Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
5.1 This Chapter explains amendments to the taxation laws relating to credit unions. Two Acts are to be amended. Section 1 explains amendments to the Income Tax Assessment Act 1936. Section 2 deals with amendments to the Income Tax Rates Act 1986.
5.2 The Bill amends the definition of 'notional taxable income' of a credit union in the Income Tax Assessment Act 1936 (the ITAA).
5.3 The amendment confirms that credit unions can offset against their non-corporate member interest income, deductions that relate to that income in calculating notional taxable income.
5.4 The amendment also confirms that a net loss arising from non member income and corporate member interest income may be offset by credit unions against a net profit arising from non-corporate member interest income and vice versa.
5.5 The Bill thus ensures that the size of a credit union, as measured by 'notional taxable income', is not inflated by failing to offset deductions against income, or losses in one area against income in another. The size of a credit union is relevant to the way in which its income is taxed.
Purpose of the amendments
5.6 The amendment clarifies the original intended meaning of 'notional taxable income'.
5.7 The amendment clarifies the meaning of the term notional taxable income of a credit union to ensure that it is calculated as originally intended. The term was introduced as a result of amendments made in the budget last year.
5.8 The size of a credit union is measured for some purposes on the basis of its notional taxable income. That size could be over-estimated, in relation to comparable credit unions, if deductions related to non-corporate member interest income were not taken into account, or if losses on one category of income were not to be offset against income of the other category.
Date of effect
5.9 The amendments will apply to assessments for the 1994-95 and later years of income. The calculation of notional taxable income is first required in assessments for the 1994-95 year of income. [Item 90 of Schedule 1]
5.10 The definition of notional taxable income is to be amended to clarify its meaning to answer questions raised by the credit union industry concerning its operation. The industry expressed doubt about the following aspects of the current provision:
- whether credit unions can offset against their non-corporate member interest income, deductions that relate to that income in calculating notional taxable income.
- whether a net loss arising from non-member income and corporate member interest income may be offset by credit unions against a net profit arising from non-corporate member interest income and vice versa.
5.11 The amount of a credit union's notional taxable income is used to determine whether it is a small, medium or large credit union and consequently the rate of tax it is required to pay on its taxable income. Notional taxable income is defined in subsection 6H(5) of the ITAA.
5.12 The present wording of subsection 6H(5) defines notional taxable income as the sum of the credit union's taxable income for that year, and that part of its income which is exempt by reason of the operation of subsection 23G(2). Because the present wording includes "that part of its income which is exempt", the industry feared that this might be interpreted as relating only to revenue, and not to related deductions. Because the present wording sums two amounts of income, the industry feared that losses in either amount could be taken into account only as no income, not as a negative amount of income.
5.13 The present wording calculates notional taxable income as if particular subsections were not applicable. This can be confusing to taxpayers, particularly when it has the effect of requiring them to apply provisions which they do not otherwise apply (because the particular subsections operate to exclude the provisions from applying).
5.14 The amendments ensure that the industry doubts about the operation of the definition of notional taxable income are overcome.
5.15 Amended subsection 6H(5) [item 89 of Schedule 1] operates to calculate the amount that would be the taxable income of a credit union if (under paragraph 6G(5)(a)) section 23G did not exempt the credit union's income for the 1994-95 and later years of income. This clearly allows deductions in relation to what would otherwise be exempt income to be taken into account.
5.16 This has the effect of allowing tax losses of all prior years to be carried forward and offset in the calculation of notional taxable income. It also allows the offsetting of exempt losses which arise in the 1994-95 or a later year of income. Exempt losses which arise prior to the 1994-95 year of income can not be offset in the calculation of notional taxable income. Such exempt losses are difficult to verify. They are also extremely unlikely to have arisen, on information now available.
5.17 Amended paragraph 6H(5)(b) provides that the calculation of notional taxable income is worked out on the basis that Division 9 of Part III had not been enacted. The effect of this paragraph is that in calculating notional taxable income, the calculation is made on the basis that the cooperative company provisions in sections 117 to 121 do not apply to the credit union. Division 9 also does not apply in determining the amount of prior losses that can be brought forward and offset in the calculation of notional taxable income.
5.18 Because the amended subsection 6H(5) no longer sums income amounts from separate areas of operation, but instead calculates taxable income on new assumptions, there is no possibility of losses in one area of operation being ignored in calculating that overall income.
Calculation of notional taxable income
5.19 Credit Union Memonly 1994-95 income and deduction details:
|non-corporate member interest income||$100,000|
|deductions which relate directly to the above income||($15,000)|
|deductions which relate indirectly to it||($20,000)|
|net loss for 1993-94 year of income from above income||($1,000)|
|(This is income which would be exempt if section 23G applied, and deductions which relate to that income.)|
|corporate member interest income and non-member income(CM & NMI)||$1,000|
|deductions which relate directly to CM & NMI||($5,000)|
|deductions which relate indirectly to CM & NMI||($200)|
|net loss for 1993-94 year of income from CM & NMI||($6,000)|
Memonly's 1994-95 notional taxable income is as follows:
- (a) interest income from non-corporate members less allowable deductions which relate to this income being: $100,000 - ($15,000 + $20,000) = $65,000
income from corporate members and other non-member income less allowable deductions
which relate to this income and any
prior year losses
(for the 1993-94 or prior years) from this class of income:
$1,000 - ($5,000 + $200 + $6,000) = ($10,200)
Memonly's notional taxable income = $65,000 less $10,200 = $54,800
The net loss for 1993-94 from exempt income does not affect the calculation, because it arose at a time when section 23G is not assumed to be inapplicable.
5.20 The Income Tax Rates Act 1986 will be amended by the Income Tax Rates Amendment Bill 1994 to correct an error in a tax threshold.
5.21 The amendment is designed to correct an error in the threshold in subsection 23(6) of the Income Tax Rates Act 1986 at which the income of a medium credit union is subject to tax. The threshold is reduced from income exceeding $50,000 to income exceeding $49,999. [Clause 4 of the Income Tax Rates Amendment Bill 1994]
5.22 The alteration to the threshold aligns it with the threshold for a medium credit union in the Income Tax Assessment Act 1936 and corrects it so that the threshold is the original threshold level intended.
5.23 The amendment applies to assessments for the 1994-95 and later years of income. The tax threshold for medium credit unions is first required in assessments for the 1994-95 year of income. [Clause 5 of the Income Tax Rates Amendment Bill 1994] -