House of Representatives

Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 2 - Amendment of assessments

Outline of chapter

2.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to make a number of changes to reduce the periods during which the Commissioner of Taxation (Commissioner) may amend income tax assessments in a range of circumstances. The period in which the Commissioner can amend an assessment for most individuals or very small business taxpayers will be standardised at 2 years. A 4-year period of review will apply for taxpayers with more complex affairs.

2.2 The period for review and amendment of assessments involving arrangements with a dominant tax avoidance purpose will be 4 years. This will reduce the amendment period where the general anti-avoidance provision (Part IVA) applies from 6 years and also apply to other cases with a dominant tax avoidance purpose.

2.3 Where a taxpayer returns a nil tax liability for an income year, the taxpayer will now have a limited period of review - either 2 or 4 years, depending on the complexity of their affairs - rather than an unlimited period of review, as is presently the case.

2.4 This Bill also restructures and redrafts section 170 of the ITAA 1936, which is the main provision covering amended assessments. A number of provisions have been converted to tables.

Context of amendments

2.5 These provisions have been developed as part of the Government's response to the recommendations made in the Report on Aspects of Income Tax Self Assessment (the Report). Background to the Report, and the recommendations made, is in Chapter 1 of this explanatory memorandum.

Operation of current provisions

2.6 Currently, the standard period for the Commissioner to amend an assessment is 4 years. If the underassessment of tax was due to fraud or evasion, the Commissioner can amend the assessment at any time. The Commissioner has 6 years to amend an assessment to give effect to a Part IVA determination to cancel a tax benefit (section 177G of the ITAA 1936). Certain special circumstances described in the legislation also give rise to unlimited review periods (see paragraph 2.13).

2.7 For certain individuals with very simple tax affairs, called shorter period of review (SPOR) taxpayers (the definition of SPOR taxpayers is contained in section 6AD of the ITAA 1936), the current period for amendment is 2 years.

2.8 Where the amendment is initiated by the taxpayer the time limits outlined above generally also apply. The Commissioner can rely on a statement by a taxpayer in making an amendment to increase or decrease a liability (commonly called a 'self amendment'), in the same way the Commissioner can rely on a statement in a return (subsection 169A(1)). If the Commissioner does amend an assessment relying on a taxpayer's request, then the amendment period with respect to that particular is refreshed.

2.9 The time limits for lodgment of objections against assessments correspond to the periods for amendment of assessments (section 14ZW of the Taxation Administration Act 1953 ). Taxpayers can request the Commissioner to deal with objections lodged outside those time limits as if they had been lodged within time (subsection 14ZW(2)). The Commissioner must consider the request and decide whether to agree to it or refuse it (subsection 14ZX(1)).

2.10 If a taxpayer applies for an amendment of their assessment before the period for amendment ends, and has supplied to the Commissioner all information necessary for deciding the application, amendment is allowed even though the period for amendment has elapsed (subsection 170(6) of the ITAA 1936).

Nil liability (including loss) returns

2.11 For individual taxpayers, the time periods for amendment currently start to run when tax becomes due and payable under an assessment. Therefore, if a taxpayer has a nil liability or a loss in an income year so that no tax is 'due and payable', the Commissioner effectively has an unlimited period to review their affairs (subsection 170(2) of the ITAA 1936).

2.12 A recent Federal Court decision indicates that full self assessment taxpayers, such as companies and the trustees of approved deposit funds, eligible superannuation funds or pooled superannuation trusts, similarly face an unlimited review period when they lodge nil liability returns ( FCT v BCD Technologies Pty Ltd
[2005] FCA 708 ).

Other unlimited periods of review

2.13 There are numerous specific provisions that have unlimited periods of review. The majority of these provisions are listed in subsections 170(10) and (10AA) of the ITAA 1936, but some are found in other parts of the tax laws or contained in legislation other than tax laws (eg, subsection 56(3) of the Child Support (Assessment) Act 1989 ).

Summary of new law

2.14 The purpose of these amendments is to ensure that the time during which taxpayers experience uncertainty over whether they have correctly self assessed their income tax liability approaches the minimum required for the Australian Taxation Office (ATO) to identify the majority of incorrect assessments of that type and correct them.

2.15 The Government has decided that the period during which the Commissioner may amend the assessment of an individual or very small business taxpayer to increase or decrease their tax liability should be reduced to 2 years. Taxpayers excluded from the 2-year amendment period will generally have a 4-year amendment period, unless a special amendment period applies.

2.16 A business will be treated as a very small business in any income year in which it is eligible for, and has elected to participate in, the simplified tax system (STS). The STS is dealt with in Division 328 of the Income Tax Assessment Act 1997 (ITAA 1997).

2.17 Taxpayers with more complex affairs, including businesses that are not in the STS, have a 4-year amendment period. This reflects the greater time generally needed for the ATO to complete compliance activity for this type of taxpayer. Therefore, the 2-year amendment period excludes:

·
a taxpayer that carries on a business (or is a partner in a business) that is not in the STS;
·
a taxpayer that is a beneficiary of a trust estate at any time in that income year, unless the trust is an STS taxpayer or the trustee of the trust (in that capacity) is a full self assessment taxpayer (eg, a corporate unit trust, public trading trust or superannuation fund);
·
a taxpayer if, in that year, that taxpayer or another entity entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the taxpayer obtaining a scheme benefit in relation to income tax from the scheme; and
·
other high risk and special cases prescribed by regulation.

2.18 Fraud or evasion cases will continue to have an unlimited amendment period, as people who engage in calculated behaviour to evade tax should remain permanently at risk.

2.19 The current powers to extend the standard amendment periods generally continue to apply, an example being the power of the Federal Court to extend time where the Commissioner has commenced an examination of a taxpayer's affairs.

2.20 The present 6-year amendment period for the Commissioner to give effect to Part IVA (the general anti-avoidance provision) and certain other anti -avoidance provisions is abolished. Schemes where someone entered into or carried out the scheme with a dominant purpose of the taxpayer avoiding tax will, like other complex cases, be subject to a 4 -year amendment period. This will not be limited to where Part IVA applies - it also applies where a scheme is defeated by any other provision, provided the relevant purpose is present.

2.21 From the 2004 -05 income year, the amendment period for loss and nil liability assessments will be the same as the period for assessments with positive liabilities. Transitional rules for taxpayers who lodged nil liability returns for earlier income years will enable those taxpayers to obtain finality for those earlier years.

2.22 Because these amendments significantly revise and update the former section 170 of the ITAA 1936, the whole section has been restructured and renumbered.

Comparison of key features of new law and current law

New law Current law
A majority of taxpayers have a 2 -year amendment period. Some classes of taxpayer are excluded from the 2 year period in the law and some cases are dealt with by the regulations. A majority of taxpayers have a 4 -year amendment period.
Taxpayers with more complex affairs have a 4-year amendment period. A majority of taxpayers have a 4 -year amendment period.
The shorter period of review (SPOR) class of taxpayer is no longer required. Shorter period of review (SPOR) taxpayers are entitled to a reduced amendment period.
Nil assessments (including loss cases) have a limited amendment period, of 2 or 4 years, depending on the circumstances of the taxpayer. Nil and loss returns have an unlimited review period.
The amendment period for avoidance arrangements, including where Part IVA applies, is 4 years. The amendment period for avoidance arrangements subject to Part IVA and certain other avoidance provisions is 6 years.
Normal amendment periods apply for substantiation and car expenses provisions. Substantiation and car expenses provisions have unlimited amendment periods.
The review period commences when the Commissioner gives the taxpayer the notice of assessment. The review period commences when an assessment becomes due and payable.

Detailed explanation of new law

A shorter standard amendment period

2.23 The majority of taxpayers will have their tax affairs for a particular income year finalised 2 years after the Commissioner gives them a notice of assessment for that income year.

Eligibility for the 2-year amendment period

2.24 Most taxpayers will be subject to the standard 2-year amendment period. A taxpayer will be excluded from the standard amendment period only if he or she has complex affairs and therefore fits within one of the categories of exclusion outlined in subsection 170(1). New items 1 to 3 of subsection 170(1) set up the standard period for taxpayers with simple affairs and item 4 deals with the default amendment period of 4 years. Items 5 and 6 of subsection 170(1) establish unlimited amendment periods for fraud or evasion and for giving effect to decisions on review or appeal, while subsections 170(9) to (10A) set out special amendment periods (other special amendment periods are currently found throughout the tax laws and other Acts).

Individual taxpayers

2.25 The Commissioner may amend the assessment of an individual taxpayer within 2 years after the day on which the Commissioner gave notice of the assessment, unless the individual:

·
carries on a business and is not an STS taxpayer for that year;
·
is a partner in a partnership that carries on a business that is not an STS taxpayer for that year;
·
is acting in the capacity of a trustee of a trust estate in that year (see paragraph 2.27 for special rules relating to this case);
·
is a beneficiary of a trust estate in that year, except where the trust is an STS taxpayer or the trustee of the trust (in their capacity as trustee) is a full self assessment taxpayer for that year;
·
or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of obtaining a scheme benefit in relation to income tax from the scheme for that year; or
·
is excluded from the 2-year period by regulation.

[Schedule 1, item 1, item 1 in the table in subsection 170(1)]

This 2-year time limit is subject to items 5 and 6, subsections 170(9) to (10A) and other special amendment periods found throughout the income tax laws and other Acts.

Companies

2.26 The Commissioner may amend the assessment of a company that is an STS taxpayer for the year of income of that assessment, within 2 years after the day on which the Commissioner gave notice of the assessment, unless the company:

·
is a partner in a partnership that carries on a business that is not an STS taxpayer for that year;
·
is acting in the capacity of a trustee of a trust estate in that year (see paragraph 2.27 for special rules relating to this case);
·
is a beneficiary of a trust estate in that year, except where the trust is an STS taxpayer or the trustee of the trust (in their capacity as trustee) is a full self assessment taxpayer for that year;
·
or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the company obtaining a scheme benefit in relation to income tax from the scheme for that year; or
·
is excluded from the 2-year period by regulation.

This 2-year time limit is subject to items 5 and 6, subsections 170(9) to (10A) and other special amendment periods found throughout the income tax laws and other Acts. Section 166A of the ITAA 1936 deems that the Commissioner is taken to have given notice of an assessment on the day on which the return is lodged.

[Schedule 1, item 1, item 2 in the table in subsection 170(1)]

Trustees

2.27 The Commissioner may amend the assessment of a trustee of a trust estate that is an STS taxpayer within 2 years after the day on which the Commissioner gave notice of the assessment, unless the trustee:

·
is a partner in a partnership that carries on a business that is not an STS taxpayer for that year;
·
is a beneficiary of another trust estate in that year, except where the trust is an STS taxpayer or the trustee of the trust (in their capacity as trustee) is a full self assessment taxpayer for that year;
·
or another person entered into or carried out a scheme (either alone or with others) for the sole or dominant purpose of the trust obtaining a scheme benefit in relation to income tax from the scheme for that year; or
·
is excluded from the 2-year period by regulation.

Item 3 is subject to items 5 and 6, subsections (9) to (10A) and other special amendment periods found throughout the income tax laws and other Acts.

[Schedule 1, item 1, item 3 in the table in subsection 170(1)]

Exclusion for avoidance schemes

2.28 As outlined above, an exclusion from the 2-year amendment period for avoidance cases applies to individuals, companies and trustees otherwise eligible for a 2-year amendment period. Avoidance cases are complex and therefore a 4-year amendment period is warranted.

2.29 For the exclusion to apply, it must be reasonable to conclude that someone entered into or carried out a scheme (not necessarily the taxpayer) for the sole or dominant purpose described. That purpose is for the taxpayer to obtain a scheme benefit in relation to income tax from the scheme for that income year and is objectively determined having regard to any relevant factors. The matters listed in section 177D of the ITAA 1936 provide guidance as to what is likely to be relevant in objectively determining the purpose. As in section 177D, a person's actual subjective purpose is not relevant.

2.30 Scheme benefit has the same meaning as in the scheme penalty provisions in Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) and scheme has the same meaning as in those provisions and in Part IVA of the ITAA 1936.

2.31 The exclusion is not limited to cases where Part IVA applies - it can also apply where the benefit sought is unavailable because of any provision of the law, provided the relevant purpose is present.

2.32 Finally, the exclusion does not depend on whether the taxpayer is actually entitled to the benefit in question. If the necessary purpose is present, the longer 4-year amendment period applies, whether or not the taxpayer is entitled to the benefit.

Other exclusion by regulation

2.33 Because taxpayers' financial affairs are constantly evolving and from time to time new arrangements emerge, the law includes a mechanism by which sets of circumstances can be excluded from the standard amendment period by allowing for exclusion 'in any other circumstance prescribed by the regulations'. The Legislative Instruments Act 2003 restricts the retrospective application of regulations and provides for consultation on regulations affecting businesses. [Schedule 1, item 1, paragraph (f) in column 3 of item 1, paragraph (e) in column 3 of item 2 and paragraph (d) in column 3 of item 3 in the table in subsection 170(1)]

Determining whether the 2-year amendment period applies

2.34 Eligibility for the standard 2-year amendment period depends on the actual tax affairs of the taxpayer for that year, and not the taxpayer's or the Commissioner's understanding of the status of the affairs at the time of the assessment.

Example 2.1 George includes in his 2004-05 tax return his salary and a share of his interest in the net income of a partnership that he wrongly believes to be an STS taxpayer for that year. In 2008, the Commissioner adjusts the net partnership income and issues an amended assessment to George reflecting that adjustment. Although the amended assessment was issued more than 2 years after George received his notice of assessment, he is not eligible for the standard amendment period for 2004-05 because he is a partner in a partnership that was not a STS business.

Example 2.2 In her 2004-05 return, Rachael declares her salary and a distribution from a non-STS trust. Therefore, it appears that she is not eligible for the standard amendment period. Three years after she receives her notice of assessment for 2004-05, she discovers that the trust was an STS trust. Rachael is eligible for the standard amendment period for the 2004-05 income year.

The 4-year amendment period

2.35 A taxpayer that is not eligible for the standard 2-year amendment period will be subject to a 4-year amendment period, unless they fall within items 5 or 6, subsections 170(9) to (10A) or other special amendment period. Generally speaking, non-STS businesses, however structured, and individuals with complex financial affairs will fall into the 4-year amendment period, rather than the standard 2-year period. [Schedule 1, item 1, item 4 in the table in subsection 170(1)]

Exclusions from limited amendment periods

2.36 The provisions outlining eligibility for the 2 or 4-year amendment periods, as outlined above, are all subject to the following exclusions.

Fraud or evasion

2.37 The Commissioner can, as is presently the case, amend an assessment at any time if the Commissioner is of the opinion that there has been fraud or evasion. The omission of the phrase referring to 'an avoidance of tax' from the old paragraph 170(2)(a) is not expected to have practical significance. [Schedule 1, item 1, item 5 in the table in subsection 170(1)]

Unlimited amendment period to give effect to objection and appeal

2.38 The Commissioner has an unlimited period to give effect to a decision on a review or appeal, or as a result of an objection made by the taxpayer, or pending a review or appeal. [Schedule 1, item 6, section 170, subsection 170(1)]

Other unlimited amendment periods

2.39 Section 170 lists a number of provisions that are not subject to time limits. These are discussed in paragraphs 2.55 to 2.57.

Commissioner may amend an amended assessment

2.40 Every amended assessment is an assessment for all purposes of the income tax law, unless the law provides otherwise (section 173 of the ITAA 1936). This rule means that the Commissioner is able to amend an amended assessment. However, the amended assessment provisions ensure that, when the Commissioner amends an assessment, a fresh amendment period only arises for the particular that was amended.

2.41 The new provisions restructure and re-express the rules about amending assessments. They reflect the new shorter periods for amendments, especially the 2-year period applying to individuals and businesses in the STS, but otherwise work in the same way as the existing law.

2.42 The Commissioner can amend an amended assessment at any time within the limited amendment period applying to the original assessment. However, after that period expires, the Commissioner can only amend an amended assessment in the following cases (or if there is a special or unlimited time for amendment, for example because of fraud or evasion). [Schedule 1, item 1, subsections 170(1) and (2)]

2.43 The first case is where the Commissioner amends an earlier assessment about a particular in a way that reduces a taxpayer's liability and the Commissioner accepts a statement made by the taxpayer in making the amendment. This is commonly called a self amendment. Here, the Commissioner may amend the later assessment about that particular to increase the taxpayer's liability. [Schedule 1, item 1, item 1 in the table in subsection 170(3)]

2.44 The second case is where the Commissioner amends an earlier assessment about a particular in a way that increases a taxpayer's liability or reduces the liability (other than in a self amendment). The Commissioner may amend the later assessment about that particular in a way that reduces the taxpayer's liability. [Schedule 1, item 1, item 2 in the table in subsection 170(3)]

2.45 In these cases, there is a refreshed amendment period, of either 2 or 4 years (according to the amendment period applying to the taxpayer's original assessment), but only for the particular in question. [Schedule 1, item 1, subsection 170(3)]

Example 2.3 Emily is an individual taxpayer who is subject to the standard 2 -year amendment period. Eighteen months after her original assessment, Emily requests that the Commissioner amend her assessment to allow a deduction for work-related expenses. The Commissioner accepts Emily's statement, amends her assessment accordingly, and then Emily's standard amendment period expires. However, on further examination, the work-related expenses are not deductible. In addition, the Commissioner identifies that Emily has incorrectly deducted some interest expenses in the relevant year. The Commissioner has until 2 years after the day on which he gave notice of the amended assessment to amend the amended assessment to deny the deduction for work -related expenses. However, the Commissioner is out of time to amend to deny the deduction for the interest expenses.

2.46 If in the first case (see paragraph 2.43), the Commissioner amends an assessment about a particular to correct a self amendment, the Commissioner cannot, under the second case (see paragraph 2.44), amend again about that particular (but could, for example, amend to give effect to an objection to the most recent assessment). This structure is designed to stop the amendment period being extended multiple times by alternating first case and second case assessments. [Schedule 1, item 1, subsection 170(4)]

Example 2.4 Using Example 2.3, if the Commissioner amends to disallow the work -related expenses within 2 years of the amended assessment, as provided for in column 3 of item 1 in subsection 170(3), the Commissioner cannot amend under item 2 in the table in subsection 170(3) to reduce the liability. However, if Emily objects against the amended assessment within time, the Commissioner can amend at any time to give effect to the objection.

Commencement of the amendment period

2.47 The day of commencement of the amendment period will now be the day that the notice of assessment is given by the Commissioner, instead of the day that the tax is due and payable. This is to accommodate loss and nil liability assessments which have no tax due and payable, but are now eligible for limited amendment periods. This change will further shorten amendment periods, commonly by 21 days.

Extensions of the amendment period

2.48 The rewritten section 170 maintains the existing rules that allow for extension of amendment periods in three cases:

·
where the taxpayer applies for an amendment in the approved form before the end of the amendment period;
·
where the taxpayer applies for a private ruling before the end of the amendment period and the Commissioner makes a ruling in response to the application; and
·
where the Commissioner has started to examine a taxpayer's affairs but has not completed that examination by the end of the amendment period, the period can be extended in two cases: first, by Federal Court order where it is satisfied that the failure to complete the examination was due to the taxpayer's behaviour; secondly, by the consent of the taxpayer.

[Schedule 1, item 1, subsections 170(6) to (8)]

Definition of assessment

2.49 The definition of 'assessment' is amended to include nil liability assessments, with the result that nil assessments for the income years 2004-05 and later years will be eligible for the same amendment period as assessments of a positive liability with the same characteristics.

2.50 Currently, the primary meaning of assessment is the ascertainment of taxable income and the tax payable thereon. This is extended to cover the ascertainment that a taxpayer has no taxable income because his or her total deductions equal or exceed total assessable income. The new definition covers the case where the Commissioner ascertains that there is a taxable income but no tax is payable (eg, because the taxable income is below the tax-free threshold or because tax offsets reduce the tax payable to nil). [Schedule 1, item 16, subsection 6(1)]

2.51 The meaning of assessment does not extend to the ascertainment of the amount of a tax loss. The deductibility of a tax loss will be determined in the year that the taxpayer has income against which to offset the loss, in accordance with normal deduction principles.

Example 2.5 A company returns losses of $10 million in the first year, $12 million in the second year, $5 million in year 3 and $3 million in year 4. In year 5, the taxpayer returns a taxable income of $10 million after deducting $30 million for losses of previous years. During year 6, the taxpayer is audited with the result that the company's first year return was incorrect and should have returned a taxable income of $8 million. Under the new law, the ATO would be unable to issue an assessment of a positive liability for year one. However, the year 5 assessment can be amended to disallow the $10 million deduction claimed for the loss brought forward from year one.

2.52 The amendments to insert paragraphs (f) and (g) into the definition of 'assessment' in subsection 6(1) are required because the existing amendment provisions apply, through deeming provisions, to the assessment of additional tax under section 128TE (penalty for setting out incorrect amounts in dividend statements) and the assessment of tax payable under section 159GZZZZH (tax payable where infrastructure borrowing certificate cancelled). The new amendment provisions do not use the words needed to pick up the deeming rules. Consequently, to ensure that the amendment rules continue to apply in these cases, this Bill adds the ascertainment of this penalty or tax to the definition of assessment.

2.53 Under the current law, a taxpayer may not object against the Commissioner ascertaining that the taxpayer has no liability. Under the new law, a taxpayer's objection rights will be broader in one respect - a taxpayer will be able to object against a nil liability assessment in the unusual case where the taxpayer is seeking to move to a positive liability. Otherwise, there will continue to be no objection rights in nil liability cases. Where a taxpayer wants to dispute the quantum of a tax loss, that can be done in the income year the loss is deducted. [Schedule 1, items 17 and 18, section 175A]

Remaining subsections in section 170

2.54 Subsection 170(9A) has been repealed, as the circumstance it referred to (amendment of an assessment of a deceased estate) is covered by the new general rules allowing amendments, so that a special rule is unnecessary. Subsections (9E) and (9F) have been repealed as they relate to the SPOR provisions and are no longer needed. [Schedule 1, item 21, subsections 170(9A ), ( 9E) and (9F)]

2.55 Subsection 170(10) (which sets out specific unlimited amendment periods in the ITAA 1936) has been converted to the same tabular style as subsection 170(10AA) (specific unlimited amendment periods in the ITAA 1997). [Schedule 1, items 3 to 7, subsection 170(10)]

2.56 In reformatting subsection 170(10), the following provisions have been omitted because they have no ongoing operation for the 2004 -05 income year and later income years.

Provision reference Subject
26AAB Assessable income from the sale of a leased motor vehicle.
31C Purchase of trading stock not at arm's length.
36AAA Alternative election in case of disposal, death or compulsory destruction of live stock.
36AA Compensation for death, disposal or compulsory destruction of live stock.
36A(8) Disposal on change of ownership or interests in trading stock.
70A Cost of mains electricity connections.
74B(4) Certain election expenses not deductible.
75D(4) Deduction of expenditure on prevention of land degradation.
Subdivision B of Division 3 of Part III Development allowance.
Subdivision BA of Division 3 of Part III General investment allowance.
Subdivision F of Division 3 of Part III Substantiation of certain expenses for years of income up to and including 1993-94.
122B(2) Purchase of mining or prospecting right or information.
122BA(7) Allowable capital expenditure in respect of cash -bidding payments to acquire exploration or prospecting authorities.
122JD(2) Purchase of quarrying or prospecting right or information.
122T Recoupment of expenditure on mining or quarrying.
123A(2) or (3) Application of the Subdivision covering transport of certain minerals.
123BD(4) or (5) Application of the Subdivision covering transport of quarry materials.
124AB(3) Purchase of prospecting or mining rights or information.
124ABA(4) Allowable capital expenditure in respect of cash bidding payments for exploration permits and production licences.
124AQ Recoupment of expenditure on prospecting or mining for petroleum.
Division 16C of Part III Income equalisation deposits.
221YRA(2) Interest or royalty not an allowable deduction until payment made to Commissioner on account of tax.
Part XII Drought investment allowance.
Schedule 2A Calculating car expense deductions.
Schedule 2B Substantiation rules.

2.57 Subsection 170(10AB), which gives an unlimited amendment period for amounts you must repay, has been repealed and reintroduced as item 22 in subsection 170(10AA). In subsection 170(10AA), item 10 (car expenses) and item 210 (substantiation) have been repealed, consistent with Recommendation 3.8 of the Report.

2.58 Subsection 170(13) (dealing with certain company assessments) has been repealed, as the anti-avoidance issues it relates to are now subject to the 4-year amendment period. [Schedule 1, item 8, subsection 170(13)]

2.59 Definitions of 'limited amendment period', 'scheme', 'scheme benefit' and 'STS taxpayer' have been introduced into subsection 170(14), and the definition of 'tax' has been repealed as it is no longer necessary. [Schedule 1, items 9 to 13, subsection 170(14)]

2.60 Section 170A is also repealed as it is no longer necessary. That section states that 'Where a provision of this Act authorises the Commissioner to amend an assessment, that provision does not limit the power of the Commissioner to amend an assessment in accordance with any other provision of this Act'. The various sections outside section 170 that provide for special amendment periods generally make this clear by using words such as '...notwithstanding anything in section 170...' or '...despite anything in this Act...'. [Schedule 1, item 14, section 170A]

Application and transitional provisions

2.61 These amendments apply to assessments for the 2004-05 income year and later income years. [Schedule 1, items 15 and 19]

2.62 Transitional provisions apply for nil liability returns for the 2003-04 income year and earlier income years (see paragraphs 2.62 to 2.70).

Nil liability returns for the 2003-04 income year and earlier income years

2.63 To ensure that nil liability returns from previous years do not remain open to review indefinitely, Recommendation 3.5 of the Report proposed that nil liability (non-loss) returns become final after 4 years and loss returns become final after 6 years. This Bill gives effect to that recommendation through a new section 171A. Essentially, prior years are given a limited review period tailored according to the circumstances and information provided to the Commissioner.

2.64 If a taxpayer's return for the 2003-04 income year or an earlier year shows a nil liability, but not a loss, the Commissioner will generally have until the later of 31 October 2008, or 4 years from the date of lodgment of the return, to issue an assessment. [Schedule 1, item 20, item 1 in the table in subsection 171A(1)]

Example 2.6 James lodges his return for the income year ended 30 June 2002 in September 2002, showing taxable income below the threshold at which tax became payable for that year. The Commissioner has until 31 October 2008 to issue an assessment showing a positive liability for James' 2002 income year.

Example 2.7 Isabelle delays the lodgment of her return for the income year ended 30 June 2002 until 1 July 2005. When lodged, it shows taxable income below the threshold at which tax became payable. The Commissioner has until 1 July 2009 to issue an assessment showing a positive liability for Isabelle's 2002 income year.

2.65 If the taxpayer also deducted a tax loss in the nil liability year, the Commissioner will have 6 years from the later of the date of lodgment of the 2004-05 return or the date of lodgment of the nil return. [Schedule 1, item 20, item 2 in the table in subsection 171A(1)]

2.66 If a taxpayer's return for the 2003-04 income year or an earlier year shows a nil liability due to a loss in that year, no portion of which has been carried forward to the 2004-05 return, the Commissioner will have 6 years from the later of the date of lodgment of the 2004-05 return, or the lodgment of that prior year return, to issue an assessment. [Schedule 1, item 20, item 3 in the table in subsection 171A(1)]

2.67 If a taxpayer's return for the 2003-04 income year or an earlier year shows a nil liability due to a loss in that year, some of which has been carried forward to the 2004-05 return, and the taxpayer notified the Commissioner of this, the Commissioner will have 6 years from the later of the date the information is provided and the date of lodgment of the nil return to issue an assessment. [Schedule 1, item 20, item 4 in the table in subsection 171A(1)]

2.68 When a taxpayer becomes a member of a consolidated group and transfers their loss to a head company, that taxpayer loses their income tax identity. Section 171A ensures that the benefit of the limited assessment period is extended to the original taxpayer as well as to the consolidated group.

·
Where the taxpayer is not required to lodge a return for the 2004-05 year of income, the head company of the consolidated group can fulfil the requirement by lodging its return for that year [Schedule 1, item 20, items 2 and item 3, paragraph (a) in the table in subsection 171A(1)] .
·
If for example, the original taxpayer made a tax loss that was transferred to one consolidated group, but then moved to a second consolidated group and left its undeducted tax loss with the first group, the declaration of the tax loss by the first group would suffice to trigger the limited 6-year amendment period for the original taxpayer [Schedule 1, item 20 and item 4 in the table in subsection 171A(1)] .

Example 2.8 JKL Pty Ltd's return for the 2001-02 income year disclosed a nil taxable income and JKL deducted a tax loss in that year. In 2003 -04, JKL became part of the Ozceuticals consolidated group. For 2004-05, JKL does not lodge a return but the head company of the Ozceuticals consolidated group lodges a return on 1 December 2005.The Commissioner cannot make an assessment for JKL for the 2001 -02 income year after 1 December 2011.

2.69 Item 4 allows taxpayers who are not required to lodge 2004 -05 returns to notify the Commissioner of prior years losses without needing to lodge a return for the 2004-05 year.

Example 2.9 Andrew fails to lodge his return on time for the income year ended 30 June 2004. With his return for 2004-05, lodged on 1 February 2006, Andrew advises the Commissioner, in the approved form, that he has a carry forward loss from 2003-04. When offset against other income in 2004-05, the result is a taxable income below the threshold at which tax becomes payable in that year. Andrew later lodges his return for the 2003-04 income year on 1 September 2006. The Commissioner has until 1 September 2012 to issue an assessment showing a positive liability for Andrew's 2003-04 income year.

2.70 As with the rules for positive liability assessments, where a taxpayer that returned a nil liability has committed fraud or evasion, the Commissioner will have an unlimited time to make an assessment (just as for amending an assessment). Other special review periods will also continue to apply. [Schedule 1, item 20, subsection 171A(2)]

Consequential amendments

SPOR provisions no longer necessary

2.71 Because eligibility for the 2-year period of review is much broader than the requirements that previously applied to the shorter period of review (SPOR) class of taxpayers, the SPOR classification and the provisions relying on it are no longer necessary. One consequence of this change has been to remove a special record-retention period of 2 years (instead of the normal 5 years) that applied to SPOR taxpayers for payment summaries, Medicare levy family agreements and taxpayer declarations for returns lodged by tax agents. [Schedule 1, items 21, 22, 26 and 27]

2.72 To minimise unnecessary record keeping, under the new law taxpayers will only need to keep records for the 5 years or such a shorter period as determined by the Commissioner. The Commissioner will be able to make a determination by legislative instrument for a class of taxpayers or in writing for an individual taxpayer. [Schedule 1, items 23, 24, 33, 34 and 36, subsections 251R(6F) and (6FA) of the ITAA 1936, subsections 18-100(1) and 388-65(3), Schedule 1 of the TAA 1953]

2.73 The group of taxpayers for whom the Commissioner can exercise this power will be much larger than the current class of shorter period of review (SPOR) taxpayers. Moreover, where appropriate, the Commissioner can shorten the retention period to less than the current 2 -year period.

Objection periods to reflect amendment periods

2.74 The objection provisions are altered to correspond with the new amendment periods. If the taxpayer is eligible for the standard amendment period, they must lodge any objection with the Commissioner within 2 years after the notice of assessment is given to the taxpayer. If a 4-year amendment period applies, the objection must be lodged within 4 years after the notice of assessment is given to the taxpayer. There has been no change to the rules relating to objections made under section 78A of the Fringe Benefits Tax Assessment Act 1986 or section 160AL of the ITAA 1936. [Schedule 1, item 28, paragraphs 14ZW(1)(aa) and (aaa) of the TAA 1953]

2.75 For objections against a private ruling, the time allowed has been reduced to 2 years after the last day allowed for lodging a return for that income year (or 60 days after the notice of the decision was given to the person, whichever is later), for those taxpayers who qualify for the standard amendment period. The time limit for a person with a 4-year amendment period has not changed. [Schedule 1, item 29, subsections 14ZW(1A) and (1AA) of the TAA 1953]

2.76 Changes have also been made to references in the objection provisions. [Schedule 1, items 30 and 31, paragraphs 14ZW(1B)(b) and 14ZW(1BA)(b) of the TAA 1953]

Nil assessments

2.77 There is a series of consequential amendments, particularly to the assessment rules for income tax, to reflect that the Commissioner may now make an assessment that a taxpayer has no taxable income or that no tax is payable on the taxable income. [Schedule 1, items 38 to 45, sections 161AA, 166, 166A, 168 and 169 of the ITAA 1936]

2.78 The crediting rules in the pay as you go provisions are similarly amended to reflect the expanded definition of assessment, although no change in outcome will follow. Taxpayers will be entitled to credits in the same way at the same time. [Schedule 1, items 46 to 58, sections 18-15, 18-20, 18-25, 18-27, 45-30 and 45-865, Schedule 1 to the TAA 1953 and section 8K of the Taxation (Interest on Overpayments and Early Payments) Act 1983]

Date of effect

2.79 These consequential amendments generally apply for the 2004 -05 income year and later income years. [Schedule 1, items 25, 32 and 59]

2.80 The new record retention rules for payment summaries apply from the financial year beginning 1 July 2004 and the record retention rules for declarations apply to declarations made on or after 1 April 2004. [Schedule 1, items 35 and 37]


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