount by which the cost base, indexed cost base or reduced cost base of direct shares or loans in the transferor have correspondingly been reduced by the application of section 160ZZRE or 160ZZRF.

However, no cost base increase will be made in excess of those corresponding reduction amounts; if the cost base of directly held shares or loans has been reduced to "nil", any cost base increases will be limited to the actual reduction amounts.

Also, cost base increases would only be made to post-19 September 1985 share interests in the transferee in proportion to the extent that their value forms part of the total value of all the shares in the transferee. This is because the transfer of an asset for reduced consideration would usually increase the value of all shares, irrespective of their acquisition date. A distortion could therefore result if the total amount of any cost base reductions were applied to increase the cost bases only of the post-19 September 1985 shares.

A technical matter that arises in relation to section 160ZZRH is that it would apply to increase cost bases at the time of disposal of particular shares. However, the cost base reductions to shares or loans by reference to which those increases are in turn to be made could have occurred some time previously, and occur by a different technical mechanism i.e. a deemed disposal and reacquisition at that time of the shares or loans for a reduced amount of consideration. Accordingly, in determining the appropriate amount of any subsequent increases to the indexed cost base of shares in the transferee, paragraph 160ZZRH(e) provides for circumstances where it may be necessary to effectively "index" the reduction amount (by reference to which the cost base increases are made) to take account of inflation, (by reference to the methods used generally to determine the indexed cost base of an asset for the purposes of Part IIIA).

Clause 62: Disposal of shares or interest in trust

As Part IIIA, as proposed to be amended, will not treat a partnership as the owner of assets, the concept of a partnership holding an interest through an interposed entity as expressed in subparagraph 160ZZT(1)(c)(ii) would be inconsistent. Also, the term "net worth of a partnership" (as used in subsection 160ZZT(3)) would be redundant because, for CGT purposes, the partners themselves will be taken to directly own the partnership assets. Accordingly, references to a "partnership" will be removed from section 160ZZT by clause 62.

Clause 63: Keeping of records

Clause 63 proposes a number of amendments to the CGT record keeping requirements contained in section 160ZZU.

The principal amendment proposed will impose a new record-keeping obligation on the transferee of an asset in respect of which rollover relief under section 160ZZO has been obtained. The transferee is required to keep sufficient records to enable the determination of the existence of a group relationship between the transferor and transferee in a period up to the earlier of the times when either that group relationship ceased or the transferred asset was disposed of. The transferee is also required to maintain records of the acts, transactions and other circumstances that resulted in the earlier application of section 160ZZO e.g. the transferee must keep records of the asset's cost base, indexed cost base or reduced cost base at the time of the asset's transfer, the date of the transfer, etc.

The particular records that the transferee of an asset must keep must then be retained for the period of 5 years from the time when either the group relationship with the transferor ceased or the asset was disposed of, whichever is the earlier.

Clause 63 proposes a number of other consequential amendments to section 160ZZU, and also proposes, consistent with other record keeping requirements elsewhere in the Act, to reduce the period for which records must be kept following the disposal of an asset from seven years to five years. It will also increase the penalty for non-compliance with the requirements of the section from $2000 to $3000.

The amendments to section 160ZZU will apply from the date of Royal Assent to the Bill. If the transferor and transferee of an asset have elected that section 160ZZO is to apply in relation to the transfer of an asset before the date of Royal Assent, the transferee must ensure that the necessary records that it will be required to keep are in existence on that date.

Clause 64: Effect of incorrect quotation of tax file number

Consequential to the repeal of section 202E (by Act No. 57 of 1990), this amendment will omit subsection 202DF(7).

Clause 65: Interpretation

Section 317 of the Principal Act (to be inserted by the Foreign Income Bill) contains definitions of terms that have general use in proposed Part X of that Act that provides for the accruals system of taxation of the income of controlled foreign companies.

Clause 65 will insert a definition of "accruals tax law" in section 317. "Accruals tax law" is to be defined as the law of a listed (comparable-tax) country that is declared by regulation to be an accruals tax law. Countries such as the United States, United Kingdom, Japan, Canada, Germany, France and New Zealand have accruals tax systems in place. The listing by regulation of countries that have accruals tax measures will facilitate the inclusion of countries that introduce accruals tax measures comparable to Australia's without the need for an amendment to the Principal Act.

The term "accruals tax law" is relevant to proposed section 456A that will provide relief in certain cases where the income of a controlled foreign company will be subject to accruals taxation in Australia and another country (see notes on clause 76).

Clause 66: When part only of a capital gains is taxed in a listed country

Why is this amendment necessary?

This clause will amend section 324, to be inserted by the Foreign Income Bill, by adding subsections (3) and (4). They consider the case where an entity changes residence from a listed country that does not tax capital gains to a listed country that taxes only that part of a capital gain accruing after the entity has become a resident of the listed country. This might be attempted in order to avoid Australia's capital gains provisions as applied by the accruals measures, on the argument that capital gains subject to tax in a listed country are exempt from Australian tax.

Section 324 specifies when income or profits will be taken to be subject to tax in a listed country for the purposes of Part X. A particular item of income or profit is to be taken to be subject to tax in a listed country in a particular tax accounting period if foreign tax (other than a withholding-type tax) is payable on that item because it is included in the tax base for the tax accounting period.

Subsections (3) and (4) clarify the extent to which a capital gain on the disposal of an asset in a listed country is to be taken to be subject to tax for the purposes of the accruals tax measures to be introduced by the Foreign Income Bill. The subsections ensure that where such a change of residence occurs, that part of any capital gain that is referable to the period the entity was a resident of the listed country that did not tax capital gains, would not be exempt from Australian tax.

How does the amendment work?

Paragraphs (a) and (b) of clause 66 amend existing subsections 324(1) and (2) to reflect the addition of the two further subsections (3) and (4).

Paragraph (c) of this clause will insert into section 324 subsections (3) and (4). Subsection 324(3) provides that where an entity disposes of an asset in a particular listed country (referred to as the 'current listed country') following a change of residence to that country and any capital gain on the disposal of the asset is subject to tax in the current listed country, then the whole of the gain will be taken to be subject to tax in the current listed country even if only that part of the gain that accrued after the residence-change time is included in the tax base of the current listed country. This provision is expressed to be subject to subsection 324(4).

Subsection 324(4) provides that, for the purposes of Part X, so much of a capital gain on a disposal of an asset as is not included in the tax base of the current listed country and was not subject to tax in a previous listed country in which the entity was a resident at a time when it owned that asset will be taken to be not subject to tax in the current listed country (paragraphs (a) (b) and (c))

Where an entity has changed its residence a number of times before taking up residence in the current listed country, then for the purposes of this subsection there is no need to take into account any previous period of residence before a change of residence from an unlisted to a listed country. Accrued gains from a period or periods prior to a change of residence from an unlisted to a listed country will have been taken into account under section 457 (to be inserted by the Foreign Income Bill).

Paragraph 324(4)(d) will prevent a gain derived by an entity for a period from being treated as not subject to tax in the current listed country where a previous listed country has taxed the gain for that period.

Calculation of attributable income - Introductory note to Clauses 67 to 74

What is attributable income?

The Principal Act is proposed to be amended by the Foreign Income Bill, so that, broadly, certain income and profits of controlled foreign companies (called "CFCs") will be included in the assessable income of certain residents (called "attributable taxpayers"). The relevant residents are those that hold interests in a foreign company at the end of the company's accounting period. The amount to be included is the attributable taxpayer's share of the income and profits of the CFC (called "attributable income"). The calculation of the profit of the CFC is made by hypothetically applying the Principal Act to the CFC to determine its taxable income on the assumption that the CFC is a resident of Australia. The measures also assume that specified amounts only were derived by the CFC. In making the calculation, some provisions of the Principal Act are disregarded while others are modified. In some cases provision is made for a treatment quite different from the normal operation of the Principal Act.

How will the calculation be altered by this Bill?

The calculation of the attributable income of a CFC will be altered by this Bill as follows:

·
to ensure that certain premiums in respect of insurance business are taken into account in the calculation, and tax paid on those premiums is allowable as a deduction (clauses 67, 69 and 71);
·
to ensure that certain provisions of the Principal Act, to be inserted by this Bill, are disregarded for that calculation (see notes on clause 68);
·
to provide that, subject to transitional provisions, interest paid on convertible notes is to be disallowed under Division 3A only where the note was issued on or after 1 July 1990 (see notes on clause 70);
·
to make modifications to the capital gains treatment of assets where the CFC has changed its residence (clauses 72 and 73); and
·
to remove the modifications made to the operation of section 160ZZOA of the Principal Act, which is consequential on the repeal of that section by clause 60 of this Bill (see notes on clause 74).

Clause 67: Exempting receipt of an unlisted country company

The purpose of this clause is to ensure that certain premium income of a non-resident insurer is not excluded from the calculation of attributable income of a CFC because of section 377 (to be inserted in the Principal Act by the Foreign Income Bill). Section 377 lists categories of exempt receipts of companies in unlisted countries.

Paragraph (a) of Clause 67

The effect of paragraph (a) of clause 67 is to limit the exemption provided by proposed paragraph 377(1)(b) in its application to non-resident insurers.

Under section 143, as a general rule only 10 per cent of premiums paid or payable to a non-resident insurer are 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 non-resident insurer's taxable income would be calculated in the normal way.

Paragraph (a) of clause 67 has the effect that premium income assessed under the 10 per cent rule will not qualify as an exempting receipt. This amendment will ensure that the policy objective of conferring exemption only on those amounts that have been subject to the full corporate rate of tax is achieved.

It is not necessary to amend paragraph 377(1)(b) to exclude income under section 148 because the potential difficulty arises only in relation to income of a CFC that is included in assessable income for Australian tax purposes. Subsection 148(1) expressly excludes such income from the assessable income of the non-resident and the later subsections of section 148 do not include any amount in the non-resident's assessable income.

Paragraph (b) of Clause 67

Paragraph (b) of clause 67 adds paragraph (h) to subsection 377(1) to treat premiums paid or credited in respect of reinsurance out of Australia as exempting receipts where those premiums are assessed in accordance with subsection 148(1) of the Principal Act.

Broadly, the effect of subsection 148(1) is to treat the reinsurance as part of the income earning activities of the Australian insurer by denying deductions for the reinsurance premiums paid and not assessing the recipient of those premiums. Consistent with this approach, sums recovered from the non- resident are not included in the assessable income of the Australian insurer.

In view of the fact that the premium income is assessed to the resident insurer it is appropriate to treat the reinsurance premiums paid or credited to a CFC as an exempting receipt. If this was not done the same income would, in effect, be taxed twice.

Where, however, the Australian insurer makes an election under subsection 148(2), the provisions of subsection 148(1) do not apply and the Australian insurer is assessed as an agent of the non-resident reinsurer on 10 per cent of the gross premiums paid or credited to the non-resident reinsurer. The effect of paragraph 377(1)(h) being limited to amounts to which subsection 148(1) relates will be that reinsurance premiums subject to this 10 per cent rule will not qualify as an exempting receipt under paragraph (h).

Clause 68: Certain provisions to be disregarded in calculating attributable income

Section 389, to be inserted by the Foreign Income Bill, is to be amended to add two new references - Division 15 of Part III (other than subsection 148(1)) of the Principal Act and section 459A to be inserted by this Bill. This will ensure that these provisions are not taken into account in the calculation of the attributable income of a CFC.

Why is the reference to Division 15 of Part III made?

The effect of paragraph (a) of clause 68 is, subject to one exception, that the specific provisions dealing with the treatment of insurance and reinsurance income in Division 15 of Part III of the Principal Act will not apply for the purpose of calculating a CFC's attributable income. The exception is subsection 148(1) which will apply to a CFC reinsurer so that its attributable income will not include income or profits already assessable to the Australian insurer that paid or credited the reinsurance premiums to the CFC.

Why is reference to section 459A necessary?

New section 459A (see notes on clause 77) is intended to attribute amounts only to an attributable taxpayer. Ignoring this section for the calculation of the attributable income of a CFC will ensure that no amount is included in the notional assessable income of the CFC and so will prevent double taxation.

What calculations will the amendment affect?

The amendments will apply to all calculations of attributable income, whether before or after the commencement of this Bill (see further notes on subclause 79(17)).

Clause 69: Notional allowable deduction for taxes paid

Clause 69 will insert subsection 393(4) to allow a notional allowable deduction to a CFC in respect of Australian tax paid on reinsurance income derived by the CFC. This is in recognition of the fact that under subsection 148(3) of the Principal Act Australian insurers who reinsure risks with non-residents may elect that 10 per cent of the premiums paid or credited to the non-residents be assessed to them as agents of the non-resident. The effect of this amendment is that the notional taxable income of the CFC is reduced by the amount of Australian tax paid.

Clause 70: Modified application of Division 3A of Part III

New section 398A of the Principal Act, to be inserted by this clause, will modify the calculation of the attributable income of a CFC. Broadly, the section will prevent the disallowance under Division 3A of Part III of the Principal Act of interest paid on convertible notes issued prior to 1 July 1990. The amendment gives effect to the policy announced on 29 June 1990.

How does Division 3A operate?

Division 3A of Part III of the Act governs the deductibility of interest paid by a company in respect of borrowings which are convertible into shares (that is, convertible notes). In summary, the Division operates as follows:

·
in respect of a convertible note issued after 15 November 1960 and before 28 October 1970, interest or a payment in the nature of interest paid by a company during a year of income is not an allowable deduction (section 82R);
·
in respect of a convertible note issued on or after 28 October 1970 and before 1 January 1976, interest or a payment in the nature of interest paid by a company during a year of income is not an allowable deduction unless certain conditions are satisfied (section 82R as modified by section 82S); and
·
in respect of a convertible note issued on or after 1 January 1976, interest or a payment in the nature of interest paid by a company during a year of income is not an allowable deduction unless certain less stringent conditions are satisfied (section 82R as modified by section 82SA).

Why is section 398A necessary?

Where a CFC previously chose to arrange financing by the issue of convertible notes, it would be unlikely that the non- deductibility of interest paid under Division 3A, would have been seen as relevant to the operations of these non-resident companies. This is because there was previously no reason to expect that the provisions of the Principal Act would have any application. In many cases there would be difficulties in restructuring the financial arrangements already in place. Accordingly, interest paid on financing under such pre-existing convertible note issues is not to be disallowed under Division 3A in the calculation of the attributable income of a CFC.

However, Division 3B is to apply for notes issued on or after 1 July 1990 since the broad implications and mechanics of the proposed CFC regime -including the notional assessment approach - should have been known by then.

What does subsection 398A(1) do?

Where an attributable taxpayer is required to calculate the attributable income of a CFC, interest paid on convertible notes issued prior to 1 July 1990 are to be excluded from the operation of Division 3A in its notional operation for that calculation. In effect, this means that the interest paid by the CFC on a convertible note is to be disallowed as a notional allowable deduction under section 82R only if:

·
subject to the transitional measure discussed below, the note is issued by the company on or after 1 July 1990;
·
the conditions prescribed in section 82R are satisfied; and
·
the conditions prescribed in section 82SA are not satisfied.

The exclusion is to apply whether or not the CFC for which the calculation of attributable income is to be made (that is, the "eligible CFC" within the meaning of Division 7) was also a CFC at the time the note was issued or at the date of grandfathering.

What happens to arrangements already in place to issue convertible notes in the future?

A convertible note issued by the CFC on or after 1 July 1990 may relate to an arrangement to issue the note, or to a borrowing agreement, that was entered into prior to 1 July 1990. In such cases, the note is to be treated in the same way as a note issued before that date provided that the note is issued before 1 July 1992. This is intended to ensure that a CFC which was committed to the issue of a note but had not actually issued the note will not be disadvantaged.

What is an "arrangement" to issue a note?

The transitional measure will apply only where the arrangement satisfies one of the following conditions:

·
the terms of the issue of the note were publicly announced by the company prior to 1 July 1990; or
·
the company was committed, because of a contractual obligation entered into prior to 1 July 1990, to the issue of the note.

However, as mentioned, the note must be issued before 1 July 1992. This is intended to prevent open-ended arrangements. The period to 1 July 1992 will allow ample time for notes to issue pursuant to arrangements that are well in train.

How does the public announcement requirement in sub-subparagraph (1)(a)(ii)(A) operate?

Under the first alternative precondition, that the terms of the note were publicly announced, there is no necessity that there be a contract to issue the notes before 1 July 1990. For example, public offers satisfying all the normal conditions but where the period for acceptance has not yet expired would satisfy the requirement. However, it will not be sufficient that the foreign company merely announced that an issue was pending or advised of the general nature of an impending issue. The terms and conditions of the notes must be publicly announced.

Further, it is a requirement that the announcement of the terms be made by the company, although this would include an announcement by any of its agents. Notwithstanding this, a failure to directly notify the general public would not, of itself, mean that a public announcement had not been made. For example, notifying a stock exchange of the terms of an offer such that the terms were available to the public would generally be sufficient.

How does the contractual obligation requirement in sub- subparagraph (1)(a)(ii)(B) operate?

Even if there was no public announcement of the terms of the issue of the note, interest on a note issued on or after 1 July 1990 may still be deductible in calculating attributable income if, before 1 July 1990, there was a contractual obligation on the foreign company to issue that note. However, an offer that was not accepted by 1 July 1990 would not qualify since there would be no binding contract. The provision would also apply where, although there was not yet a contract for the issue of the note, there was a contract which would require the company to enter another contract which would be for the issue of the note.

To which attributable taxpayers does subsection 398A(1) apply?

The concession made by subsection (1) is available only to persons who are attributable taxpayers at the end of the first statutory accounting period that ended on or after 1 July 1990. Those persons must also be attributable taxpayers at the end of each following statutory accounting period in order to get interest deductions in those future years. The calculation is done for each individual attributable taxpayer and is done on a year by year basis. Where a person ceases to be an attributable taxpayer interest deductions in respect of past years will not be lost.

In keeping with the point at which attributable income is calculated, the continuity is measured as the end of the statutory accounting period of the CFC. However, a person who buys into a CFC and becomes an attributable taxpayer after the end of the first statutory accounting period of the CFC will not gain the benefit of deductions for interest paid on the note unless the note issue complies with section 82S or 82SA.

How long will these measures on convertible notes operate?

The exclusion of the notes will be discontinued for statutory accounting years of a CFC that begin on or after 1 July 2000, a period of, depending on the circumstances of the CFC, about ten years from the date of announcement of the measures. If the note issue does not already comply with Division 3A, a CFC must rearrange its finances within this time to comply with the Division. If this is not done the interest expense will not be taken into account in the calculation of the attributable income of the CFC.

Where the CFC has a statutory accounting period that begins after 1 July, the period will be greater than 10 years, the maximum period being 11 years. Grandfathering will continue to apply in determining the previous years' losses of the CFC that, in the calculation of the attributable income of the CFC, are carried forward from a statutory accounting period beginning before 1 July 2000.

For what calculations does the amendment apply?

The amendment is to take effect for all calculations of attributable income of a CFC for all attributable taxpayers, wherever this is required. Moreover calculating the carry-forward losses of a CFC for the purposes of the accruals measures, deductions would be available under the rules set out above for interest expense on all convertible notes (see notes on subclause 79(16)).

Anti-avoidance rules for the exclusion under subsection 398A(2)

An anti-avoidance measure will remove the grandfathering where the terms of the note have substantially changed so as to evidence, in fact, a new loan. Whether this is the case is to be determined by the Commissioner of Taxation. Where the Commissioner is of the opinion that the variation of the terms of the note constitute a new loan, the exclusion of the note would be removed only for calculations of attributable income after the date of such change. However, where the variation was in accordance with an order of a court the anti-avoidance rule would not apply.

How will the rule apply in practice?

Each situation will need to be determined on its facts and no hard and fast rule can be applied. However, as an example, if a convertible note was required to be converted to shares before 1 July 1995, and that period was extended to 1 July 2000, the variation could be of such significance that it would evidence a new loan and the exclusion of the note would be removed at the time of the change in the terms. Where this extension was due to an option that was included as a term of the original loan, there would be no variation in the terms and subsection (2) could not apply. Moreover, a variation in the interest rate on the loan would be evidence of a new loan, unless the original loan agreement provided for a floating rate of interest.

Clause 71: Exclusion of certain premium income of non-resident insurers from the category of notional exempt income of CFCs

Why is it necessary to amend section 402?

The amendment of section 402 (to be inserted by the Foreign Income Bill) is necessary to limit the exemption to premium income of non-resident insurers that has been subject to full assessment in Australia.

How does section 402 operate?

Section 402 identifies certain receipts that, for the purpose of calculating attributable income of a CFC for the eligible period, are to be treated as notional exempt income of the CFC. These receipts do not form part of the notional assessable income of the CFC for that period.

What is the practical effect of the amendment?

By paragraph (a) of clause 71, paragraph 402(2)(a) is amended so that where 10 per cent of the premium income of non-resident insurers is taxed under the special rule in section 143, that premium income will not be accorded notional exempt income status. Amounts that are assessed at the full corporate rate in Australia under the proviso to section 143 will continue to be notional exempt income.

The purpose of paragraph (b) of clause 71 is to create a new category of notional exempt income by inserting paragraph 402(2)(e) to cover cases where an Australian insurer reinsures a risk or part of a risk with a non-resident and subsection 148(1) applies. Since in these circumstances no deductions are given to the Australian insurer for the reinsurance premiums paid or credited, and the premiums are not taxed in the hands of the non- resident insurer, the premiums should properly be excluded in calculating the attributable income of the CFC, being subject to full taxation in Australia in the hands of the Australian insurer.

Clause 72: Modified application of Part IIIA - general modifications

Certain subsections disregarded when calculating attributable income for a CFC.

Section 410, to be inserted by the Foreign Income Bill, disregards certain capital gains provisions for the purpose of calculating the attributable income of a CFC.

Paragraph (a) of clause 72 replaces paragraph 410(a). The new paragraph 410(a) has the effect that subsections 160M(12) to 160M(12AB) will also be disregarded for the purposes of calculating the attributable income of a CFC. Subsections 160M(12A) to (12AB) are to be inserted into the Principal Act by clause 49 of this Bill. Each of those subsections operate to determine the cost base to be used in capital gains tax calculation on the disposal of a 30 June 1990 non-taxable Australian asset (defined in section 406 to be inserted by the Foreign Income Bill) after the change of residence by a CFC to Australia.

Paragraph 410(ca), to be inserted by paragraph (b) of this clause, will disregard for the purpose of calculating the attributable income of a CFC section 160ZFB to be inserted in the Principal Act by clause 54.

Why does the operation of these subsections need to be excluded?

The attributable income of a CFC is calculated on the assumption that the CFC was a resident for the whole of the year of income. This assumption may be construed as deeming the CFC to have changed its residence where the company was not a resident at the end of the preceding year. The non-application of subsections 160M(12) to 160M(12AB) in the calculation of attributable income makes it clear that the company will not be treated as having changed its residence. Consequently, the cost base of the assets of the company will not be affected by the fact that the attributable income of the CFC is calculated on the assumption that it is a resident.

Section 160ZFB provides for a compensating adjustment of the consideration on the disposal of a taxable Australian asset where an amount has been included in the assessable income of an attributable taxpayer under section 457 (to be inserted by the Foreign Income Bill) on a change of residence of the CFC.

Section 160ZFB is not relevant to the calculation of attributable income of a CFC because Part IIIA as modified for the purpose of calculating the attributable income of a CFC does not apply to the disposal of a taxable Australian asset of the CFC.

Clause 73: How capital gains provisions changed for accruals purposes when an Australian company becomes a CFC

How does the existing law work?

Under the existing law, subsection 160M(8) of the Principal Act will apply to a company which ceases to be a section 6 resident company and deem it to have disposed of all assets (other than taxable Australian assets and assets acquired before 20 September 1985) for their market value at that time. A liability to capital gains tax may therefore arise where a company ceases to be a section 6 resident company and becomes a resident of another country.

What will the amendment do?

Clause 73 will insert section 418A into the Principal Act to provide for the determination of a cost base of an asset disposed of by a CFC, where that CFC was previously a section 6 resident company and owned the asset at the time it changed residence from Australia (called the residence-change time).

Why is the amendment necessary?

The purpose of the amendment is to remove the possibility of double taxation where there is an overlap between the calculation of a capital gain on the deemed disposal of an asset on change of residency and the calculation of an attributable capital gain on the actual disposal of the asset by the CFC. Moreover, proposed section 418A will give assets (other than taxable Australian assets) to which section 160M(8) did not apply because the assets were acquired before 20 September 1985 a cost base referable to the residence-change time where the change of residence occurred after 30 June 1990.

How does the new provision work?

For the purpose of applying section 418A in the calculation of the attributable income of an eligible CFC, subsection 418A(1) disregards the residency assumption of section 383 (to be inserted by the Foreign Income Bill). This assumption would otherwise negate the tax effect for accruals purposes of an actual change of residency.

Section 418A provides a means of determining a cost base for the purposes of calculating attributable income that excludes any notional capital gain or loss referable to the period the company was a resident of Australia for tax purposes. It applies in cases where the CFC:

·
ceased to be a resident within the meaning of section 6 and became a resident of a listed or unlisted country during the statutory accounting period of the CFC that is under consideration (i.e. the eligible period -see section 381 to be inserted by the Foreign Income Bill) or an earlier statutory accounting period beginning on or after 1 July 1990 (paragraph (a));
·
owned an asset at the residence-change time (paragraph (b)); and
·
disposed of the asset during the eligible period (paragraph (c)).

Having satisfied each of these requirements, subsection 418A(1) provides that sections 411 to 417 (to be inserted by the Foreign Income Bill) will apply to the asset as if any reference in those sections to a 30 June 1990 non-taxable Australian asset is a reference to the asset (paragraph (d)), and any reference relating to 30 June 1990 or 1 July 1990 is a reference relating respectively to the residence-change time or a time immediately after the residence-change time (paragraph (e)).

In effect this will ensure that where the residence-change time occurred after 30 June 1990, the cost base of an asset which was owned at the residence-change time but to which section 160M(8) did not apply will be taken to be the greater of the market value or cost base of the asset to the eligible CFC at the residence- change time for the purpose of determining whether a capital gain has accrued. For the purpose of determining whether a capital loss has been incurred the lesser of the market value or cost base to the eligible CFC at the residence change time is used.

Where, however, subsection 160M(8) applied to an asset of the company when it ceased to be a section 6 resident company, the market value of the asset at the residence-change time will be taken to be the cost base of the asset for the purpose of determining any capital gain or loss as a result of the disposal of the asset. That gain or loss will be taken into account in the calculation of attributable income of the CFC. This has been achieved by omitting from sections 412, 414, 415, 416 and 417 any provision that would allow a cost base other than market value (paragraph (f)).

The result of this provision is that where section 160M(8) has applied to an asset only accrued gains incurred after the residence-change time will be taken into account in calculating the attributable income of a CFC.

Subsection 418A(2) provides that where an asset is a 30 June 1990 non-taxable Australian asset and the CFC that disposes of that asset had previously been a section 6 resident company and owned the asset at the time it changed residence from Australia, then sections 411 to 417 will apply to that asset only as modified in accordance with subsection 418A(1).

Clause 74: Repeal of section 420

Section 420, proposed to be inserted into the Principal Act by the Foreign Bill is to be repealed. This amendment is a consequence of the repeal of section 160ZZOA of the Principal Act by clause 60 of this Bill.

What does section 420 do?

Proposed section 420 modifies the operation of section 160ZZOA (see notes on clause 60 for an explanation of the operation of section 160ZZOA). Broadly, section 420 restricts the roll-over relief for the transfer of an asset between wholly owned group companies to transfers where:

·
both companies are residents of the same listed country;
·
both companies are residents of an unlisted country;
·
the company disposing of the asset is a resident of either a listed or unlisted country and the other company is a resident of Australia; or
·
the company disposing of the asset is a resident of a listed country, the company acquiring the asset is a resident of an unlisted country, and the asset is an asset that, prior to the disposal, was used in carrying on business through a branch in any unlisted country.

Does this mean that a CFC cannot roll over assets?

No. The repeal of section 160ZZOA and proposed section 420 are a result of the amendment of section 160ZZO to allow the roll-over that was previously only possible under section 160ZZOA to fall within section 160ZZO (see notes on clause 59). Therefore, in calculating a CFC's attributable income, the asset may now be rolled over in accordance with section 160ZZO, as it is modified for that calculation by section 419 (to be inserted by the Foreign Income Bill).

What is the date of effect of the repeal?

As with the repeal of section 160ZZOA, roll-over relief under section 160ZZOA (as modified by section 420) will not be available for assets disposed of after the date of introduction of this Bill into the Parliament (see clause 79).

What is the effect for other provisions?

Section 438, also proposed by the Foreign Income Bill, extends roll-over relief for the disposal of an asset for the purpose of determining whether or not a CFC passes the active income test. That roll-over relief is linked to the availability of a roll- over for the calculation of the attributable income of a CFC, and so includes the roll-over relief under section 160ZZOA as modified by section 420.

The effect of the repeal of sections 160ZZOA and 420 is that this particular form of roll-over relief will not be available for the active income test. However, as for the calculation of attributable, roll-over relief may instead be available under the amended section 160ZZO, as modified by section 419. Again, this will only apply for assets disposed of after the date of introduction of this Bill.

Clause 75: Adjustment of the active income test to ensure certain premium income of non-resident insurers is taken into account

What will this amendment do?

This clause will amend section 436 (to be inserted by the Foreign Income Bill) which determines the amounts to be excluded when applying the active income test. The amendment relates to certain insurance and reinsurance income.

How does section 436 work?

Section 436 eliminates from both the numerator and denominator of the tainted income ratio particular types of income that would not be attributed to shareholders of a CFC that failed the active income test.

What are the practical effects of the amendment?

The qualification proposed by paragraph (a) of clause 75 will ensure that premium income taxed under section 143 of the Principal Act, whereby the taxable income is taken to be 10 per cent of the total amount of the premiums, will be included in the determination of the tainted income ratio - unlike amounts that are assessed under the normal assessment procedures on a net income basis.

Paragraph (b) of clause 75 will introduce a new exclusion from the active income test. The amounts described in paragraph 436(1)(g), to be inserted by paragraph (b), relate to reinsurance. Subsection 148(1) of the Principal Act relates to the circumstance where an Australian insurer reinsures a risk or part of a risk with a non-resident. Broadly, the effect of subsection 148(1) is to treat the reinsurance as part of the income earning activities of the Australian insurer by denying deductions for the reinsurance premiums paid and not assessing the non-resident recipient of those premiums. Consistent with this approach, sums recovered from the non-resident are not included in the assessable income of the Australian insurer.

The effect of excluding this amount from the active income test is that where a CFC insurer takes on reinsurance business with an Australian insurer and subsection 148(1) applies, the premium income received by the non-resident reinsurer will not figure in the tainted income ratio.

Clause 76: Insertion of new section 456A in the Principal Act

This clause will insert new section 456A in the Principal Act which will, in certain circumstances, provide relief from double taxation where amounts derived by a CFC have been taxed under the accruals system of another country.

How does the accruals tax system operate?

The provisions of section 456 (to be inserted by the Foreign Income Bill) will include in the assessable income of an attributable taxpayer the taxpayer's attribution percentage of the attributable income of a controlled foreign company. The expression "attributable taxpayer" is defined in section 361 and, means a resident entity to which the income of a CFC could be attributed. "Attribution percentage" is defined in section 362 and means the percentage interest in the CFC that a particular taxpayer holds and is used to calculate how much of the CFC's income should be attributed to an attributable taxpayer. The "attributable income" of the CFC is computed in accordance with the provisions of Division 7 of Part X. Sections 361 and 362 and Division 7 of Part X are to be inserted by the Foreign Income Bill.

The proportion of the income of a CFC to be attributed to a resident entity is generally to be determined by reference to that entity's direct interests in the CFC and indirect interests in the CFC held through non-resident entities.

For what double accruals taxation is relief to be provided?

A non-resident entity through which an indirect interest of a resident entity in a CFC is traced may itself be a resident of a listed country that has comparable accruals tax measures in place. In this case, the income of the CFC may be subject to tax under both the listed country's and Australia's accruals tax system. Section 456A will provide relief from the double accruals taxation in these circumstances by reducing the amount to be included in the resident taxpayer's assessable income.

What is the method of calculation of the relief?

The following steps explain the calculation of the reduction in the amount to be included in assessable income of a resident taxpayer.

Step 1
Calculate the amount of the attributable income of the CFC that would be attributed to the resident taxpayer for the year of income. This is done by multiplying the attributable income of the CFC by the total of the direct attribution interest and all the indirect attribution interests of the taxpayer in the CFC.
Step 2
Identify the indirect attribution interest of the taxpayer in the CFC that is held through the particular listed country entity subject to the listed country's accruals tax on any part of the income of the CFC.
Step 3
Calculate the amount of any items of net income of the CFC that are included in the taxable income of the listed country entity under the accruals tax law of the listed country. Where there is more than one such item, total these amounts. This is done to satisfy the requirement that the same item of net income or profit must be subject to accruals tax in both countries. The amount calculated is not used in any of the following steps.
Step 4
Where the items of net income referred to in item 3 are also included in the attributable income of the CFC, total the amounts of the net income included in attributable income in respect of those items.
Step 5
Multiply the total amount in step 4 by the indirect attribution interest described at step 2.

The result in step 5 is the amount that is to be deducted from the amount that would otherwise be included, under section 456, in the assessable income of a taxpayer in respect of the attributable income of the CFC.

EXAMPLE

(a)
Ausco owns 50 per cent of the share capital of US Co (a company resident in the United States) which in turn owns 50 per cent of the share capital of a company that is a resident of an unlisted country. Ausco also holds a direct interest of 25 per cent of the unlisted country company. The share capital of the US company and of the unlisted country company comprise of only one class of shares.
Given the interests Ausco holds in US co and the unlisted country company, both foreign companies are CFCs.
(b)
The unlisted country company has the same accounting year as Ausco, ie year commencing on 1 July.
(c)
For the income year 1990-91, the unlisted country company had an attributable income of $10,000 in relation to Ausco. Items of income of the unlisted country company yielding a net income of $8000 were taken into account in computing the amount that is to be included in the taxable income of the US Co. Because US Co's interest in the unlisted country company was 50 percent only half of the $8000 was subject to accruals tax in the United States.
(d)
These items totalling $8000 were also included in the attributable income of the CFC for Australian accruals tax purposes.

Applying the five steps set out above:

Step 1
Calculation of the attributable income of the CFC that is to be attributed to Ausco

direct attribution interest 25%
indirect attribution interest 25% attribution percentage 50%
Ausco's share of the attributable income is 50% of $10 000 = $5 000

Step 2
Indirect attribution percentage of Ausco in the CFC held through US Co = 25 per cent.
Step 3
Amount subject to accruals tax in the United States : $4000 (ie 50 per cent of $8000)
Step 4
Amount included in attributable income of the CFC = $8000
Step 5
Amount in Step 4 x indirect attribution interest in Step 2 : 25 per cent of $8000 = $2000

$2000 will be deducted from the attributable income of the CFC that would otherwise have been included in the assessable income of Ausco.

What is the effect of subsection 456A(1)?

Subsection 456A(1) sets out the pre-conditions for the grant of relief from double accruals taxation and provides the formula for the calculation of the relief.

The first of these conditions is that the assessable income of a resident taxpayer of a year of income must include an amount of the attributable income of a CFC, that amount being computed under section 456 (paragraph (a)).

The second is that the taxpayer's attribution percentage for the CFC must also have been traced, wholly or in part, through a controlled foreign entity that was interposed between the taxpayer and the CFC (paragraph (b)).

The third condition is that an item of net income of the CFC must be subject to tax in a listed country at or above that country's normal company tax rate. It is also a requirement that the item of income must be subject to tax in the listed country in a tax accounting period commencing or ending in the taxpayer's year of income or in the accounting period of the CFC for which the income of the CFC was included in the assessable income of the taxpayer of the taxpayer's year of income.

The last condition is that the amount of the item of net income that was included in the listed country entity's taxable income under that country's tax law must be the whole or a part of the net income included in the attributable income of the CFC in relation to that item of income (paragraph (d)).

Where these conditions are satisfied, the amount of the attributable income of the CFC that would ordinarily have been included in the assessable income of the taxpayer would be reduced by an amount that is calculated using the formula provided in subsection (1).

What is the effect of subsection 456A(2)?

Subsection (2) deals with the case where a resident taxpayer has an indirect attribution interest in a CFC that is held though more than one listed country entity. In this case, the income of the CFC may be subjected to tax in more than one listed country under the accruals tax measures of those countries.

EXAMPLE

Ausco has a 50 per cent interest in US Co that has a 100 per cent interest in UK Co. UK Co owns a 50 per cent interest in an unlisted country company. Ausco has a 25 per cent direct interest in the unlisted country company.

It may be the case that the 50 per cent of the CFC's income may be subject to tax in the UK under its accruals tax measures and again in the US under the US accruals tax measures.

The effect of subsection (2) will be that the indirect attribution interest of Ausco in the unlisted country company is to be taken into account only once to obtain a deduction from the amount of the attributable income of the CFC that is to be included in the assessable income of the taxpayer under section 456.

What is the effect of subsection 456A(3)?

Subsection (3) relates to the calculation of the indirect attribution percentage of an attributable taxpayer in a CFC where the Commissioner of Taxation reduces, under subsections 362(2) to (5) - to be inserted by the Foreign Income Bill - the attribution percentage of the attributable tax payer in the CFC. Those subsections will enable the reduction of what would otherwise have been the attribution percentage of a taxpayer in a CFC. Subsection (5) would also provide for a proportionate reduction of the attribution percentage of resident taxpayers in the CFC where the total of their attribution percentages in the CFC exceeds 100 per cent. Where the attribution percentage of a taxpayer is reduced under those provisions, subsection (3) will enable a corresponding adjustment of the indirect attribution percentage of the taxpayer in the CFC that is held through the listed country entity.

From what income year will the amendment take effect?

The amendments that will provide relief from double accruals taxation are to apply in relation to an assessment for any income year of a taxpayer in which the income of a CFC is attributed to that taxpayer. The income year 1990-91 will be the earliest of these years.

Clause 77: Assessability where CFC or CFT has interest in certain attributable taxpayers

New section 459A of the Principal Act, to be inserted by this clause, is an anti-avoidance provision designed to ensure that the attribution of income under any of sections 456 to 459 will not be avoided through the use of interposed Australian trusts or Australian partnerships in conjunction with a controlled foreign company (CFC) or controlled foreign trust (CFT).

What is attribution?

Under the Foreign Income Bill, it is proposed that certain amounts derived by non-resident entities may be included in the assessable income of a resident where, at the time the amount is to be calculated, the resident is an attributable taxpayer. Broadly, an amount will be attributed to an attributable taxpayer where:

·
a CFC has attributable income (the amount to be included in the attributable taxpayer's assessable income being determined under section 456 according to the attributable taxpayer's share of the attributable income);
·
a CFC resident in an unlisted country changes residence to a listed country or to Australia (the amount to be included under section 457 in the attributable taxpayer's assessable income being determined according to the attributable taxpayer's share of the accumulated profits of the CFC, subject to certain adjustments); or
·
a CFC resident in an unlisted country pays (or is deemed to pay) a dividend, directly or through certain other entities, to either another CFC that is, in general, resident in a listed country or to a CFT (the amount to be included in the attributable taxpayer's assessable income under sections 458 and 459 being determined according to the attributable taxpayer's share of the dividend).

What is the avoidance possibility?

An attributable taxpayer is defined in proposed section 361 of the Foreign Income Bill and is restricted to Australian entities. An Australian entity is defined in proposed section 336 of that Bill to be an Australian trust, an Australian partnership, or any other entity that, broadly, is a resident of Australia. Where the tie-breaker rules in a double tax agreement between Australia and a foreign country result in a dual resident entity being regarded as a resident of the foreign country for the purposes of that agreement, that entity will not be a resident for attribution purposes.

Where the attributable taxpayer is an Australian partnership, the amount attributed from the CFC will be included in the net income of the partnership in accordance with the rules for the calculation of the net income contained in existing Division 5 of Part III of the Act. An amount will then be included in the assessable income of the partners in the partnership in accordance with the individual interests of the various partners in the net income of the partnership. However, under Division 5, a non-resident partner will have included in assessable income only that part of the share of the net income of the partnership as relates to the period when the partner was a resident, or, where the partner is a non-resident, relates to sources in Australia.

Similarly, where the attributable taxpayer is an Australian trust, the relevant share of the attributable income of the CFC will be included in the net income of the trust under Division 6 of Part III of the Principal Act. An amount will then be included in the assessable income of the beneficiary of the trust or taxed to the trustee or settlor of the trust, depending on the circumstances that prevail, in accordance with that Division. However, as with a non-resident partner, a non-resident beneficiary will have included in assessable income only that part of the share of the net income of the trust as relates to the period when the beneficiary was a resident, or, if the beneficiary is a non-resident, relates to sources in Australia.

Leaving aside the operation of the general anti-avoidance provisions of Part IVA of the Principal Act, each of proposed sections 456 to 459 could be avoided by using the same structure. Basically, the avoidance technique involves ensuring that:

·
the attributable taxpayer to which an amount is to be 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
·
at least one CFC or 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.

Example One : Avoidance of section 456 (assessability in respect of a CFC's attributable income)

For example, assume that an Australian company (AustCo) owns 100 per cent of the interests in a CFC (CFC1). CFC1 is presently entitled to 100 per cent share in the profits of an Australian trust. The Australian trust holds the shares of another CFC (CFC2) and has no income or expenses. CFC2 has attributable income of $100,000 for its statutory accounting period. The result is that the Australian trust, having the requisite 10 per cent or greater interest in CFC2, is an attributable taxpayer. This is illustrated on the next page.

Illustration of Avoidance Structure
              

The effect for the entities will be as follows:

·
the $100,000 attributable income of CFC2 would be notionally included in the assessable income of the trust for the calculation of the net income;
·
AustCo would have no amount included in its assessable income under section 456 in respect of the indirect interest through CFC 1, since it is not an attributable taxpayer in respect of CFC2, there being no mechanism in Part X for tracing through an Australian entity;
·
assuming CFC 1 is not a resident of Australia leaving aside questions of central management and control - and assuming the income is not sourced in Australia, CFC 1 would not be subject to Australian tax;
·
CFC 2's net income cannot be attributed to AustCo via CFC 1 since, to avoid double taxation, the rules that attribute the income of controlled foreign companies (CFCs) to Australian residents do not allow the calculation of the attributable income of any CFC to include the attributable income of another CFC - leaving aside some special cases of dividend payments.

A similar result could be obtained by using an Australian partnership instead of an Australian trust and/or by using a CFT instead of a CFC.

Other variations on such an avoidance arrangement could be developed in relation to dividends and deemed dividends paid by a CFC.

To what attribution does subsection 459A(1) apply?

The first condition of the application of new section 459A is that any of proposed sections 456 to 459 have applied to include an amount in the assessable income of an Australian trust or Australian partnership. It will also apply where there has been a prior application of section 459A that includes an amount in the assessable income of either of those entities (see later notes). These amounts are called section 456 to 459A amounts.

What entity must have an interest in the Australian partnership or trust?

The section will apply where a CFC or a CFT has an interest in an Australian trust or an Australian partnership. The interest of the CFT or CFC could be direct - that is, the CFC or CFT may have a share of the net income of an Australian partnership or a present entitlement to a share of the net income of an Australian trust.

Alternatively, there may be an indirect interest held by the CFC or CFT through another Australian trust, another Australian partnership or a controlled foreign partnership, or any number or combination of these.

Where tracing indirect interests in an Australian partnership or trust, one interposed controlled entity has an interest in another interposed controlled entity, section 459A ignores one of the interposed entities so as to avoid double taxation. In such situations the section focuses on the entity that has the more proximate interest in the Australian partnership or trust.

The direct or indirect interest that the CFC or CFT holds in the net income of the Australian partnership or trust need not be held at the time of attribution as specified in sections 456 to 459. It is only relevant that the CFC or CFT has a share of the net income at some stage.

Who must have an interest in the CFC or CFT?

There must be an attributable taxpayer in relation to the CFC or to the CFT. Only attributable taxpayers are included since these are the only ones that are considered to have a large enough interest (and control and access) to make the necessary calculations. This approach is consistent with the general approach taken in the CFC measures.

When does the attributable taxpayer need to have an interest in the CFT or CFC?

The interest of the attributable taxpayer must be held at the time of the calculation of the section 456 to 459A amount. This time of attribution differs depending on which section applies to attribute an amount to an Australian trust or partnership. The times are as follows:

·
where the attribution was under section 456, at the end of the statutory accounting period of the CFC for which attributable income was calculated;
·
where the attribution was under section 457, at the time that the CFC changed residence;
·
where the attribution was under section 458, at the time that the dividend was paid;
·
where the attribution was under 459, at the time that the dividend was deemed to have been paid; and
·
where the attribution was under a previous application of section 459A, at the time of that attribution, which in turn will depend on the time of the underlying attribution under sections 456 to 459.

What amount is to be included in assessable income?

The amount to be included in the attributable taxpayer's assessable income is calculated in accordance with the formula in subsection (1). The formula operates so that, where an amount was attributed to an Australian partnership, the amount included in the attributable taxpayer's assessable income is determined by multiplying the attributable taxpayer's interest in the interposed CFC or CFT by the share the interposed CFC or CFT has in the Australian partnership's net income. This determines the indirect interest of the attributable taxpayer in the net income of the Australian partnership in respect of the CFC or CFT. That percentage is then applied to the amount included in the assessable income of the Australian partnership under section 456, 457, 458, 459 or 459A. This approach is also followed where there is an Australian trust instead of an Australian partnership.

There could be more than one amount attributed to an Australian trust or Australian partnership. For example, there could be several dividends paid by a CFC resulting in several applications of section 458. Also, there could be an application of more than one of sections 456 to 458. Section 459A would then apply separately to each amount so attributed.

Are foreign tax credits allowed?

No credit for foreign taxes paid in respect of the amount attributed under section 459A will be allowed - see further notes on clause 9. This is in keeping with the anti-avoidance nature of the amendment.

Do attribution credits arise?

No attribution credits will arise. This is because attribution credits arise under section 371 (to be introduced by the Foreign Income Bill) only in respect of amounts included in assessable income under sections 456 to 458. This result is in keeping with the avoidance nature of the arrangements to which section 459A applies.

What happens if the avoidance structure is duplicated?

In the absence of a provision to the contrary, this structure could be repeated so that the anti-avoidance provision operated to attribute an amount to another Australian partnership or trust. The avoidance opportunity could then be re-created. To prevent this, the section applies not only for amounts attributed under sections 456 to 459, but also to amounts previously attributed under section 459A. In the successive application of subsection 459A(1), any reduction that occurred under subsection 459A(2) is ignored.

What about attribution under the transitional provisions?

The Foreign Income Bill also contains transitional provisions that attribute amounts paid by a CFC or a CFT to an attributable taxpayer as follows:

·
subclause 52(2) - provides for the attribution of certain amounts deemed to be dividends under section 108 as it applies in accordance with subclause 52(1), and corresponds to section 459;
·
clause 55 - provides for the attribution of a certain dividends paid by a CFC resident in an unlisted country to either a CFC resident in a listed country, a CFT or a partnership, and corresponds to section 458;
·
clause 56 - provides for the attribution of a certain amounts deemed to be dividends under section 47A (to be inserted by the Foreign Income Bill) that are paid by a CFC resident in an unlisted country to a either CFC resident in a listed country, a CFT or a partnership, and corresponds to section 459;
·
clause 57 - provides for the attribution of certain distributions made by a CFT to a CFC resident in a listed country, directly or indirectly through a partnership or an Australian trust;
·
clause 58 - provides for the attribution of a certain accumulated profits of a CFC upon change of residence from an unlisted country to a listed country, and corresponds to section 457; and
·
clause 59 - provides for the attribution of a certain accumulated profits of a CFC upon change of residence from an unlisted country to Australia, and also corresponds to section 457.

Clauses 54 to 58 will provide that an amount is to be included in assessable income under one of sections 456 to 459, while clause 52 will have the same effect after the amendment to be made by Part 6 of this Bill (see notes on clause 99). Because the transitional provisions deem that assessability arises under the operation of a substantive provision of the Principal Act, these amounts are also section 456 to 459A amounts and section 459A will extend to the operation of those transitional provisions.

Elimination of double taxation

Where an amount is included in assessable income because an attributable taxpayer has an interest in a CFT, the amount attributed may have already been liable to Australian tax. Subsection 459A(2) will prevent this double taxation.

How could this double taxation happen?

This would occur where an amount was included in the net income of a CFT which, in turn was included in the assessable income of a resident under Division 6 of the Principal Act because that resident was presently entitled to a share of the net income of the CFT (see example one).

How is this prevented?

This double taxation is prevented by reducing the amount to be included in an attributable taxpayer's assessable income under subsection (1) by the amount that has already been subject to Australian tax, provided that the already assessed amount can be said to relate to the amount that is assessed under subsection 459A(1). The Commissioner of Taxation is given the authority to determine this matter. An amount will be considered to have been subject to Australian tax if it has been included in the assessable income of a taxpayer or if the trustee of a trust estate has been liable to tax on the amount.

Inclusion in the assessable income of a taxpayer does not refer to the inclusion of an amount in the assessable income of a partnership or a trust for the calculation of the net income of that partnership or trust. However, the amount that is so included in the net income and is eventually, through the operation of Division 5 or Division 6 of the Principal Act, included in the assessable income of a natural person, a company, a corporate unit trust, a public unit trust, an eligible entity (within the meaning of Part IX of the Principal Act) or is taxed to a trustee will reduce the section 459A amount.

Does it apply to all double taxation?

Not all double taxation is eliminated by this section. As previously mentioned, it does not eliminate double taxation in respect of an eventual distribution of the amount to which any of sections 456 to 459 applied.

Example One : Double taxation involving one resident

Assume the following:

·
an Australian company (AustCo) has a present entitlement to 50 per cent of the net income of a CFT;
·
the Australian company is also a transferor in respect of the CFT and therefore has an attribution percentage, within the meaning of the transferor trust measures, of 100 per cent;
·
the CFT is presently entitled to 100 per cent of the profits of an Australian trust;
·
the Australian trust holds the shares in a CFC and has no income or expenses;
·
CFC has attributable income of $100,000 at the end of its statutory accounting period.

This is illustrated on the next page. The situation before the application of section 459A to the AustCo is that the only amount that is liable to Australian tax is AustCo's share of the net income of the CFT, being $50,000.

Diagram for Example One
              

Disregarding subsection 459A(2), subsection 459A(1) would then operate to include in AustCo's assessable income $100,000. That is, the attribution percentage that AustCo holds in the CFT (100 percent) multiplied by the entitlement of the CFT to the net income of the Australian trust (100 per cent) multiplied by the share of the net income that relates to the section 456 to 459A amount ($100,000).

Thus, although only $100,000 was originally attributed to the Australian trust under section 456, after the application of the anti-avoidance rule a total of $150,000 is taken into account in calculating AustCo's Australian tax liability.

In this case, it would be reasonable for the Commissioner to form the view that $50,000 of the amount included under subsection 459A(1) was attributable to an amount already assessed. Subsection 459A(2) would then operate to reduce the amount attributed by $50,000 to $50,000, so that the total amount taken into account to determine AustCo's tax liability is $100,000.

Example two : Double taxation involving more than one taxpayer

Assume the same facts as in example one but instead AustCo has no present entitlement to the net income of the CFT. Rather, that 50 per cent interest is held by another resident company (AustCo2).

This is diagrammatically illustrated on the next page. Again, the situation before the application of section 459A is that the only amount that is liable to Australian tax is $50,000, being AustCo2's share of the net income of the CFT.

Disregarding subsection 459A(2), subsection 459A(1) would then operate to include amounts in assessable income as follows:

·
for AustCo1, an amount of $67,000 would be included under the formula in subsection (1); and
·
for AustCo2, an amount of $33,000 would be included - being the attribution percentage that AustCo2 holds in the CFT (33 per cent) multiplied by the entitlement of the CFT to the net income of the Australian trust (100 per cent), multiplied by the part of the net income of the Australian trust that relates to the amount attributed under section 456 ($100,000).

Thus, although only $100,000 was originally attributed to the Australian trust under section 456, $150,000 in total is taken into account in calculating AustCo1 and AustCo2's Australian tax liabilities.

Diagram for Example Two
              

In this case it would be reasonable for the Commissioner to form the view that:

·
a part of the amount that would be attributed to AustCo1 under subsection 459A(1) represents an amount already assessed to AustCo2; and
·
the amount that would be attributed to AustCo2 under subsection 459A(1) also represents the amount already assessed to AustCo2.

The result would be that subsection 459A(2) would operate to:

·
reduce the amount attributed to AustCo1 to $50,000; and
·
reduce the amount to be attributed to AustCo2 to nil;

so that, once again, a total amount of $100,000 is taken into account to determine the total Australian tax liabilities.

Interpretation

Subsection 459A(3) modifies the meanings of the terms "Australian trust", as used in subsection (1), and "trust", as used in subsection (2). The references in those sections will not include a reference to a corporate trading trust, a public trading trust or a certain superannuation funds.

Why are some trusts excluded?

Under the Principal Act, corporate trading trusts and public trading trusts are taxed as if they were companies. Further, superannuation funds that are eligible entities within the meaning of Part IX of the Principal Act are subject to special rules that impose taxation on the trustees. In these cases, the provisions of Division 6 of Part III do not apply. As a result, the avoidance opportunity does not arise and there is no necessity for section 459A to apply.

Clause 78: Only resident partners, beneficiaries etc. liable to be assessed as a result of attribution

The amendments to insert a reference to section 459A into section 460 and to delete subsection 460(5) of the Principal Act are consequential on the amendment to insert section 459A (see notes on clause 77).

What does section 460 do?

Section 460, to be inserted by the Foreign Income Bill, ensures that a person who is a non-resident during a year of income is not liable to Australian tax as a partner or beneficiary (including indirectly by a liability imposed on the trustee in respect of such a beneficiary) on income attributed to an Australian partnership or Australian trust under section 456 to 459 in respect of the period where the partner or beneficiary was a non-resident. An exception is made where the partner or beneficiary is a CFC.

What will the reference to 459A do?

The insertion of a reference to section 459A in section 460 will ensure that a non-resident partner or beneficiary, who is the ultimate beneficial owner of a share of the income of an Australian partnership or Australian trust, will not be liable to Australian tax where the attribution is under section 459A. This accords with the purpose of section 459A, which is to attribute income only to residents.

What does subsection (5) do?

As mentioned, section 460 does not apply to reduce an Australian tax liability where the partner or beneficiary is a CFC. The section was inserted to prevent the avoidance that section 459A addresses. However, it does not address all circumstances - for example, where the partner or beneficiary is a CFT - and, to the extent that the section 456 to 459A amounts could be said to be from a foreign source, could be ineffectual. The desired outcome is to instead include an amount in the assessable income of the resident controllers of the CFC according to their interest in the CFC, which is to be achieved by the insertion of section 459A. Therefore, the operation of the subsection is not necessary.

Is there a corresponding effect on other provisions?

The operation of section 460, including the operation of subsection (5), is adopted by section 102AAZF of Division 6AAA of Part III (to be inserted by the Foreign Income Bill) and applied to trusts. That Division deals with the proposed attribution to residents of amounts accumulating in certain non-resident trusts to which the resident has transferred certain property or services. The amendment to delete subsection (5) will have the effect that amounts attributed to an Australian partnership or trust under the transferor tax measures will not result in an additional Australian tax liability for a CFC.

What is the date of effect of the amendment?

Like the amendment made by clause 77 to insert section 459A, this amendment will commence immediately after the commencement of the proposed Taxation Laws Amendment (Foreign Income) Act 1990, assuming the enactment of the Taxation Laws (Foreign Income) Bill 1990 (see further notes on subclause 2(2)). There is also no application clause for the amendment in the present Bill. This will have the effect that subsection 460(5) never had any operation.

Clause 79: Application of amendments

Clause 79 contains the application provisions relating to the operation of certain measures contained in the Bill.

Subclause (1) is an interpretative provision and defines "amended Act" to mean the Principal Act as amended by Part 3 of this Bill.

Subject to subclause (4), by subclause (2) the amendments made by clause 10 (not including paragraphs (b) and (j) of clause 10) apply to bereavement payments made in relation to deaths occurring on or after 1 January 1990.

By the operation of subclause (3), the proposed amendments by paragraph (j) of clause 10 to paragraph 23AD(3)(C) of the Principal Act will apply to pensions paid during the year 1988-89 and subsequent years of assessment within the meaning of section 843 of the Income and Corporation Taxes Act 1988 of the United Kingdom. In the majority of cases this will be from 6 April 1988.

Subclause (4) specifies that the amendments made by clause 10 in respect of bereavement payments made under section 98A of the Veterans' Entitlements Act 1986 and section 248 of the Seamen's War Pensions and Allowances Act 1940 apply in relation to deaths occurring on or after 19 December 1989.

Subclause 79(5) provides that the amendment proposed by clause 11 will apply to asset disposals during the year of income commencing on 1 July 1990 or a subsequent year of income (see notes on clause 11).

Subclause (6) will provide that the amendments to be made by clause 12 to section 47A (to be inserted by the Foreign Income Bill) will have effect in relation to payments made and benefits provided by a CFC after 3 June 1990. Section 47A will itself apply only to those payments and benefits.

Subclause (7) provides that the amendment proposed by clause 16 which inserts section 102AAZBA in the Principal Act will apply in relation to the calculation of attributable income of any year of income whether commencing before or after the commencement of that section.

Section 102AAZBA will determine the cost base of assets, to which subsections 160M(9) or (10) have applied, for the purpose of calculating the gain on the disposal of such assets to be included in the attributable income of non-resident trust to which Division 6AAA (to be inserted by the Foreign Income Bill) applies.

Subclause (8), which will not amend the Principal Act, contains application provisions relating to amendments proposed by clauses 17 to 30 inclusive.

By those proposed amendments, the special deductions that are available to taxpayers for capital expenditure incurred by them in connection with:

·
prescribed mining and petroleum activities (Division 10, 10AAA and 10AA of Part III of the Principal Act); and,
·
industrial property and buildings (Divisions 10B and 10D of Part III of the Principal Act)

will be extended to relevant capital expenditure incurred in relation to ex-Australian activities etc that generate assessable income.

By subclause 79(8) all of those proposed amendments will apply to relevant expenditure incurred after 7.30 pm E.S.T. on 21 August 1990.

Subclause (9) provides that the amendments proposed by clause 32 will apply to 1990/91 and all subsequent years of income.

By subclause (10) the amendments proposed by clauses 34, 37 to 39 and 41 to 43 relating to the reducing franking debits and credits that will arise to life assurance companies, other than mutual life assurance companies, will apply from the commencement of the first franking year following the introduction of the Bill into Parliament.

By subclause (11) all those proposed amendments will apply in relation to disposal of assets in relation to disposals of assets after the date of introduction of this Bill.

Subclause (12) provides that the amendments proposed by paragraphs (h), (j), (k) and (m) of clause 49 and paragraph 72(a), which apply respectively to a CFC becoming a section 6 resident company and the calculation of the attributable income of a CFC, are to apply in respect of a change of residence that takes place on or after the date of introduction of this Bill into the Parliament.

Paragraphs (h), (j), (k) and (m) of clause 49 will amend subsection 160M(12A) to be inserted by the Foreign Income Bill and will insert subsections 160M(12AA) and (12AB) in the Principal Act. Those provisions apply where a CFC becomes a resident and subsequently disposes of assets owned by it on 30 June 1990.

Subclause (13) provides that the amendments proposed by Clause 54 and paragraph 72(b), will apply to changes of residence taking place on or after 1 July 1989. Clause 54 will insert section 160ZFB in the Principal Act. Paragraph 72(b) will ensure that section 160ZFB is not taken into account in the calculation of the attributable income of a CFC.

Section 160ZFB provides for an adjustment to the consideration on the disposal of a taxable Australian asset by a CFC where an amount had previously been included in the assessable income of the attributable taxpayer on a change of residence of the CFC by the operation of section 457 to be inserted by the Foreign Income Bill. The earliest change of residence in respect of which an amount can be included in the assessable income of an attributable taxpayer under section 457 is 1 July 1989. Therefore, the compensating adjustment in respect of the actual disposal by the CFC of a taxable Australia asset is to apply to changes of residence on or after 1 July 1989.

Subclause (14) provides that the amendment proposed by clause 66 will apply to disposals of assets taking place after the date of introduction of this Bill into Parliament. Clause 66 proposes to amend section 324 (to be inserted by the Foreign Income Bill) which will set out the circumstances in which a particular item of income or profits derived by an entity is taken to be subject to tax in a listed country. The proposed amendments will clarify the concept of subject to tax in section 324.

Subclause (15) will provide that the amendments to be made to section 377 (to be inserted by the Foreign Income Bill) that sets out the exempting receipts of an unlisted country company will apply to amounts derived by or dividends paid to the company for any accounting period of the company that ends after 30 June 1990.

Section 377 treats as an exempting receipt of a company that is a resident of an unlisted country certain income of the company of an accounting period that ends after 30 June 1990. Exempting receipts include income that is included in assessable income for Australian tax purposes or dividends paid out of that income. The effect of the amendment is to exclude from exempting receipts certain insurance and reinsurance premiums paid to non-residents where 10 percentum of those premiums is treated as taxable income for Australian taxation purposes.

Subclause (16) provides that the amendments to be made by clauses 68, 69, 70, 71, 73 and 75 will apply to the calculation of the attributable income of a CFC for any statutory accounting period of the CFC.

Clause 68 will amend section 389 (to be inserted by the Foreign Income Bill) and will provide that section 459A to be inserted by the present Bill and certain provisions that deal with insurance and reinsurance premiums will be disregarded in calculating the attributable income of a CFC.

Clause 69 will amend section 393 (to be inserted by the Foreign Income Bill) to permit Australian tax paid by a CFC in respect of insurance and reinsurance premiums that are taxed by including 10 per cent as taxable income, to qualify as Australian tax paid on those premiums. Where those premiums paid are included in the attributable income of the CFC, this amendment will treat the CFC as having paid Australian tax on those amounts where that tax has been assessed and paid. The amendment to be made by clause 75 to section 436 will deny an exclusion for those premiums in applying the active income test. Clause 71 will exclude from the notional exempt income of a CFC that is a resident of an unlisted country those insurance and reinsurance premiums. It will include in notional exempt income certain reinsurance premiums received by the CFC for which no deduction is granted to the insurer.

Clause 70 will have the effect of allowing a deduction in calculating the attributable income of a CFC for interest paid on certain convertible notes.

Clause 73 will insert section 418A in the Principal Act to make certain adjustments to the cost base of the assets of a CFC that changes residence from Australia to a listed or unlisted country.

Clause 80: Application of bad debt amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the amendments made by clauses 150 and 155.

By subclause (1) the amendments apply to debts created or acquired (whichever is the later) after the earlier of the commencement of the taxpayer's 1990-91 year of income (including a substituted accounting period in lieu thereof) and 7.30 pm, eastern standard time on 21 August 1990 (called the "application time" in subclause (2)).

By the operation of this subclause all loans issued or acquired by a money-lender after the commencement of the new measures for taxing foreign source income will be subject to the limitations provided by section 63D.

Subclause (2) will ensure that certain debts created after the application time are treated as existing debts and therefore not subject to the amendments made by clauses 13 and 14.

By subclause (2), those amendments will not apply where:

·
a debt is created under a contract entered into before the application time; or
·
a debt existed at the application time and a latter debt is created by rolling over or extending its term, provided it would have been reasonable to expect that action to be taken at that time.

The subclause will ensure, for example, that in the case of staggered draw-downs and roll-overs under a loan facility entered into before the application time that subsequent draw-downs and roll-overs are not treated as new loans.

It should be noted, however, that the subclause has no application in the case of a loan renewal. A renewal of a loan at the termination of an existing loan facility would constitute a new loan.

Clause 81: Savings - section 159GZZJ of the Principal Act

This is a savings clause that provides that the amendment proposed to section 159GZZJ is to be disregarded if an assessment is affected by that amendment.

Clause 82: Transitional - cancellation of franking surplus for mutual life assurance companies and SGIOs

Clause 82 will result in the cancellation of the franking surplus of each mutual life assurance company or SGIO on 21 August 1990. This is achieved by a franking debit equal to the amount of the surplus arising at the beginning of the following day, i.e., 22 August 1990.

Clause 83: Transitional - application of Part IIIA of the Principal Act to partnerships

The Bill proposes a number of amendments to clarify the application of Part IIIA to disposals of partnership assets. The amendments are not intended to alter the application of the existing law in substance. However, to eliminate any possibility of their having a detrimental effect in relation to earlier transactions, clause 83 proposes (as a transitional measure) that the amendments made by the Bill should be disregarded in considering the application of Part IIIA to disposals of partnership assets before 7 December 1990.

Clause 84: Transitional - section 160ZZU of the amended Act

Section 160ZZU imposes a number of record-keeping obligations on taxpayers, for the purposes of the capital gains and capital losses provisions (Part IIIA of the Act). A number of amendments are proposed by the Bill to section 160ZZU. At present, by paragraph 160ZZU(3)(b), the record-keeping obligations imposed on taxpayers can effectively be "waived" following notification from the Commissioner of Taxation that records are no longer required to kept. However, as a consequence of the amendments proposed by the Bill, this record-keeping waiver provision will be contained in new paragraph 160ZZU(7)(a). As a transitional measure, clause 84 ensures that a notification given by the Commissioner pursuant to existing paragraph 160ZZU(3)(b) (prior to the date of Royal Assent to the Bill) will instead be taken to have been given pursuant to paragraph 160ZZU(7)(a).

Clause 85: Amendment of assessments

Clause 85 of the Bill authorises the Commissioner of Taxation to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving affect to amendments proposed by the Bill.

PART 4 - AMENDMENT OF THE INCOME TAX RATES ACT 1986

Part 4 of the Bill will amend the Income Tax Rates Act 1986 to reduce the lowest marginal rate of tax for resident individuals, applying in the income range $5,401 to $20,700, from 21 per cent to 20 per cent.

Clause 86: Principal Act

The Income Tax Rates Act 1986 is referred to as the Principal Act in Part 4 of the Bill.

Clause 87: Interpretation

This clause omits a reference in the definition of "prescribed non-resident" in section 3 of the Principal Act to the Tuberculosis Act 1948. The reference to the Tuberculosis Act is redundant as benefits are no longer payable under the Act.

Clause 88: Limitation on tax payable by certain trustees

Consistent with the decrease in the lowest marginal tax rate from 21 per cent to 20.5 per cent for 1990-91 by virtue of the operation of clause 90 of this Bill, subsection 14(2) of the Principal Act is amended by subclause 88(1) to omit the reference to $717 and replace it with $705. Subsection 14(2) applies where the net income of a resident trust exceeds $416 but not $705 and limits the rate of tax to 50 per cent of the excess over $416. This amendment applies to assessments in respect of income of the 1990-91 year of income.

Subclause 88(2) further amends subsection 14(2) of the Principal Act to omit the reference to $705 and replace it with $693. This amendment applies to assessments in respect of income of the 1991-92 and all subsequent years of income.

Clause 89: Interpretation

This clause has the same effect as clause by omitting a now redundant reference to the Tuberculosis Act 1948 from the definition of "eligible pensioner" in section 16 of the Principal Act.

Clause 90: Tax cuts for 1990-91

The existing composite rate table in Part 1 of Schedule 7 to the Principal Act, which declares the rates of tax for resident taxpayers for the 1990-91 year of income, will be adjusted by clause 90 of this Bill. The new rates for resident individuals for 1990-91 will be as follows:

For parts of taxable income   Exceeding Rate But not exceeding   $ $ %
0 5,250 0
5,250 17,650 20.5
17,650 20,600 24.5
20,600 20,700 29.5
20,700 35,000 38.5
35,000 36,000 42.5
36,000 50,000 46.5
50,000 - 47

The tax payable by resident taxpayers for 1990-91 may be calculated from the following table:

Parts of taxable income   Exceeding But not exceeding Tax on total taxable income $ $  
0 5,250 NIL
5,250 17,650 Nil plus 20.5 cents for each dollar of taxable income in excess of $5,250.
17,650 20,600 $2,542 plus 24.5 cents for each dollar of taxable income in excess at $17,650.
20,600 20,700 $3,264.75 plus 29.5 cents for each dollar of taxable income in excess of $20,600.
20,700 35,000 $3,294.25 plus 38.5 cents for each dollar of taxable income in excess at $20,700.
35,000 36,000 $8,799.75 plus 42.5 cents for each dollar of taxable income in excess of $35,000.
36,000 50,000 $9,224.75 plus 46.5 cents for each dollar of taxable income in excess of $36,000.
50,000 - $15,734.75 plus 47 cents for each dollar of taxable income in excess of $50,000.
The rates of tax declared for non-resident taxpayers for 1990-91 will not change.

Clause 91: Tax cuts for 1991-92 and subsequent years

The rate table in Part 1 of Schedule 7 to the Principal Act is to be amended by clause 91 to apply in respect of the 1991-92 and subsequent income years. The new rates for resident individuals for the 1991-92 and subsequent income years will be as follows:

For parts of taxable income   Exceeding But not exceeding Rate $ $ %
0 5,400 0
5,400 20,700 20
20,700 36,000 38
36,000 50,000 46
50,000 - 47

The tax payable by resident taxpayers for the 1991-92 and subsequent financial years may be calculated from the following table:

For parts of taxable income   Exceeding But not exceeding Tax on total taxable income $ $  
0 5,400 NIL
5,400 20,700 Nil plus 20 cents for each dollar of taxable income in excess of $5,400.
20,700 36,000 $3,060 plus 38 cents for each dollar of taxable income in excess of $20,700.
36,000 50,000 $8,874 plus 46 cents for each dollar of taxable income in excess of $36,000.
50,000 - $15,314 plus 47 cents for each dollar of taxable income in excess of $50,000.
The rates of tax declared for non-resident taxpayers for the 1991-92 and subsequent financial years will not change.

Clause 92: Application of amendments

By subclause (1) the amendments made by clause 89 are to apply to assessments in respect of income for the year of income commencing on 1 July 1990 and for all subsequent years of income.

Subclause (2) provides that the amendments made by subclause 88(1) and clause 90 will apply to assessments of income of the 1990-91 year of income. The amendments relate to the change in the rate of personal tax for residents that is effective from 1 January 1991 and as such, composite rates of tax will apply for the 1990-91 year.

By subclause (3) the amendments made by subclause 88(2) and clause 91 of the Bill apply to assessments of income of the 1991-92 and subsequent years of income.

Clause 93: Transitional - provisional tax for 1990-91

This clause provides that the amendments to the personal tax rates contained in this Bill for 1990-91 (refer clause 90) will not be used in the calculation of 1990-91 provisional tax. The rates of tax to be used in the 1990-91 provisional tax calculations are the rates announced in the February 1990 Economic Statement and subsequently declared for the 1990-91 year by the Taxation Laws Amendment (Rates and Provisional Tax) Act 1990 (Act No.87).

Clause 94: Amendment of assessments

Clause 94 of the Bill authorises the Commissioner of Taxation to re-open an income tax assessment made before the Bill becomes law should this become necessary for the purposes of giving effect to the amendments proposed by Part 4 of the Bill.

PART 5 - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 95: Principal Act

This clause facilitates reference to the Taxation Administration Act 1953 which, in this Part, is referred to as "the Principal Act".

Clause 96: Unauthorised access to taxation records

Section 8XA of the Taxation Administration Act 1953 ("the Principal Act") will be repealed and replaced by a new section 8XA. The current section was enacted as part of the Tax File Number system and makes it an offence for a person knowingly to take action to obtain information held under or for the purposes of a taxation law unless the person does so in the course of exercising powers or performing functions under a taxation law. The term "taxation law" is defined in section 2 of the Principal Act to mean, broadly, the Commonwealth tax laws administered by the Commissioner of Taxation.

Section 8XA was intended to prohibit persons from gaining access to records containing information obtained or held by the Commissioner. However as it stands, the section is having the unintended consequence of hindering the compliance activities of the State and Territory taxation authorities whose officers are seeking information collected by businesses for the purposes of the "taxation law".

Subject to certain exceptions, the new section 8XA will make it an offence for a person to take action to obtain access to records containing information about a person's affairs where those records are in the Commissioner's possession and are held by the Commissioner for the purposes of a taxation law. The section does not apply to prohibit access to records that are in the possession of someone other than the Commissioner.

The exceptions are situations in which those records are required under the Freedom of Information Act 1982, or as part of a court or an Administrative Appeals Tribunal action, or in the course of carrying out duties relating to a taxation law. The penalty under the current section 8XA of $10,000 or imprisonment for 2 years, or both, will not be changed by this amendment.

Clause 97: Secrecy

Section 8XB of the Principal Act makes it an offence if a person makes a record of or divulges information about the affairs of a taxpayer when that information has been obtained in breach of a taxation law. This amendment of the section will create an offence if the person uses the information other than by recording it or by disclosing it to another person. The effect of the amendment will be to extend the protections available for individuals under Information Privacy Principle 4 of the Privacy Act 1988.

The amendments of sections 8XA and 8XB will apply from the date of Royal Assent of the Bill.

PART 6 - AMENDMENT OF THE TAXATION LAWS AMENDMENT (FOREIGN INCOME) ACT 1990

Clause 98: Principal Act

This clause facilitates references to the Taxation Laws Amendment (Foreign Income) Act 1990 (which was introduced as the Taxation Laws Amendment (Foreign Income) Bill 1990) and had not been enacted as at the date of introduction of the present Bill). In this Division, that Act is referred to as the "Principal Act".

Clause 99: Transitional - section 108 of the amended Act

This clause makes a technical amendment to section 52 of the Principal Act which will ensure that the amount to be included in a taxpayer's assessable income under that section is instead deemed to be included under section 459 of the Income Tax Assessment Act 1936.

What does section 52 do?

In essence, section 52 of the Principal Act is a companion provision to section 459 of the ITAA for amounts deemed to be a dividend by the modified operation of section 108 of the ITAA rather than by section 47A of the ITAA. The section operates as follows:

·
the operation of section 108 of the ITAA is modified so that, for the period 1 July 1989 to 27 June 1990, section 108 is taken to operate to deem certain disguised distributions by CFCs to be dividends (subsection 52(1)); and
·
subject to the circumstances of the payment, the amount of the deemed dividend in respect of the recipient is included in the assessable income of an attributable taxpayer for the year of income commencing on 1 July 1990 or the year substituted in lieu thereof. This is on the assumption that section 458 of the ITAA (including its operation in accordance with section 57 of the Principal Act) has not already included the amount (subsection 52(2)).

Why is the amendment necessary?

Primarily, the amendment is consequential upon the insertion of section 459A into the ITAA and ensures that section 459A will apply to amounts attributed to a taxpayer under this section (see further notes on Clause 77, especially the application in the transitional period).

Another effect of the section is that the amount attributed because of subsection (2) will be deemed to be foreign income within the meaning of section 6AB because of the inclusion in that definition of amounts assessable under section 459 (see further notes on clause 9).

As a matter of form only, the amendment also brings the manner of operation of subsection 52(2) into line with the manner of operation of the transitional provisions of clauses 54 to 59 of the Foreign Income Bill.

Does the amendment charge the amount calculated under section 52?

Although the section modifies the way an amount is included in the assessable income of a taxpayer under section 52, the amendment in no way affects the quantum to be included because of section 52.

What is the date of effect?

The amendment will apply so that, assuming the enactment of the Taxation Laws Amendment (Foreign Income) Bill 1990, the amendment to be made by clause 99 of the present Bill, will have effect from the date from which Section 52 of that Act will have effect.


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