House of Representatives

Tax Laws Amendment (2011 Measures No. 8) Bill 2011

Pay As You Go Withholding Non-compliance Tax Bill 2011

Pay As You Go Withholding Non-compliance Tax Act 2012

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Commissioner's discretion for primary production elections

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide the Commissioner of Taxation (Commissioner) with discretion to disregard certain events (for example, when a beneficiary becomes insolvent) that would otherwise trigger the assessment of certain income for a primary production trust, in the year of the event.

Context of amendments

1.2 The income tax law contains provisions allowing taxpayers to defer taxation liabilities on income from certain primary production activities which have been affected by certain diseases and natural disasters (Division 385).

1.3 Subdivision 385-E allows taxpayers to access two forms of concessional tax treatments through an election to either defer or spread profits made on the death and forced disposal of livestock.

1.4 Subdivision 385-F allows taxpayers who receive insurance proceeds for the loss of livestock or trees, which would otherwise be assessable, to spread that income.

1.5 Subdivision 385-G allows taxpayers to defer for one year the profit on the sale of a second wool clip in a year, if natural disasters were the reason for the taxpayers having to shear twice in one income year.

1.6 The concessional treatment under these provisions continues until such time a 'disentitling event' occurs. When a disentitling event occurs, the concession immediately ends and any unassessed portion of the profit is included in the assessable income of the trust, in the same income year. Disentitling events can occur at both the trustee level (for example, when the trustee leaves Australia permanently) and the beneficiary level (for example, when the beneficiary dies).

1.7 Prior to the re-write of the income tax laws under the Tax Law Improvement Project, a Commissioner's discretion existed in the corresponding provisions in the Income Tax Assessment Act 1936 .

1.8 Under the former rules, the Commissioner could, broadly speaking, determine that the concession ended and any untaxed profit be included in the assessable income of the taxpayer who made the election if that taxpayer or a beneficiary of the trust died, became bankrupt or left Australia permanently.

1.9 The removal of the Commissioner's discretion was part of a broader approach by the Tax Law Improvement Project of removing discretions pertaining to liability. However, the removal of the discretion can potentially result in harsh outcomes where a trust carries on the primary production business and the disentitling event happens to a beneficiary.

Summary of new law

1.10 This Schedule amends the primary production provisions under Division 385 of the ITAA 1997 to introduce a Commissioner's discretion to ignore certain disentitling events relating to a beneficiary of a primary production trust.

1.11 This Schedule also repeals the death of a beneficiary as a disentitling event from Division 385.

1.12 These amendments will apply retrospectively from the 2005-06 income year and later income years.

Comparison of key features of new law and current law

New law Current law
The Commissioner has a discretion to ignore certain beneficiary level disentitling events (for example, when a beneficiary declares bankruptcy or leaves Australia permanently).

The death of a beneficiary is no longer a disentitling event.

When a 'disentitling event' occurs (for example, death or bankruptcy of a beneficiary), the election made by a primary production trust pursuant to Division 385 immediately ends and any unassessed portion of the profit or insurance recovery is included in the assessable income of the trust in the income year of the event.

Detailed explanation of new law

1.13 This Schedule introduces a discretion for the Commissioner to ignore certain disentitling events for a primary production trust which has made an election under Division 385 of the ITAA 1997. The Commissioner in exercising this discretion must have regard to the factors under subsection 385-163(5). [ Schedule 1, item 2, subsections 385-163(4) and ( 5 )]

1.14 The Commissioner's discretion relates to disentitling events that occur at a beneficiary level of a primary production trust. These events include when a beneficiary becomes bankrupt, or leaves Australia permanently. [ Schedule 1, item 2, paragraph 385-163(4)(a )]

1.15 The Commissioner's discretion is confined to events that affect beneficiaries and does not apply to disentitling events that occur at trustee level.

1.16 In exercising this discretion, the Commissioner must take into account certain factors. These are:

·
the nature of the disentitling event to which subsection (3) applies;
·
any relevant circumstances relating to a beneficiary mentioned in paragraph (3)(c) or (d);
·
any other relevant circumstances relating to the trust; and
·
any other matters the Commissioner considers relevant.

[ Schedule 1, item 1, paragraph 385-163(4)(b) and subsection 385-163(5) ]

1.17 The death of a beneficiary as a disentitling event has been repealed as it is difficult to contemplate circumstances where it would not be appropriate for the Commissioner to exercise a favourable discretion. [ Schedule 1, item 1, paragraph 385-163(3)(a )]

Example 1.1 The Chua trust carries on a primary production business. During the 2011-12 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $20,000.Stephen is the trustee of the Chua trust and makes an election under section 385-130 to spread the $20,000 over five years.Jonathan is a beneficiary of the Chua trust and declares bankruptcy during the 2013-14 income year. As the bankruptcy of a beneficiary is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5).As the Commissioner is satisfied that it would be fair and reasonable to exercise the discretion, having regard to the factors under subsection 385-163(5), the spreading election for the Chua trust continues.

Example 1.2 The Robinson trust carries on a primary production business. During the 2012-13 income year, the trust is forced to dispose of livestock because of drought and realises a profit of $85,000.Kevin is the trustee of the Robinson trust and makes an election under section 385-130 of the ITAA 1997 to spread the $85,000 over five years.Krispin is a beneficiary of the Robinson trust and in the 2014-15 income year decides to leave Australia permanently. As a beneficiary leaving Australia permanently is a disentitling event which is covered by the discretion under paragraph 385-163(4)(a), the Commissioner may make a determination that the disentitling event did not happen, having regard to the factors under subsection 385-163(5).The Commissioner, after considering all the factors under subsection 385-163(5), determines it is not fair and reasonable to exercise the discretion in this instance. As a result, the spreading election for the Robinson trust ends in the 2014-15 income year.

Example 1.3 The Muscat trust carries on a primary production business. During the 2011-12 income year, the trust receives an insurance recovery of $10,000 for the loss of some trees because of fire.Hugh is the trustee of the Muscat trust and makes an election under section 385-130 of the ITAA 1997 to spread the $10,000 over five years.Hugh decides to leave Australia permanently in the 2014-15 income year. The spreading election for the Muscat trust will automatically end in the 2014-15 income year, as the Commissioner's discretion only extends to a beneficiary leaving Australia permanently under subparagraph 385-163(4)(a)(ii).

1.18 The Commissioner's determination must be made in writing. [ Schedule 1, item 1, subsection 385-163(6 )]

1.19 The Commissioner must give the trustee of the trust a copy of the determination. [ Schedule 1, item 1, subsection 385-163(7 )]

Application and transitional provisions

1.20 These amendments are to apply to trusts for the 2005-06 income year and later income years. [ Schedule 1, item 2 ]

1.21 The retrospective application of the amendments is to give taxpayers the benefit of this favourable change for earlier years back to 2005-06.

Consequential amendments

1.22 The standard time limitations on amending an assessment do not prevent the Commissioner from amending an assessment for the purposes of giving effect to the proposed change. [ Clause 4 ]


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