House of Representatives

Minerals Resource Rent Tax Repeal and Other Measures Bill 2014

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Repeal and rephasing of MRRT-related measures

Outline of chapter

2.1 This chapter explains the treatment of the measures that were related to the enactment of the Minerals Resource Rent Tax (MRRT) given the repeal of that tax. Most of those measures are repealed. The gradual increase in the superannuation guarantee (SG) charge percentage to 12 per cent is to proceed but the timetable for the increase will be rephased.

2.2 Legislative references in this chapter are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise specified.

Context of amendments

2.3 The Government made an election commitment to repeal the MRRT and its related measures.

2.4 The revenue expected from the MRRT was intended to fund a number of other tax and social security measures, including changes to the capital allowances for small business entities, the creation of a loss carry-back regime for companies and the payment of a superannuation co-contribution to low income individuals. With the repeal of the MRRT, these measures are also repealed.

2.5 The gradual increase in the minimum percentage of wages, salary and other earnings that must be paid as superannuation contributions for the purposes of the SG charge was also related to the enactment of the MRRT. With mining investment at or near its peak, a transition to new sources of economic growth is needed. However, the 2013 June quarter National Accounts and other recent data releases show that the transition to broader based growth has been slow, with the economy growing below trend. Businesses are contending with high operating costs and current challenging economic conditions, which is placing pressures on their viability and their ability to employ people.

2.6 Given that increases in the SG are funded largely from reductions in take-home wages or business profits, rephasing the SG is expected to boost near-term economic activity. Any reductions in businesses' overall wages bills would lower their operating costs, while employees could also receive more take-home pay in the near term.

Summary of new law

2.7 The measures that were intended to be funded by the revenue expected from the MRRT are either being repealed or rephased.

Comparison of key features of new law and current law

New law Current law
Repeal of loss carry back
Companies can only carry their tax losses forward to use as a deduction for a future year. Companies can either carry their tax losses forward to use as a deduction for a future income year or carry up to $1 million back to an earlier year (in which they paid tax) to obtain a tax offset for the current year.
Changes to the capital allowances for small business entities
Small business entities can claim a deduction for the value of a depreciating asset that costs less than $1,000 in the income year the asset is first used or installed ready for use.

Small business entities can claim a deduction for an amount included in the second element of the cost of a depreciating asset that was first used or installed ready for use in a previous income year. The amount must be less than $1,000.

Small business entities can allocate depreciating assets that cost $1,000 or more to their general small business pool and claim a deduction for the depreciation of the assets in the pool.

Assets allocated to the general small business pool depreciate at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the value of a small business entity's general small business pool is less than $1,000 at the end of the income year, the small business entity can claim a deduction for the entire value of the pool.

Motor vehicles are subject to the same rules as other depreciating assets.

Small business entities can claim a deduction for the value of a depreciating asset that costs less than $6,500 in the income year the asset is first used or installed ready for use.

Small business entities can claim a deduction for an amount included in the second element of the cost of a depreciating asset that was first used or installed ready for use in a previous income year. The amount must be less than $6,500.

Small business entities can allocate depreciating assets that cost $6,500 or more to their general small business pool and claim a deduction for the depreciation of the assets in that pool.

Assets allocated to the general small business pool depreciate at a rate of 15 per cent in the year they are allocated, and a rate of 30 per cent in subsequent income years.

If the value of a small business entity's general small business pool is less than $6,500 at the end of the income year, the small business entity can claim a deduction for the entire value of the pool.

Special rules apply to depreciating assets that are motor vehicles. A small business entity can deduct the first $5,000 of the cost of a motor vehicle, plus 15 per cent of any remaining cost, in the income year that it is first used or installed ready for use.

The motor vehicle is then added to the small business entity's general small business pool, and depreciated as part of the pool at a rate of 30 per cent in subsequent income years.

Repeal of the geothermal exploration deduction
Geothermal energy exploration and prospecting expenditure is not immediately deductible.

If a geothermal exploration right is exchanged for a geothermal energy extraction right relating to the same, or a similar area, then a capital gains tax (CGT) roll-over applies to defer the liability until the sale of the extraction right.

Geothermal energy exploration and prospecting expenditure is deductible in the income year that the asset is first used or expenditure is incurred.

No CGT roll-over is provided for geothermal explorers when an exploration right is exchanged for a geothermal energy extraction right as the geothermal exploration right is a depreciating asset, not a CGT asset. However, there is relief from income tax liability upon disposal of a geothermal exploration right.

Rephasing of the SG charge percentage increase
The Treasurer will be able to vary the SG charge percentage by legislative instrument, subject to a number of conditions. The SG charge percentage will increase from 9.25 per cent to 9.5 per cent for the year starting on 1 July 2014, and gradually increase by half a percentage point each year until it reaches 12 per cent for years starting on or after 1 July 2019.
Repeal of the LISC
The low income superannuation contribution (LISC) is not payable in respect of concessional contributions made for the financial year before the financial year in which the amendments commence, the financial year in which the Schedule commences or later financial years. The LISC is payable each year in respect of concessional contributions made in each income year.
Repeal of the income support bonus
The income support bonus is repealed.

Saving provisions apply to preserve the law with respect to the income support bonus in relation to taxpayers' entitlements to payments of income support bonus for the period before the repeal, whether payments are made before, on or after the commencement of the amendments.

The income support bonus is an income tax exempt, indexed, non-means tested payment paid twice annually to eligible social security recipients.
Repeal of the schoolkids bonus
The schoolkids bonus is repealed.

Saving provisions apply to preserve the law with respect to schoolkids bonus in relation to eligibility on a bonus test day occurring before commencement and in relation to payments of schoolkids bonus made before, on or after the commencement of the amendments.

The schoolkids bonus is an income tax exempt, indexed family assistance payment that is available to eligible families receiving Family Tax Benefit Part A and young people in school receiving youth allowance or certain other income support or veterans' payments on two test dates each year.

Detailed explanation of new law

Background

2.8 The expected revenue from the MRRT was intended to fund a number of related measures that each had a cost to revenue.

2.9 This Bill repeals the MRRT. In accordance with the Government's election commitment, most of the related measures are also repealed.

Loss carry-back

What is loss carry-back?

2.10 Loss carry-back was added to the income tax law by the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013.

2.11 It allows a company to choose to use its tax losses in a way other than carrying them forward as a deduction for a future income year. Instead, companies can choose to carry their losses back to one of the previous two income years. The amount carried back is then multiplied by the corporate tax rate to produce a tax offset that is refundable to the company in the current income year.

2.12 The offset is limited to the least of the amount of tax paid in the year the loss is carried back to, the amount in the company's franking account, and $300,000 (at current corporate tax rates).

Loss carry-back repealed

2.13 Schedule 2 repeals the loss carry-back provisions. [Schedule 2, item 1, Division 160]

2.14 Schedule 2 also repeals the transitional provisions related to the introduction of the loss carry-back measure. [Schedule 2, item 2, Division 160 of the Income Tax (Transitional Provisions) Act 1997 (IT(TP) Act 1997)]

Repeal of consequential amendments

2.15 The consequential amendments that were made to the tax laws as a result the introduction of loss carry-back are largely reversed to reflect the fact that the loss carry-back measure are also repealed by Schedule 2.

2.16 The amendments remove references to loss carry-back, and to loss carry-back provisions, that were previously added to the law. [Schedule 2, items 3 to 13, subsections 6(1), 92A(3), 177C(1), (2) and (3), 177CB(1) and 177F(1) and (3) of the Income Tax Assessment Act 1936; items 14 to 40, sections 13-1, 36-25, 67-23, 195-37 and 195-72 and subsections 36-17(1), 195-15(5), 205-35(1), 320-149(2), 830-65(3), 960-20(2) and (4) and 995-1(1) ; and item 41, section 45-340 in Schedule 1 to the TAA 1953]

General tax law improvements not repealed

2.17 Some general improvements to the income tax law that were made as part of the loss carry-back measure are not repealed. These are:

·
The inclusion of the amount of a taxpayer's refund from refundable tax offsets in the taxpayer's income tax assessment. This ensures that the amount of the refund can be contested using the normal objection and appeal procedures. This inclusion was made by Part 2 of Schedule 5 to the Tax and Superannuation Laws Amendment (2013 Measures No. 1) Act 2013.
·
The wider use of the term 'utilise' in relation to tax losses. However, the part of the definition of that term that refers to utilisation through carrying back a tax loss to an earlier year is repealed.
·
The changes to the franking account debit rules to ensure that any franking account that a foreign resident company might have is debited when it receives a tax offset refund in the same way an Australian resident company's franking account would be debited.

Changes to the capital allowances for small business entities

2.18 The $6,500 threshold for depreciating assets, costs incurred in relation to depreciating assets, and low pool values under the small business entity capital allowance rules is reduced to $1,000 (returning it to the level it was prior to the changes made by the Tax Laws Amendment (Stronger, Fairer, Simpler and Other Measures) Act 2012).

2.19 The special rules for certain motor vehicles are also repealed.

Deductions for depreciating assets

2.20 Under the existing arrangements, a small business entity that elects to use the capital allowance rules may deduct the taxable purpose proportion of the value of (or 'write-off') an asset that cost less than $6,500 in the income year in which it was first used or installed ready for use. These amendments reduce the threshold for writing-off depreciating assets from $6,500 to $1,000. [Schedule 3, item 3, paragraph 328-180(1)(b)]

2.21 Following the amendments, depreciating assets that cost $1,000 or more are allocated to the small business entity's general small business pool, depreciated at a rate of 15 per cent in the income year in which they are first used or installed ready for use, and then depreciated as part of that pool at an ongoing rate of 30 per cent in later income years.

2.22 The existing arrangements simplified the pooling arrangements available for small business entities by consolidating what were previously the 'general small business pool' (for assets with an effective life of less than 25 years) and the 'long life small business pool' (for assets with an effective life of 25 years or more). The amendments do not affect those simplified pooling arrangements.

Deductions for amounts included in the second element of the cost of depreciating assets

2.23 Under the existing arrangements, a small business entity can also deduct an amount included in the second element of a depreciating asset's cost (for example, an amount spent on improving or transporting a depreciating asset), provided the amount is under $6,500, the amount is the first such amount to be deducted in respect of the asset, and the asset was written-off in a previous income year. These amendments reduce the threshold for writing-off amounts included in the second element of an asset's cost from $6,500 to $1,000. [Schedule 3, item 4, paragraphs 328-180(2)(a) and (3)(a)]

2.24 Following the amendments, where an amount of $1,000 or more is included in the second element of a depreciating asset's cost, and the depreciating asset has been written-off in a previous income year, the asset is treated as having a value equal to the amount and is allocated to the small business entity's general small business pool. The asset is depreciated at a rate of 15 per cent in the income year in which the amount was incurred, and 30 per cent in subsequent income years.

Deductions for low pool values

2.25 Under the existing arrangements, a small business entity can also deduct the value of its general small business pool at the end of an income year if the value of the pool at the end of the year is less than $6,500 (this value is determined prior to applying any applicable rates of depreciation to the pool). These amendments reduce this 'low pool value' threshold to $1,000, meaning that a small business entity can deduct the entire value of its general small business pool at the end of an income year if the value of the pool at the end of the year is less than $1,000. [Schedule 3, item 5, subsection 328-210(1)]

Consequential amendments

2.26 Other amendments are made to provisions that reference the deductions for depreciating assets, amounts incurred in respect of depreciating assets, and low pool values to reflect the reduction of the $6,500 threshold to $1,000. [Schedule 3, items 1, 2, and 6 to 10, heading in sections 328-170 and 328-180, example in subsections 328-210(3), 328-215(4), 328-250(1), and heading 328-250(4), and heading in 328-253(4)]

Special rules for certain motor vehicles

2.27 Under the existing arrangements, a small business entity can claim a special deduction in respect of a depreciating asset that was a motor vehicle in the income year in which the vehicle was first used or installed ready for use. That deduction is equal to the taxable purpose proportion of the first $5,000 value of the motor vehicle plus 15 per cent of any additional value. The remaining value of the motor vehicle is then allocated to the small business entity's general small business pool and depreciated as part of that pool at an ongoing rate of 30 per cent in later income years. These rules only apply where the motor vehicle cost $6,500 or more (as motor vehicles that cost less than $6,500 are written-off under the general instant asset write-off rule).

2.28 These amendments repeal the special rules for certain motor vehicles. [Schedule 4, items 3 and 4, section 328-237 and the group heading before that section]

2.29 In the absence of the special rules for certain motor vehicles, the general capital allowance provisions apply to depreciating assets that are motor vehicles in the same way they do to all other depreciating assets.

2.30 Minor amendments are also made to a number of other provisions to remove references to the special rules for certain motor vehicles. [Schedule 4, items 1, 2 and 5 to 7, subsection 328-190(2A), section 328-200, subsections 328-250(1) and (2) and paragraph 328-250(3)(b)]

Repeal of geothermal energy exploration deduction

What is the geothermal energy exploration deduction?

2.31 Currently, there are two ways that the capital allowance provisions may provide an immediate deduction for geothermal energy exploration expenditure.

Assets first used in geothermal energy exploration

2.32 Under the capital allowance provisions, geothermal energy exploration rights are depreciating assets. The provisions apply to depreciating assets first used for exploration or prospecting for geothermal energy resources from which geothermal energy can be extracted. They also provide that in certain circumstances an asset's decline in value is equal to the amount of its cost, which has the consequence that an immediate deduction of this amount may be available. A depreciating asset starts to decline in value when it is used or installed ready for use for any purpose by the taxpayer.

2.33 An immediate deduction is not available if, when the asset is first used, it is used for development drilling for geothermal energy resources or for operations in the course of working a property containing geothermal energy resources. This ensures that the immediate deduction is only available for the cost of depreciating assets first used for exploration or prospecting, and not for the costs of depreciating assets used in the development or extraction of a geothermal energy resource.

Immediate deduction for expenditure on exploration or prospecting for geothermal energy resources

2.34 Expenditure on exploration or prospecting which does not form part of the cost of a depreciating asset may also qualify for an immediate deduction under another part of the capital allowance provisions (section 40-730). An immediate deduction is available for expenditure incurred in exploration or prospecting for geothermal energy resources which is not part of the cost of a depreciating asset.

2.35 To be entitled to this deduction, expenditure must be incurred on exploration or prospecting for geothermal energy resources from which energy can be extracted and the geothermal energy extraction must be carried on by the entity claiming the deduction. Otherwise, the entity must be carrying on a business of exploration or prospecting for geothermal energy resources from which energy can be extracted and that expenditure was necessarily incurred in carrying on that business.

2.36 Like the deduction available for assets first used in geothermal energy exploration, an entity is not entitled to an immediate deduction for other expenditure on exploration or prospecting for geothermal energy resources if the expenditure was on development drilling for geothermal energy resources, or on operations in the course of working a property containing geothermal energy resources.

Repeal of the geothermal energy exploration deduction

2.37 The amendments repeal the two ways in which geothermal exploration or prospecting expenditure can be immediately deducted. Firstly, geothermal exploration rights and information are no longer defined as a depreciating asset. Secondly, expenditure on exploration or prospecting for geothermal energy resources is no longer immediately deductible under the capital allowance provisions. [Schedule 5, items 5 to 8, 16 to 19, 21 and 22, paragraphs 40-30(2)(ba) and (bb), table item 9A in section 40-40, subsections 40-80(1A), 40-290(5), 40-730(2A) and (2B) and 40-730(3), paragraphs 40-730(4)(b), (c), (d) and (e) and subsections 40-730(7A), (7B) and (9)]

Repeal of exclusion of certain types of deductions

2.38 Deductions are currently not available for certain types of expenditure relating to geothermal energy extraction, including expenditure for landcare, electricity, phone lines and construction.

2.39 This ensures consistency between the treatment of mining operations and geothermal energy extraction, and denies taxpayers the opportunity to deduct the same capital expenditure more than once.

2.40 The amendments remove the provisions denying deductions for landcare, electricity, phone lines and construction expenditure in relation to geothermal energy extraction. Geothermal explorers can therefore deduct these expenditures under the capital allowance provisions, which are available to any taxpayer other than a miner who uses land for carrying on a business for a taxable purpose. [Schedule 5, items 10 to 14 and 23, paragraph 40-630(1)(b), note in subsection 40-630(1), paragraphs 40-630(1A)(b), (1B)(b) and (3)(b), paragraphs 40-650(3)(a) and (b) and subparagraph 43-70(2)(fa)(iv)]

CGT roll-over

2.41 The amendments prevent a tax liability from arising from the conversion of a geothermal exploration right to a geothermal extraction right in relation to the same (or a similar) area. This is achieved by extending the existing CGT roll-over in Subdivision 124-L that applies to prospecting and mining entitlements. This ensures that the roll-over includes the conversion, exchange or replacement of exploration or mining rights held by geothermal energy explorers.

2.42 The broadening of the scope of the existing CGT roll-over is achieved by providing that geothermal exploration rights are treated in the same way as prospecting entitlements and geothermal extraction rights are treated in the same way as mining entitlements, for the purpose of the CGT roll-over. However, an authority, licence, permit or entitlement to prospect for, or extract, geothermal energy resources only include those issued under an Australian law. [Schedule 5, items 25 to 29, paragraphs 124-710(1)(a), (b) and (c) and 124-710(2)(a), (b) and (c)]

2.43 Under the existing arrangements, the termination value of the geothermal exploration right is zero. This ensures that there is no immediate tax liability when the geothermal energy explorer stops holding a geothermal exploration right and acquires a geothermal extraction right relating to the same, or a similar area.

2.44 As the geothermal energy extraction right that is acquired is a CGT asset, changes are also made to the CGT cost base rules in Division 110 to ensure that the appropriate capital gains tax outcome arises. Specifically, the first element of the cost base of the geothermal extraction right is set to zero.

2.45 As geothermal exploration rights cease to be depreciating assets as a result of the amendments, rules concerning their termination value in Division 40 become redundant and are repealed. [Schedule 5, item 9, table item 12 in subsection 40-300(2)]

2.46 Similarly, as geothermal exploration rights are no longer depreciating assets, the CGT rules would result in a CGT gain arising upon disposal. Therefore, the amendments repeal the special cost base rules for geothermal extraction rights so that the gain from the disposal of the geothermal energy extraction right is the same as it would otherwise be under the normal CGT rules. CGT roll-over relief ensures that no income tax liability arises on the exchange of a geothermal exploration right for a geothermal extraction right. [Schedule 5, item 24, section 112-38]

Assessable income - amounts received for geothermal exploration information

2.47 Consideration received for dealing with or disclosing geothermal exploration information is ordinary income assessable under section 6-5 if the information is:

·
disclosed for the purpose of profit-making, or
·
dealt with or disclosed under an agreement for the provision of a service that involves sharing the information with another person and has no adverse effect on the profit-making structure of the business.

2.48 However, there are circumstances where the consideration received for dealing with or disclosing information does not give rise to ordinary income (for example, the amount received is not assessable income under 6-5). Therefore, under the existing arrangements, such amounts are included as statutory income in part by reference to their status as a depreciating asset.

2.49 This removes any doubt that the dealing with or sharing of such information is assessable income. As the amendments in Schedule 5 provide that geothermal exploration information is no longer a depreciating asset, amendments are made to maintain the scope of amounts included in statutory income. [Schedule 5, items 2, 3 and 4, section 15-40]

2.50 The amendments ensure that amounts received by taxpayers for geothermal exploration information are statutory income if:

·
the taxpayer continues to hold the information;
·
the information is relevant to geothermal energy extraction or a business carried on relating to geothermal energy prospecting or extraction; and
·
the amount received is not assessable income under section 6-5.

[Schedule 5, items 2, 3 and 4, section 15-40]

Consequential amendments

2.51 A number of consequential amendments to headings, notes and other things are made to reflect the repeal of the geothermal energy exploration deduction. The redundant definitions of 'geothermal exploration right' and 'geothermal energy extraction right' are repealed. [Schedule 5, items 1, 15 and 31 to 38, table item headed 'capital allowances' in section 12-5, subsection 40-730(1), paragraphs 165-55(2)(ba) and 716-300(1)(b) and (c), note in subsections 716-300(1) and subsection 995-1(1)]

Superannuation guarantee charge percentage

SG charge percentage

2.52 Under the SG legislation, employers are required to make a prescribed minimum level of superannuation contributions to a complying superannuation fund or a retirement savings account on behalf of their eligible employees.

2.53 The minimum level of employer superannuation contributions is calculated with reference to the SG 'charge percentage' (as defined in subsection 19(2) of the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992)) and each eligible employee's ordinary time earnings, salary or wages.

2.54 The Superannuation Guarantee Charge Act 1992 imposes the SG charge on any employer who has an SG shortfall in respect of a quarter. An employer who does not contribute the minimum level of required employer superannuation contributions on time is liable to pay a charge based on the SG shortfall. The SG shortfall for a quarter is calculated under section 17 of the SGAA 1992 and consists of the total of the employer's individual SG shortfalls for that quarter, a nominal interest component, and an administration component.

Rephasing of the SG charge percentage increase

2.55 The SG charge percentage is currently legislated to gradually increase to reach 12 per cent for quarters in years starting on or after 1 July 2019.

2.56 The passage of legislation to repeal the MRRT and make amendments to related spending measures (including the SG charge percentage) was delayed prior to the 2014-15 Budget, creating uncertainty for businesses. To provide certainty, the Government announced in the 2014-15 Budget changes to the schedule for increasing the SG charge percentage to 12 per cent. In order to provide businesses and the community with appropriate notice about changes to the SG charge percentage should the passage of the repeal legislation be further delayed, the amendments allow the Treasurer (as the responsible Minister) to vary the SG charge percentage for a particular year starting on 1 July, subject to a number of strict conditions. These conditions reflect the Government's policy as announced in the 2014-15 Budget in relation to the increase to the SG charge percentage. [Schedule 6, item 1, subsection 19(2) of the Superannuation Guarantee (Administration) Act 1992]

2.57 The Minister may, by legislative instrument, vary the SG charge percentage for quarters in a particular year commencing on 1 July, or for two or more years starting on a particular 1 July. Pursuant to item 39 in the table in subsection 44(2) of the Legislative Instruments Act 2003, the legislative instrument is not subject to disallowance, being an instrument relating to superannuation. [Schedule 6, items 2, subsection 19(2AA) of the Superannuation Guarantee (Administration) Act 1992]

2.58 However, the exercise of this power is subject to the following strict conditions:

·
the Minister must not make a determination for a period starting before or during the financial year in which it is made. That is, the determination must be made prospectively;
·
the Minister must not vary the SG charge percentage so that the percentage is less than the percentage that applied for the previous year commencing on 1 July (whether that be the percentage as set out in the legislation or the percentage varied by legislative instrument);
·
the Minister must not vary the SG charge percentage so that it is the same number for more than 4 years (apart from when it reaches 12 per cent);
·
the Minister must not vary the SG charge percentage to more than 12; and
·
the Minister must specify a number that is a multiple of 0.5.

[Schedule 6, item 2, subsection 19(2AB) of the Superannuation Guarantee (Administration) Act 1992]

2.59 If the Act receives the Royal Assent in the 2014-15 financial year, the Government's policy is that the schedule for increasing the SG charge percentage, as announced in the 2014-15 Budget, will be as follows:

Table 2.1: Rephasing of the SG charge percentage - current law compared to the 2014-15 Budget announcement
Year SG charge percentage
  2014-15 Budget Current law
Year starting on 1 July 2014 9.5 9.5
Year starting on 1 July 2015 9.5 10
Year starting on 1 July 2016 9.5 10.5
Year starting on 1 July 2017 9.5 11
Year starting on 1 July 2018 10 11.5
Year starting on 1 July 2019 10.5 12
Year starting on 1 July 2020 11 12
Year starting on 1 July 2021 11.5 12
Years starting on or after 1 July 2022 12 12

Low income superannuation contribution

2.60 The low income superannuation contribution (LISC) is a superannuation contribution made on behalf of individuals with an adjusted taxable income (ATI) of $37,000 or less in an income year. The maximum contribution amount payable is $500. The contribution is designed to effectively return the tax paid on concessional contributions by an individual's superannuation fund.

2.61 The LISC was funded with the expected revenue from the MRRT, and is being repealed with the removal of the MRRT. The Government will revisit incentives in superannuation for low income earners once the Budget is back in a strong surplus.

2.62 The amendments repeal the framework for the LISC contained in Part 2A of the Superannuation Government (Co-contribution for Low Income Earners) Act 2003 (SGLIA), and make consequential amendments to other areas of that Act to reflect the repeal of the LISC. [Schedule 7, items 1 to 6, subsection 5(2), Part 2A, subsection 49(1), section 55 (note), section 56 (definitions of concessional contributions and low income superannuation contribution]

Repeal of income support bonus

2.63 The income support bonus (ISB) is an indexed, non-means tested payment that is paid twice annually to eligible social security recipients. The ISB was intended to provide additional support for eligible income support payment recipients to manage unanticipated expenses. It is exempt from income tax.

2.64 ISB instalment rates are $107.80 for single people or $89.90 for most people who are an eligible member of a couple. Eligible members of a couple separated by illness, or couples where a partner is in respite care or in goal, receive the single rate of $107.80.

2.65 To be eligible to receive the ISB, a person must be a recipient of Newstart Allowance, Sickness Allowance, Youth Allowance, Austudy, ABSTUDY Living Allowance, Special Benefit, Parenting Payment, Transitional Farm Family Payment, or Exceptional Circumstances Relief Payment. The ISB is also paid to eligible recipients under the Veterans' Children Education Scheme prepared under Part VII of the Veteran's Entitlement Act 1986 and under the Military Rehabilitation and Compensation Act Education and Training Scheme established under the Military Rehabilitation and Compensation Act 2004.

2.66 People on these payments receiving more than the basic amount of Pension Supplement are not eligible for the ISB.

2.67 The ISB is repealed with the removal of the MRRT. [Schedule 8, items 1 to 11, Part 2.18B, table item 71 section 1190, subsection 23(1) (definitions of 'income support bonus' and 'income support bonus test day'), 1191(1) (table item 43) and 1192(10), and paragraph 23(4AA)(ac) of the Social Security Act 1991; and sections 12L and 47DAB and subsection 47(1) (definition of 'lump sum benefit'), of the Social Security (Administration) Act 1999]

Consequential amendments

2.68 Consequential amendments have been made to the Farm Household Support Act 1992, the Social Security Act 1991 and the Social Security (Administration) Act 1999 as a result of the repeal of the ISB, which have repealed or updated a number of cross-referenced provisions. [Schedule 8, items 12 to 14 and items 23 to 25, subsections 24A(8A), 24AA(10A) and 24B(6) of the Farm Household Support Act 1992; paragraph 1231(1AA)(b) of the Social Security Act 1991; and section 123TC (definitions of 'category I welfare payment' and 'category Q welfare payment') of the Social Security (Administration) Act 1999]

2.69 Provisions that were inserted into the ITAA 1997 to provide for income tax exemptions for ISB payments are also repealed as they are no longer required. [Schedule 8, items 15 to 22, sections 11-15, 52-75 (table item 5D) and 52-114 (table item 16A), subsections 52-10(1M) and 52-65(1K), and paragraphs 52-10(1)(zb) and (zc) and 52-65(1)(c)]

Repeal of the schoolkids bonus

2.70 The schoolkids bonus (SKB) is an indexed payment that is available to eligible families receiving Family Tax Benefit Part A and young people in school receiving Youth Allowance or certain other income support or payments (such as the Veterans' Children Education Scheme). The SKB is paid twice annually, with instalments generally paid in January and June each year. The payment was designed to provide assistance to families in meeting education expenses. It is exempt from income tax.

2.71 Currently, an instalment of the primary school amount for the SKB is $211 while an instalment of the secondary school amount for the SKB is $421.

2.72 The SKB is repealed with the repeal of the MRRT. [Schedule 9, items 1 to 20, Divisions 1A of Part 3 and 1A of Part 4, subsection 3(1) (definitions of 'bonus test day', 'current education period', 'family assistance', 'FTB child', 'previous education period', 'primary school amount', 'relevant schoolkids bonus child', 'schoolkids bonus' and 'secondary school amount'), and clause 2 (table items 17AB and 17AC) and subclause 3(1) (table items 17AB and 17AC) of Schedule 4 to the A New Tax System (Family Assistance) Act 1999; and Division 2A of Part 3, section 219TA (definition of 'relevant benefit'), subsections 93A(6) (definition of 'family assistance payment') and 221(5), and paragraphs 66(1)(ba) and 71(1)(a) of the A New Tax System (Family Assistance) (Administration) Act 1999]

Consequential amendments

2.73 A consequential amendment has been made to the Social Security (Administration) Act 1999 as a result of the repeal of the SKB which has repealed the provision relating to deductions from SKB payments. [Schedule 9, item 23, Subdivision DG of Division 5 of Part 3B of the Social Security (Administration) Act 1999]

2.74 Consequential amendments are made to the ITAA 1997 to repeal the income tax exemptions for the SKB as they are no longer required. [Schedule 9, items 21 and 22, sections 11-15 and 52-150]

Application and transitional provisions

Commencement

2.75 All of the repeals and amendments of the MRRT-related measures, with the exception of Schedule 6 (SG charge percentage), commence on the earlier of a day or days to be fixed by proclamation or twelve months after Royal Assent.

2.76 Providing flexibility for the day of commencement ensures that further delays will not result in the legislation applying retrospectively over a lengthy period, or imposing excessive uncertainty and risk on taxpayers.

2.77 However, this flexibility also means that it is difficult for both taxpayers and the Commissioner of Taxation to predict the date from which the repeal will have effect.

2.78 Providing for the day of commencement to be fixed by proclamation allows the Government to minimise any compliance costs and uncertainty for taxpayers about the date of commencement of the Bill. The Bill specifies that if a day is not fixed within 12 months of Royal Assent, the Schedule will commence on that day. While it more usual to provide that legislation will commence within six rather than twelve months, in this case it was important for it be possible to specify a day in the next financial year rather than the current financial year, so as to minimise significant risks and compliance costs for taxpayers (particularly for some of the related spending measures).

Loss carry-back

2.79 Loss carry-back is repealed with effect from the start of the income year before the income year in which Schedule 2 commences. For companies with normal accounting periods, the repeal applies from 1 July of the preceding income year. For taxpayers with substituted accounting periods, the repeal applies from the start of the period before the accounting period in which the repeal commences. [Schedule 2, item 42]

2.80 For example, if Schedule 2 commences in the 2014-15 income year, the repeal of loss carry back would have effect from the start of the 2013-14 income year.

2.81 The operation of the loss carry-back provisions for prior years is preserved, including for the purposes of any future action that relates to their operation for that year. For example, a choice to carry-back a loss for the 2012-13 income year can still be made or changed to the extent that it could have been made or changed had the provisions not been repealed. Similarly, assessments for that year can still be made or amended within the normal time limits to take into account a loss being carried back, and can still be subject to an objection in relation to a loss being carried back. [Schedule 2, subitem 43(1)]

Example 2.1: Amending loss carry-back assessments For the 2012-13 income year, Black & Boyd Pty Ltd had a $1 million loss, which it chose to carry back to its 2011-12 income year. In 2016, the Commissioner concluded that Black & Boyd had $400,000 in unreturned assessable income for its 2012-13 income year; reducing to $600,000 the loss it had available to carry back.The Commissioner can amend Black & Boyd's 2012-13 assessment to reduce its loss carry-back tax offset even though, by 2016, the loss carry-back provisions were repealed. Black & Boyd can also object to the amended assessment even though the relevant provisions no longer exist.

2.82 The similar preservation effect provided for by section 7 of the Acts Interpretation Act 1901 is not limited by the Bill's specific savings provision so it could also operate to preserve the 2012-13 operation of the repealed provisions. [Schedule 2, subitem 43(2)]

2.83 A tax loss cannot be utilised by being carried back for income years after the repeal. However, a loss that was carried back for prior years continues to be treated as having been utilised. This ensures that losses cannot be used more than once. [Schedule 2, item 44, subsection 960-20(1) of the IT(TP) Act 1997]

2.84 Net exempt income that was utilised to reduce the amount of a loss that was carried back also continues to be treated as having been utilised. [Schedule 2, item 44, subsection 960-20(2) of the IT(TP) Act 1997]

Changes to the capital allowances for small business entities

2.85 With the exception of the amendments in relation to low pool values, the amendments made by Schedules 3 and 4 apply on and after 1 January of the income year before the income year in which Schedules 3 and 4 commence and in later income years (including the income year in which the Schedules commence). These amendments include the changes in relation to depreciating assets that are first used or installed ready for use at a particular time, changes in relation to amounts included in the second element of the cost of a depreciating asset that has been written-off in an earlier income year, the repeal of the special rules for certain motor vehicles, as well as the consequential amendments to other provisions. [Schedule 3, subitems 11(1), (2) and (4); and Schedule 4, item 8]

2.86 For example, if Schedule 3 commences in the 2014-15 income year, the reduction in the instant asset write-off threshold would apply for assets that are first used and installed on or after 1 January 2014.

Depreciating assets

2.87 Depreciating assets that are first used or installed ready for use in the part of the income year falling on or after 1 January in the income year in which the repeal commences or in later income years (including the income year in which the Schedule commences) are subject to the $1,000 threshold.

2.88 The requirements that the asset be first used or installed ready for use are alternative requirements. Where a depreciating asset meets one but not the other for an income year or part of an income year prior to the period for which the repeal applies, the $6,500 threshold nonetheless continues to apply to the asset.

Amounts included in the second element of the cost of depreciating assets

2.89 The changes in respect of amounts included in the second element of a depreciating asset's cost apply to amounts that are incurred on or after 1 January of the income year before the income year in which the repeal commences or in later income years (including the income year in which the Schedule commences).

Low pool values

2.90 The amendments in relation to low pool values apply on and after 1 January of the income year before the income year in which the repeal commences and subsequent income years (including the income year in which the Schedule commences). [Schedule 3, subitem 11(3)]

2.91 The reference to the income year in which the repeal commences means that the changes will apply from 1 January of the preceding financial year for most affected small business entities. In the event that a small business entity has a substituted accounting period, in some cases it is possible it will apply from the prior 1 January.

Special rules for certain motor vehicles

2.92 As with the other changes for depreciating assets and amounts included in the second element of the cost of such assets, the repeal of the special rules for certain motor vehicles apply to motor vehicles that are first used or installed ready for use on or after 1 January of the income year before the income year in which the repeal commences or in subsequent income years (including the income year in which the Schedule commences). [Schedule 4, item 8]

Repeal of geothermal energy exploration deduction

2.93 The repeal of the capital allowance deduction for geothermal energy exploration expenditure and the repeal of the denial of deductions relating to expenditure for landcare operations, electricity and telephone lines, apply to expenditure incurred in the income year in which the repeal commences and subsequent income years. [Schedule 5, subitem 39(2)]

2.94 The repeal of the modification to the cost base rules applies to geothermal energy extraction rights held at any time after the start of the income year in which the repeal commences. [Schedule 5, subitem 39(3)]

2.95 The amendments allowing geothermal energy explorers to use a CGT roll-over in relation to the disposal of a geothermal exploration right where they acquire a geothermal energy extraction right covering the same (or a similar) area, applies to CGT events that occur after the start of the income year in which the repeal commences. [Schedule 5, subitem 39(3)]

2.96 The amendments also insert transitional provisions so that deductions or balancing adjustments for geothermal exploration rights or geothermal exploration information which were held, or started to be held, before the start of the income year in which the repeal commences are not adversely affected by the repeal of the immediate deductibility of geothermal exploration expenditure. [Schedule 5, subitem 39(1)]

Superannuation guarantee charge percentage

2.97 The Treasurer will have the power to amend the SG charge percentage from the date of Royal Assent, in respect of the following year starting on 1 July. [Section 2, commencement provisions]

Low income superannuation contribution

2.98 The repeal of the LISC applies to concessional contributions for the financial year before the financial year in which Schedule 7 commences, concessional contributions for the financial year in which Schedule 7 commences and concessional contributions for later financial years. [Schedule 7, subitems 7(1) and 7(3)]

For example, if Schedule 7 commences in the 2014-15 financial year, the LISC is repealed for concessional contributions made for the 2013-14 financial year and later financial years.

2.99

Reporting

2.100 Section 12G of the SGLIA requires the Commissioner to give a Treasury Minister a report for presentation to Parliament on the working of the LISC during the quarter.

2.101 The reporting obligation under section 12G continues until the commencement of Schedule 7 (the day fixed by proclamation), after which time no further reporting in respect of any quarter or financial year is required. [Schedule 7, subitem 7(2)]

Notification where the Commissioner receives new information

2.102 Where an individual does not lodge an income tax return, the Commissioner may estimate the individual's ATI to determine their eligibility for the LISC. The Commissioner is not required to notify the individual when, based on the information available to the Commissioner at that time, it is determined that a person is eligible for the LISC.

2.103 Subsection 12F(2) of the SGLIA provides that if the Commissioner obtains further information after estimating an individual's ATI and, as a result of that information, decides that the LISC is not payable, the Commissioner must give written notice of the decision to the person. As the individual is not notified of the first decision to pay the LISC, the notification of the subsequent decision has the potential to cause confusion. From the commencement of Schedule 7 (the day fixed by proclamation), written notification under section 12F is no longer required. Individuals continue to receive information from their superannuation fund regarding all transactions on their account in their annual member statement. [Schedule 7, subitems 8(1) and 8(2)]

Transitional - deadlines for the financial year for a LISC

2.104 The deadline for determining that a LISC is payable or determining that an underpaid amount of LISC is payable is the first day of the second financial year after the financial year in which Schedule 7 commences. For example, if Schedule 7 commences in the 2014-15 financial year, the deadline is 1 July 2016.

2.105 This provides certainty regarding eligibility for the LISC and enables the Commissioner to streamline administrative systems 2 years following the end of the last financial year for which the LISC is payable, reducing the administrative compliance burden. [Schedule 7, subitems 9(1), 9(2) and 9(3)]

Repeal of the income support bonus

Application

2.106 The repeal of the ISB applies to new instalments of the bonus after Schedule 8 commences.

Savings

2.107 The law with respect to the ISB is preserved in relation to payments of the ISB to individuals who were entitled to payment in relation to the period prior to the repeal for ISB payments made before, on or after the commencement of the amendments. Parts of the social security law relating to a person's qualification for the ISB in force prior to the commencement of the amendments continue to apply in relation to that qualification. [Schedule 8, subitems 26(1),(2) and (6)]

2.108 The provisions of the ITAA 1997 which relate to the ISB also continue to operate in respect of payments made to recipients before, on or after the commencement of the amendments to those provisions. [Schedule 8, subitems 26(3) to (5)]

Repeal of the schoolkids bonus

Application

2.109 The repeal of the SKB applies to new instalments of the bonus after Schedule 9 commences.

Savings

2.110 The law with respect to the SKB is preserved in relation to individuals who are eligible for SKB on a bonus test day occurring before commencement of the amendments. This would allow the SKB to be paid after commencement in relation to that eligibility. [Schedule 9, subitems 24(1) and (4)]

2.111 Provisions of the ITAA 1997 which relate to the SKB also continue to operate in respect of SKB payments made before, on or after commencement. [Schedule 9, subitem 24(2)]

2.112 Provisions in the Social Security (Administration) Act 1999 providing for the income management of SKB payments are preserved so that any payments made before, on or after commencement are subject to the provisions. [Schedule 9, subitem 24(3)]


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