Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Chapter 6 Elections and Notifications
This chapter deals with how elections and options available under the law are to be made by taxpayers under a self assessment system. The key features are:
- taxpayers, in most cases, will no longer be required to prepare and lodge written notices of elections;
- elections made by agreements between taxpayers will be required in writing and need to be kept by taxpayers;
- elections and notifications affecting the taxation treatment of future transactions or events, or which cause the Commissioner to take some action in relation to an assessment, will still be required to be in writing and lodged with the Commissioner;
- the Commissioner retains the power to extend the time for making an election.
The Bill gives effect to changes announced in section 12 of the August 1991 information paper entitled 'Improvements to Self Assessment - Priority Tasks'.
The amendments will have the effect that most elections and notifications relevant to the calculation of taxable income will no longer be required in writing.
There are a number of instances in the ITAA where taxpayers can decide, by way of an election, what law is to apply to a particular set of facts. These elections allow taxpayers to advise the Commissioner of their choice of the provision to be applied in determining taxable income. Making an election may enable the taxpayer to tell the Commissioner, for example, how much of an amount of income is assessable or how much of an item of expenditure is deductible. The present law generally requires an election to be in writing and lodged with the Commissioner before it is effective.
Following the move in 1986-87 to a self assessment system of taxation, tax returns are no longer subject to technical and other scrutiny prior to assessment. This means that the Commissioner no longer needs to consider the information provided by taxpayers in their tax returns. Instead, the Commissioner can rely on section 169A of the ITAA in making an assessment and accept, without examination, statements by taxpayers of assessable income and allowable deductions. The requirements that elections be in writing and lodged with the Commissioner are inconsistent with a system where the Commissioner will not look at the written elections. In these circumstances, there is generally no practical point in elections being lodged with the Commissioner.
The amendments proposed by the Bill will have the effect that the majority of elections will no longer be required to be made in writing and lodged with the Commissioner. The need to give certain notices to the Commissioner will also be removed. The process of making an election will involve the taxpayer deciding which provision of the ITAA is to be applied in calculating a component of taxable income and keeping a record which verifies the calculation. Whether or not a taxpayer has made an election will be evident from these records and in the calculation of taxable income as disclosed in the tax return. Taxpayers will still be required to make elections by a particular date, usually on or before the due date for lodging the relevant tax return. The Commissioner will be able to extend this period where he considers it appropriate.
In almost every case an election gives a taxpayer the option to override the ordinary operation of the law. An example of this occurs in section 26B of the ITAA. An insurance payment to a grazier for a loss of livestock is ordinarily assessable income in the year in which it is received. But subsection 26B(2) allows a taxpayer to elect instead to spread an insurance recovery over a five year period. In this way, the taxpayer can stop the application of the ordinary law and determine that the insurance payment is assessable in the manner chosen by the taxpayer. Taxpayers will no longer be required to notify the Commissioner of this type of election. [Schedule 1 - Clause 33]
Some elections and notifications allow two or more taxpayers, by agreement, to decide what law is to apply in a particular case. An example is the election under paragraph 80G(6)(c). That election allows companies in the same company group to transfer losses among the group. At present, the public officers of the transferor and transferee company must give a notice to the Commissioner stating that the right to the deduction for a loss has been transferred. This requirement is to be removed from the legislation [Schedule 2 - Clause 33]. Instead, it is to be a condition of the transfer that the income company and the loss company agree in writing, before lodgment of the income company's tax return for the relevant year, that the right to the allowable deduction should be transferred. These agreements will be required to be kept by the taxpayers with their taxation records.
Similar changes will be made to other provisions in the law where two or more taxpayers may enter into an agreement which allows an election to be made that effects the calculation of taxable income. In these cases taxpayers will no longer be required to lodge the notices of election with the Commissioner. A written agreement will be required which taxpayers will have to keep with their taxation records.
Notices other than elections
There is an instance, not involving an election, where a taxpayer must provide a certificate to the Commissioner, in support of a claim for a rebate. The instance is where a taxpayer wants to make a claim for a rebate in respect of a dependant invalid relative (under section 159J). A taxpayer making such a claim must provide the Commissioner with a certificate issued by an authorised medical practitioner, confirming the invalidity of the dependant. The requirement for the certificate is to be provided to the Commissioner is being removed [Schedule 4 - Clause 33]. In future a taxpayer claiming an invalid relative rebate will be required to obtain a certificate but not to notify the Commissioner.
Some elections still to be in writing
The nature of some elections and notifications is that they will still be required to be in writing and lodged with the Commissioner. Many of these elections affect the taxation treatment of a future transaction or event. Others are necessary for the Commissioner to be able to process assessments.
The elections which provide for miscellaneous roll-over relief from capital gains tax on disposal of certain assets are examples of elections which do not have any tax effect in the year of election but will have an effect in a later year. An example is section 160ZZN, where the taxpayer elects for roll-over relief on the transfer of an asset to a wholly owned company. The effect of this election is to delay any taxation consequence of the initial disposal until the asset is disposed of by the wholly owned company, possibly many years after the election is made. If the election preserves the pre-20 September 1985 status of the asset (ie., capital gains tax free), any subsequent gain on the disposal would be tax free. On the other hand, any subsequent loss on disposal would not be deductible against other capital gains.
If a taxpayer did not give the Commissioner notice of the election made under section 160ZZN, it would be possible to wait for the consequence of a subsequent disposal and choose the best result for the taxpayer. If a capital loss was made, the taxpayer could deny the existence of an election. If a capital gain was made, the taxpayer could say that there had been an election. For this reason, elections like this will still have to be made in writing and lodged with the Commissioner.
There are also two instances where the Commissioner needs to be notified of a particular event before an assessment can be made.
The first instance is where a primary producer elects under section 158A, to opt out of the averaging system. Unless the Commissioner is told about such an election, assessments would continue to be made on the basis that the taxpayer is entitled to income averaging.
The other instance is where a taxpayer wants to be given the benefit of having a lower effective tax rate applied to taxable income under section 59AB. This provision of the law provides relief to a taxpayer whose business has ceased because depreciable plant has been disposed of, lost or destroyed, eg., because of a fire, and where there is an amount included in the taxpayer's assessable income because of the disposal, eg., where there was an insurance recovery. In this case, the Commissioner needs to be told about the taxpayer's election so that the ordinary rates of tax are not applied to taxable income.
These types of elections will still have to be given to the Commissioner in writing.
Any notification that would cause the Commissioner to exercise a discretion will not be removed at this stage. It would not make sense to remove the need to make these notifications while the ascertainment of a component of taxable income was dependent on the Commissioner being advised to exercise a discretion. An example of this type of notice is the notice that may be given under subsection 31(3), where taxpayers can notify the Commissioner that, for reasons of obsolescence or any other special circumstances, they wish to adopt a value of trading stock which is lower than the lowest value applicable under subsection 31(1). Such a value is not available unless the Commissioner determines that the value is fair and reasonable. Other examples of these types of notice are in subsections 63A(3), 63A(7), 80A(2), 102AAZD and 300B(1).
The amendments that will remove the requirement to lodge written elections are set out in Schedule 1 of the Bill. [Subclause 33(1)]
The amendments in Schedule 1 apply to elections made on or after the date of Royal Assent [Clause 2]. However, if Royal Assent occurs before 1 July 1992 the amendments will only apply to elections made on or after 1 July 1992. [Subclause 34(9)]
The following provisions will be amended to remove any reference to elections being in writing and lodged with the Commissioner.
|subsection 26AAC(4E)||subsection 26AAC(8B)|
|subsection 26AAC(15B)||subsection 26B(5)|
|subsection 26BA(8)||subsection 34(2A)|
|subsection 36AA(6)||subsection 51AE(9)|
|subsection 56(1AB)||subsection 57AK(9)|
|subsection 57AM(32)||subsection 79E(7)|
|subsection 80(2D)||subsection 82KY(1)|
|subsection 88(6)||subsection 102AAX(4)|
|subsection 116D(1)||subsection 122M|
|subsection 123BB(2)||subsection 124ADH(2)|
|subsection 124AG(3)||subsection 124AH(4AB)|
|subsection 124UA(3)||subsection 124ZAE(2)|
|subsection 275B(5)||subsection 279(6)|
|subsection 290A(3)||subsection 401(4)|
The following provisions will be amended to remove the words requiring elections to be in writing.
|subsection 36(7)||subsection 36AAA(14)|
|paragraph 148(6)(a)||paragraph 148(6)(b)|
|subsection 160M(11C)||subsection 461(4)|
The following provisions will be amended to remove words referring to written elections.
|subsection 26AAC(15A)||paragraph 34(2)(a)|
|subsection 36AAA(4)||subsection 79E(6)|
|subsection 80(2C)||subsection 122D(4)|
|subsection 122DB(4)||subsection 122DD(4)|
|subsection 122DF(4)||subsection 122DG(6A)|
|subsection 122H(1)||subsection 122H(2)|
|subsection 122J(4BA)||subsection 122JE(6)|
|subsection 122JF(3)||subsection 124ADH(1)|
|subsection 124AG(1)||subsection 124AG(2)|
|subsection 124AH(4AA)||subparagraph 401(3)(d)(i)|
The following provisions will be amended to remove the words requiring elections to be lodged with the Commissioner.
|paragraph 36A(2)(d)||subsection 116D(2)|
|paragraph 148(6)(c)||subsection 159GZS(5)|
|subsection 159GZT(7)||subsection 159GZU(5)|
|subsection 159GZV(5)||subsection 159GZW(5)|
|subsection 160ZSA(2)||subsection 160ZZQ(5A)|
|subsection 160ZZQ(5B)||subsection 160ZZQ(11A)|
Notifications and requests
Further amendments relating to notices and requests are set out in Schedule 2 of the Bill. [Subclause 33(2)]
The amendments made by Schedule 2 apply to agreements and elections made on or after the later of 1 July 1992 or the date of Royal Assent. The amendments do not affect the operation of notices or requests given or made by taxpayers before whichever of those commencement dates is relevant. Any notice or request given to the Commissioner prior to the actual commencement date will be effective in respect of the assessment for the year to which it relates. This ensures that the amendments will not have a retrospective effect. The various amendments made by Schedule 2 are explained in the following notes.
Property disposal on change of ownership
Where there is a disposal of property on change of ownership or interests in a partnership, taxpayers will no longer be required to notify the Commissioner of an election that the value of property at the date of disposal is to be the subsection 36A(2) value, being the amount that would have been the year end value had the disposal not taken place. Instead, each person who owned the property before and after the change in ownership or interest must agree in writing that the subsection 36A(2) value is to apply. The agreement is to be made by the prescribed date and signed by all parties. [subsection 36A(3)]
Devolution of property on death of a taxpayer
Subsection 37(2), which relates to the devolution of property on the death of a taxpayer, is to be amended to exclude the requirement of giving notice to the Commissioner that the trustee and beneficiaries unanimously agree on the value of the property. [subsection 37(2)]
Disposal of depreciated property
Subsection 59(2A) allows a taxpayer to elect that the assessable profit on disposal of depreciated property is not to be included in assessable income. Instead, the taxpayer can request that the Commissioner offset the assessable profit against the cost, for depreciation purposes, of any replacement property or other depreciable property of the taxpayer. This provision will be amended so that the written request need no longer be made. The offsetting deduction will become a matter of choice for the taxpayer. [subsection 59(2A)]
Replacement of depreciable asset
Subsection 59(2D), which applies where a replacement asset is acquired within 2 years of the year in which there was a disposal of the depreciable item, is amended in a similar manner to subsection 59(2A). [subsection 59(2D)]
Transfer of company losses
Subsection 80G(6) allows companies in the same group to transfer losses among the group companies. The requirement for public officers of the transferor and transferee company to give the Commissioner a notice stating that the deduction for the loss has been transferred is to be removed [paragraph 80G(6)(c)]. Instead, the agreement to transfer the deduction must be in writing, signed and kept by the public officers of both companies [subsection 80G(6A)]. Consequential amendments are to be made to other provisions in section 80G removing the references to notices and replacing them with references to agreements. [subsections 80G(7), 80G(8), 80G(13) and 80G(16)]
Premium for goodwill or licence
Section 83A concerns the notification of a premium paid for goodwill or licence where there has been a grant, surrender or assignment of a lease of land upon which a business has been carried on. As with section 80G, the requirement to notify the Commissioner is to be removed and replaced by a requirement for a written agreement signed by the parties to the agreement that the amount be treated as a premium. [subsections 83A(2) and 83A(3)]
Purchasing of mining or prospecting rights or information
Subsection 122B provides for the purchaser of a mining or prospecting right or information to be entitled to a transfer of deductions for certain capital expenditure incurred by the vendor in respect of the right or information. This deduction is limited to the extent of the purchaser's expenditure on the acquisition of the right or information and is contingent on the purchaser and the vendor having agreed to the amount of the transfer and notifying the Commissioner accordingly.
The law is to be amended so that the Commissioner does not have to be notified of the agreement to include in the allowable capital expenditure of the purchaser an amount representing all or part of the expenditure incurred in acquiring the right or information [subsections 122B(1) and 122B(2)]. The agreement must be in writing and signed by or on behalf of the purchaser and the vendor and must be made not later than 2 months after the end of the relevant year of income. [subsection 122B(5)]
An agreement under this section has no effect if the expenditure incurred by the purchaser relates to the grant, assignment or surrender of a mining lease that is the subject of an election under subsection 88B(5). [subsection 122B(4)]
Acquiring petroleum prospecting or mining rights
Section 124AB allows for the inclusion in the allowable capital expenditure of the purchaser, of an amount of expenditure incurred in acquiring petroleum prospecting or mining rights or information. Similar amendments to those in section 122B above are being made to section 124AB. The requirement that the taxpayer notify the Commissioner will be replaced by a requirement that there be a written and signed agreement specifying the amount of the allowable capital expenditure. [subsections 124AB(1), 124AB(3) and 124AB(5)]
Payments for exploration permits and production licences
Section 124ABA allows for the transfer of entitlements to deductions for capital expenditure in respect of cash bidding payments for exploration permits and production licences. Where the original bidder sells part or all of the interest in the bid the deductions can be transferred to the purchaser. Similar amendments to those in section 124AB above are being made to remove the requirement that a notice be lodged with the Commissioner. [subsections 124ABA(2) and 124ABA(3) and paragraphs 124ABA(3)(a), 124ABA(3)(b) and 124ABA(3)(c)]
Transfer of foreign tax credits
Section 160AFE allows for the carrying forward of excess foreign tax credits and their transfer between group companies. Notifying the Commissioner of the transfer of the excess credit will no longer be necessary. The companies will be required to have a signed written agreement which gives effect to the transfer. [paragraph 160AFE(1D)(c), subsections 160AFE(1D) and 160AFE(1DA)]
Transfer of capital losses
Section 160ZP allows for the transfer of net capital losses to resident companies in the same group. It will no longer be necessary for the companies to give the Commissioner notice of the transfer. The companies will be required to have a signed written agreement of the transfer. [paragraph 160ZP(7)(c), subsections 160ZP(7AA), 160ZP(7A), 160ZP(7B), 160ZP(8), 160ZP(9), 160ZP(10) and paragraph 160ZP(13)(a)]
Superannuation fund - non-taxable contributions
Subsection 274(7) allows a trustee of a complying superannuation fund with the consent of a contributor to notify the Commissioner, in a prescribed manner, that certain contributions are not to be taxable contributions. This notification is to be replaced by an election which the taxpayer makes in determining the amount of taxable income. The taxpayer is not required to advise the Commissioner of the election but should keep appropriate records. [subsections 274(7), 274(8) and 274(9)]
Further amendments are set out in Schedule 4 to the Bill. [Subclause 33(4)]
Rebate for invalid relative
A medical certificate will no longer have to be produced to the Commissioner for a taxpayer to claim a rebate for the maintenance of an invalid relative. To be entitled to the rebate it will be necessary for the taxpayer to obtain the medical certificate and keep it with other taxation records [Subclause 34(11)]. This amendment will apply to rebate claims in returns lodged on or after the date of Royal Assent to the Bill or 1 July 1992, whichever is later. [paragraph 159J(6)(c)]
Foreign tax credits
In relation to claims for certain foreign tax credits made on or after the later of Royal Assent or 1 July 1992 [Subclause 34(12)], information relating to the determination of those credits will no longer have to be furnished to the Commissioner but must be able to be produced upon request. [section 160AM]
Superannuation fund - transfer of liability
Section 275 allows the trustee of a complying superannuation fund or a complying approved deposit fund (the transferor) to transfer a liability in respect of taxable contributions to a life assurance company, registered organisation or pooled superannuation trust (the transferee). For the transfer to be effective, the transferor must obtain the consent of the transferee to the transfer. At present this consent does not have to be evidenced in writing. At present the trustee of the transferor fund is required to give the Commissioner a notice of the transferred amount. This requirement is to be replaced by a requirement for a written agreement signed by or on behalf of the transferor and the transferee and made on or before the date of lodgment of the transferor's tax return for the year in which the transfer takes place. The taxpayers do not have to inform the Commissioner of the agreement but should keep appropriate records. [subsections 275(1), 275(2), 275(4), 275(6) and 275(7)]
The Bill provides that the amendments to section 275 only apply to transfers of taxable contributions made in the year of income of the transferor in which 1 July 1992 falls and all later years of income. That is, for most taxpayers it will have effect for the income year ending on 30 June 1993. For those funds with an early balancing date, it will apply to transfers in the substituted accounting period in which 1 July 1992 falls. This will allow sufficient time for transferors and transferees to comply with the new requirement that consent to a transfer of taxable contributions be in writing. [Subclause 34(13)]