Senate

Taxation Laws Amendment Bill (No. 4) 1994

Income Tax (Former Complying Superannuation Funds) Bill 1994

Income Tax (Former Complying Superannuation Funds) Act 1994

Income Tax (Former Non-Resident Superannuation Funds) Bill 1994

Income Tax (Former Non-resident Superannuation Funds) Act 1994

Income Tax Rates Amendment Bill 1994

Income Tax (Deficit Deferral) Bill 1994

Income Tax (Deficit Deferral) Act 1994

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Pooled development Funds

Overview

6.1 This Bill will amend the Income Tax Assessment Act 1936 and the Income Tax Rates Act 1986 to reduce the rate at which income derived by a Pooled Development Fund (PDF) from its investments in small and medium enterprises (SME income) is taxed.

6.2 The amendments to the Income Tax Assessment Act 1936 (the ITAA) will:

·
provide for the intercorporate dividend rebate allowable on dividends derived by a PDF to be calculated at the rate of tax applicable to the SME component of taxable income;
·
set out the rules for calculating the two components of PDF income - SME income component and unregulated investment component; and
·
make specific provision for the tax treatment of capital gains and capital losses of a PDF in calculating each component of taxable income.

6.3 The amendments to the Income Tax Rates Act 1986 (the Rates Act) will specify the rate of tax of each component of taxable income of a PDF. The tax rate for each component will be:

·
SME income component - 15 per cent
·
unregulated investment component - 25 per cent.

Summary of the amendments

Purpose of the amendments

6.4 The purpose of the amendments is to make the PDF program (which was introduced in 1992) more attractive to investors by lowering the rate at which a PDF is taxed on the income it derives from its investments in small and medium companies, from 25 per cent to 15 per cent.

6.5 Because the PDF program is designed to encourage investment in small and medium companes, the lower rate will not apply to a PDF's other income. The purpose of this distinction is to encourage PDFs to direct their funds into investment in small and medium companies, in preference to holding their funds, in effect, in interest bearing investments for long periods. [Items 1 and 5 of Schedule 2]

Date of effect

6.6 The amendments will apply to the assessments of a PDF for the 1994-95 and later years of income. [Items 4 and 23 of Schedule 2]

Background to the legislation

6.7 A PDF is a company that is registered as such under the Pooled Development Funds Act 1992 (PDF Act). Investments which a PDF may make are regulated by the PDF Act. The only investments a PDF may make are in ordinary shares (unless an investment in other kinds of shares is specifically approved by the PDF Board) and unregulated investments. Unregulated investments are in effect interest bearing investments.

6.8 The object of the law is to encourage investment in small and medium sized Australian companies through the pooling of investor funds. Restrictions are imposed on a PDF's investment activities to ensure that the funds raised are used in accordance with the intent of the program.

6.9 The taxable income of a PDF is calculated in the same way as that of other companies. A PDF is entitled to the intercorporate rebate on dividends at its average rate of tax (presently 25 per cent). PDFs derive franking credits when they pay company tax and derive franked dividends and are able to frank dividends.

6.10 The tax treatment of income derived by investors in a PDF is contained in Division 10E of the ITAA. These amendments will not change the concessional treatment presently accorded shareholders in a PDF on their PDF income. The concessions available to a shareholder in a PDF are:

·
unfranked dividends are exempt from tax;
·
franked dividends (including the franked amount of a dividend) are exempt from tax, unless the shareholder elects to include the dividends in assessable income and obtain the imputation credits;
·
dividends paid to non-residents are exempt from withholding tax;
·
gains on the disposal of shares in PDFs are exempt from income tax whether they constitute ordinary income or taxable capital gains. (Similarly, losses on the disposal of shares are not tax deductible nor can they reduce capital gains on the disposal of other assets.).

Explanation of the amendments

Income Tax Assessment Act 1936

Intercorporate dividend rebate

6.11 The rebate allowable to a company on its dividend income is calculated by applying the company's average tax rate to the part of the company's taxable income that constitutes dividend income. Where the whole of a company's taxable income is taxed at the one rate, the rebate is calculated at that rate.

6.12 Most companies' incomes are taxed uniformly at the one rate. Some companies enjoy limited rebates, which reduce that average tax rate. The averaging method ensures that such companies do not benefit excessively from the intercorporate dividend rebate.

6.13 The new tax rates for PDFs are fundamentally different. They do not give PDFs the benefit of a tax threshold or an initial rebate. Instead they give income from the investments PDFs are meant to favour a lower rate of tax. Those investments are by way of shareholding in small and medium enterprises. So dividends will be the kind of income taxed at the lower rate, and any rebate will be allowed at that tax rate.

6.14 As the rate at which the taxable income of a PDF will be taxed will depend on the component of income, the dividend rebate will not be calculated at the PDF's average rate of tax.

6.15 The Bill will amend the intercorporate dividend provisions (sections 46 and 46A) to make specific provision for the rebate on dividends derived by a PDF from its SME investments.

6.16 Under the existing law an Australian resident company (including a PDF) is entitled to a rebate on dividends included in its taxable income at the average rate of tax payable by it (subsection 46(2)). If the dividends are paid as part of a dividend stripping operation, a rebate is allowable on the net income from dividends (subsection 46A(5)). In each case the rebate is calculated by applying the company's rate of tax to either the amount of dividends included in its taxable income (section 46), or the net income from dividends included in its taxable income (section 46A).

6.17 The effect of the proposed amendments is that the rate at which dividends derived by a PDF will be taxed for the 1994-95 and later years of income will generally be different from its average rate of tax, but the same as the PDF's tax rate on such dividends. Proposed amendments to existing subsections 46(2) and 46A(5) will specifically exclude dividends derived by a PDF from entitlement to a rebate under those provisions. [Items 8 and 16 of Schedule 2]

PDF dividends

6.18 Dividends derived by a shareholder that is a PDF will be referred to as PDF dividends in sections 46 and 46A. [Items 6 and 14 of Schedule 2, definition of 'PDF dividend']

6.19 An Australian resident PDF will be entitled to a rebate in its assessment for the year of income on dividends included in its taxable income at the rate of tax applicable to the SME income component of taxable income (see later notes on that rate). [Item 9 of Schedule 2; new section 46(2A)]

6.20 Entitlement to the rebate under sections 46 and 46A will be confined to dividends derived from SME investments. [Item 7 of Schedule 2 - new subsection 46(1AAA); item 15 of Schedule 2 - new subsection 46A(1AA)]

6.21 The rebate will be allowable on the amount of dividends included in assessable income undiminished by any allowable deductions, unless the dividend income is greater than the SME income component of the PDF's taxable income. If the dividends included in the PDF's assessable income are greater than the SME income component, the rebate will be allowable on the amount of dividends equal to the SME income component. [Item 10 of Schedule 2; new subsection 46(7AA)]

6.22 The rebate allowable to a company under section 46 is reduced where:

·
the company has exercised an option under section 31(1) to value an article of trading stock on hand at the end of a year of income at a higher amount than would otherwise have applied; and
·
it is evident that the option was exercised in that way for the purpose of increasing the company's entitlement to a rebate under section 46.

6.23 If these conditions apply, subsection 46(7A) operates to limit the rebate to the amount that would have been available if the company had exercised the option to value the article of trading stock at the lowest value available under section 31(1).

6.24 The scope of subsection 46(7A) will be extended to cover the dividend rebate to which a PDF is entitled under new subsection 46(2A). [Item 11 of Schedule 2]

6.25 The reference to dividends included in taxable income in paragraph 46(7A)(a) will be amended to exclude PDF dividends. PDF dividends will be dealt with by a new provision. [Item 12 of Schedule 2]

6.26 A third amendment to subsection 46(7A) will limit the rebate allowable to a PDF where:

·
the PDF has exercised an option under section 31(1) to value an article of trading stock on hand at the end of a year of income at a higher amount than would otherwise have applied; and
·
it is evident that the option was exercised in that way for the purpose of increasing the company's entitlement to a rebate under section 46.

6.27 If these conditions are satisfied, the rebate to which the PDF would have been entitled will be limited to the amount that would have been available if the option had been exercised to value the article of trading stock at the lowest value available under section 31(1). [Item 13 of Schedule 2; new paragraph 46(7A)(c)]

Dividends paid as part of a dividend stripping operation

6.28 In the case of dividends paid as part of a dividend stripping operation, the rebate will be allowable on the net income from dividends included in taxable income. The rebate will be allowable at the rate of tax applicable to the SME income component of taxable income (see later notes). [Item 17 of Schedule 2; new subsection 46A(5A)]

6.29 The rebate will be allowable on the amount of net income derived from PDF dividends. The net amount will be the amount of PDF dividends derived from dividend stripping operations included in assessable income less deductions allowable to the PDF under the Act in respect of those dividends. [Item 18 of Schedule 2; new subsection 46A(9A)]

6.30 Subsection 46A(10) specifies the deductions that relate to dividends derived from dividend stripping operations which are taken into account in calculating the amount of the net income from dividends. This is the amount on which a rebate is allowable under subsection 46A(5).

6.31 Two amendments to subsection 46A(10) will extend the scope of the provision to include the deductions that are to be taken into account in calculating the net income from dividends derived by a PDF from dividend stripping operations. This net amount will qualify for the rebate under new subsection 46A(5A). [Items 19 and 20 of Schedule 2]

Calculating the taxable income of a PDF

6.32 The proposed amendments will divide the taxable income of a PDF into two components - SME income component and unregulated investment component - and specify the rules to be applied in calculating each component. Allowable deductions to a PDF will be offset first against SME income. This simplifies the allocation of deductions against each class of income, and encourages PDFs to keep unregulated investment income to as small a proportion of total assessable income as possible.

6.33 Capital gains and losses occurring in each income component will be determined separately. A capital loss incurred in a year of income on the disposal of assets in one component must be offset against capital gains derived in that year of income on the disposal of assets in the other component.

6.34 Division 10E of Part III of the Act (Shares in PDFs) will be restructured into three subdivisions to deal with the division of the taxable income of a PDF into two components. The heading to the Division will be changed from 'Shares in PDFs' to 'PDFs (pooled development funds)' in recognition of the extended scope of the Division. [Item 21 of Schedule 2]

·
New subdivision A, 'Shares in PDFs', will contain the existing provisions in Division 10E. [Item 22 of Schedule 2]
·
New subdivision B, 'Components of the taxable income of PDFs', will contain provisions for calculating each component of taxable income. [Item 23 of Schedule 2]
·
New subdivision C, 'Adjustments of the tax treatment of capital gains and capital losses of PDFs', will specify the basis on which capital gains and losses are to be calculated and allocated to each component of taxable income. [Item 23 of Schedule 2]

Full -year and part-year PDFs

6.35 Different rules will apply in calculating the taxable income of a company that is a PDF on the last day of the year of income according to whether the company:

·
was registered as a PDF for the whole of the year of income; or
·
became a PDF part-way through the year of income.

6.36 In each case the first step in calculating the taxable income will be to calculate the SME assessable income. Three new terms defined for the purposes of new Subdivision B will apply in calculating SME assessable income. The terms are:

·
non-CGT assessable income
·
SME investment
·
unregulated investment.

6.37 These terms are also defined for the purposes of calculating the capital gains and capital losses of each component of taxable income (new Subdivision C). The terms have the same meaning in both Subdivisions. [New sections 124ZS and 124ZW]

Non-CGT assessable income

6.38 This term is defined in new sections 124ZS and 124ZW. It will be used in calculating SME assessable income (new section 124ZT) and to calculate 'other assessable income' (new subsection 124ZY(2)).

SME investment

6.39 The term SME investment is defined in new section 124ZS and 124ZW as any investment that is not an unregulated investment (see below).

Unregulated investment

6.40 The term 'unregulated investment' will have the same meaning as in the PDF Act. The PDF Act defines an unregulated investment as an investment of a prescribed kind. Investments prescribed in Reg 3 of the PDF Regulations are:

(a)
an investment by way of:

(i)
a loan to; or
(ii)
a deposit with; or
(iii)
a debenture of;

·
a bank within the meaning of the Banking Act 1959 or a State bank;
(b)
an investment in the short term money market by way of a deposit with an authorised money market dealer.'

6.41 (An authorised money market dealer is a registered corporation that is included in a list prepared by the Treasurer under section 10 of the Financial Corporations Act 1974. )

6.42 So unregulated investment is essentially confined to lending to banks and to deposits in the short term money market.

SME assessable income

6.43 The fundamental difference between SME assessable income and assessable income calculated under general principles is that special rules will apply to allocate the assessable capital gains and deductible capital losses (see notes below on new Subdivision C of Division 10E).

6.44. The SME assessable income of a PDF will be the sum of:

·
any non-CGT assessable income (see above) derived on the disposal of an SME investment if the company is a PDF at the time the investment was disposed of; and
·
any assessable income allocated to the PDF under new section 124ZZB. This can include only income arising on the disposal of a SME investment, reduced by certain other capital losses. [New subsection124ZT(1)]

6.45 If SME income is derived, or an SME investment is disposed of, during a year of income but not on a particular day, for example, an assessable profit is derived through a trust in which the PDF was a beneficiary, the income will be taken to be derived, or the disposal will be treated as having occurred, on the last day of the year of income. [New subsection 124ZT(2)]

Company is a PDF for the whole year of income

6.46 The steps to be followed in calculating the taxable income of a company that is a PDF for the whole of the year of income are:

(1)
calculate the taxable income in the normal way (under paragraphs (a) or (b) of the definition of "taxable income" in subsection 6(1));
(2)
calculate the SME income component - SME assessable income less all allowable deductions (new subsection 124ZU(1));
(3)
calculate the unregulated investment component - taxable income less SME income component (new subsection 124ZV(1))

SME income component

6.47 The SME income component of a company that is a PDF for the whole of a year of income is the SME assessable income of that year (see notes above) less the deductions allowable to the PDF for that year of income, whether those deductions relate to the SME assessable income or not. The deductions allowable for a year of income will include any prior losses, such as those allowable under section 79E. [New subsection 124ZU(1)]

Unregulated investment component

6.48 The other component of the taxable income of a PDF of a year of income will be the unregulated investment component. This component will be the difference between the taxable income of the PDF (calculated under paragraph (a) or (b) of the definition of "taxable income" in subsection 6(1)) and the SME income component for that year of income (calculated under new section 124ZU). [New subsection 124ZV(1)]

6.49 This method of calculating the unregulated investment component will have the effect that where the deductions allowable to the PDF for a year of income exceed the income from SME investments and from the disposal of SME investments for that year, only the amount of the excess will reduce the unregulated investment component.

6.50 The unregulated investment component of the taxable income of a PDF will not be limited to income derived from the particular investments prescribed in the PDF regulations. This component will include all income that is not SME assessable income. For example, it would include management fees derived by a PDF.

Company becomes a PDF during the year of income

6.51 If a company becomes registered as a PDF part-way through a year of income, the company is taxed as a PDF for the period from the day of its registration to the end of the year of income as if that period (the PDF period) was a year of income. Tax is payable at the concessional PDF rate on the amount of taxable income that is not more than the PDF component (defined in subsection 6(1) of the Act).

6.52 In most cases the PDF component is the taxable income for the PDF period (calculated under paragraph (a) or (b) of the definition of 'taxable income', i.e. assessable income less allowable deductions). The PDF component cannot be less than nil. If a loss is incurred in the PDF period the PDF component is nil.

6.53 If the PDF component is nil the taxable income of the company for the non-PDF period is calculated under paragraph (c) of the definition of "taxable income". Paragraph (c) requires the taxable income of the non-PDF period to be calculated under paragraph (a) or (b) of the definition of 'taxable income' as if the year of income commenced on the first day of the year of income and ended on the day immediately before the company became registered as a PDF.

6.54 The effect of the proposed amendments is that in the year of income in which a company becomes a PDF it will be taxed on the SME and unregulated investment components of taxable income for the time it was a PDF, instead of the PDF component of its income for the year.

Calculating the components of taxable income

6.55 The steps to be followed in calculating the taxable income of a company that becomes a PDF during a year of income are:

(1)
calculate the adjusted taxable income (see notes below);
(2)
calculate the SME income component - SME assessable income less deductions allowable for the year that were taken into account in calculating the PDF component (new subsection 124ZU(2));
(3)
calculate the unregulated investment component - adjusted taxable income less SME income component (new subsection 124ZV(2))

Adjusted taxable income

6.56 The 'adjusted taxable income' will be relevant in calculating both the SME component and the unregulated investment component of the year of income in which a company becomes a PDF.

6.57 The adjusted taxable income is the amount that would be the taxable income for the period from the date the company is registered as a PDF until the end of the year of income if that period were a year of income. It will be the same as the PDF component. Although it has the same meaning as the PDF component the term 'adjusted taxable income' has been used for clarity.

SME component

6.58 The SME income component of a company that becomes a PDF during a year of income is the SME assessable income of that year (see notes above) less the deductions that satisfy certain conditions.

6.59 Income derived from SME investments will be SME assessable income only if it is derived while the company is a PDF. Hence, only SME assessable income derived during the period from the time the company becomes a PDF and the last day of the year of income will be SME assessable income.

6.60 Deductions incurred by the company during the year of income will be taken into account in calculating the SME component if they satisfy both the following conditions:

·
they were allowable to the PDF for that year of income; and
·
they were taken into account in calculating the PDF component.

6.61 In effect, the same rate applies to part-year PDFs as to full-year PDFs. But it applies on the basis only of the deductions that are relevant to the PDF component - the income of the period during which the company was a PDF. [New subsection 124ZU(2)]

Unregulated investment component

6.62 The unregulated investment component will be the difference between the adjusted taxable income of the PDF (same as the PDF component - defined in subsection 6(1)) and the SME income component for that year of income (calculated under new section 124ZU). [New subsection 124ZV(2)]

6.63 This method of calculating the unregulated investment component will have the effect that only where the deductions allowable to the PDF for the PDF period exceed the SME component for that period, will the amount of the excess reduce the unregulated investment component. In other words, deductions relevant to the company's time as a PDF will be taken to reduce the SME component of income, and it is only when that has been fully absorbed that deductions will be taken to reduce the unregulated investment component of the company's income as a PDF.

6.64 The unregulated investment component of the taxable income of a PDF will not be limited to income derived from the investments prescribed in the PDF regulations. This component will include all income that is not SME assessable income. For example, it would include management fees derived by a PDF.

Allocating the capital gains and capital losses of a PDF

6.65 Special rules will apply to calculate the net capital gains of a PDF that is to be included in each component of taxable income. These special rules (contained in new Subdivision C) will be used to calculate the assessable capital gains of a company that is a PDF throughout the year of income, or becomes a PDF during the year of income and is still a PDF at the end of the year of income. [New section 124ZX]

6.66 The assessable income of a PDF will be divided into two classes for the purpose of:

·
calculating the amount of any net capital gain assessable to the PDF; and
·
ascertaining the class of assessable income to which the net capital gain is to be allocated.

6.67 The effect of new Subdivisions B and C will be that the amount of any overall capital gain allocated to the SME assessable class (under new section 124ZZB) will be included in the SME assessable income (under new subsection 124ZT(1)) from which the SME income component will be calculated (under new section 124ZU).

6.68 The basic rule is that capital gains in one class are reduced first by capital losses in that class and then by capital losses in the other, and that prior year capital losses are absorbed first against capital gains in the SME assessable income class.

6.69 New Subdivision C contains definitions of terms that will be used in calculating the assessable capital gains of each class of assessable income.

'ordinary 160Z gain amount' in relation to the disposal of an asset will be any capital gain that would be deemed for the purposes of Part IIIA of the Act (if that Part applied) to have accrued in respect of the disposal of the asset.

'ordinary 160Z loss amount' in relation to the disposal of an asset is any capital loss that would be deemed for the purposes of Part IIIA of the Act (if that Part applied) to have been incurred in respect of the disposal of the asset.

'overall 160Z gain' for each class of income is the amount by which the total of the capital gains calculated under section 160Z on the disposal of assets in the particular class of income for that year of income, exceeds total capital losses calculated under section 160Z on the disposal of assets in that class of income for that year of income.

'overall 160Z loss' for each class of income is the amount by which the total of the capital losses calculated under section 160Z on the disposal of assets in the particular class of income for that year of income, exceeds total capital gains calculated under section 160Z on the disposal of assets in that class of income for that year of income.

'prior year Part IIIA loss' means, in effect, the amount of any net capital loss of the PDF. A prior year Part IIIA loss will arise where the sum of the overall 160Z losses for both classes for the year exceeds the sum of the overall 160Z gains before any part of the prior year loss has been taken into account under new subsection 124ZZB(3).

'residual overall 160Z gain' means the overall 160Z gain (see above) less the overall 160Z loss (deducted under proposed subsection 124ZZB(2)). The residual overall 160 gain is reduced by the prior year Part III losses under proposed subsection 124ZZB(3).

'total ordinary 160Z gain amount' for a class of assessable income means the total of the ordinary 160Z gain amounts allocated to that class of income. The total ordinary 160Z gain amount will be used in ascertaining the overall 160Z gain or the overall 160Z loss for that class of assessable income.

'total ordinary 160Z loss amount' for a class of assessable income means the total of the ordinary 160Z loss amounts allocated to that class of income. The total ordinary 160Z loss amount is used in ascertaining the overall 160Z gain or the overall 160Z loss for that class of assessable income.

6.70 The steps in determining the net capital gain to be included in each class of assessable income for a year of income for a PDF are:

(1)
calculate the capital gain or capital loss (under section 160Z) arising on the disposal of each asset of the PDF ('ordinary 160Z gain amount'; 'ordinary 160Z loss amount');
(2)
determine the total of the ordinary capital gains of each class of income ('total ordinary 160Z gain amount');
(3)
determine the total of the ordinary capital losses of each class of income ('total ordinary 160Z loss amount');
(4)
for each class of assessable income, calculate the:

(a)
overall 160Z gain ('total ordinary 160Z gain amount' less 'total ordinary 160Z loss amount'); or
(b)
overall 160Z loss ("total ordinary 160Z loss amount" less total ordinary 160Z gain amount"); [new section124ZZA]

(5)
if a class has an overall 160Z loss, apply that loss in reducing any overall 160Z gain of the other class. (This reduced gain is termed 'residual overall 160Z gain') [new subsection 124ZZB(2)];
(6)
if there is a prior year net capital loss, that loss will be deducted first from the overall 160Z gains for the SME assessable income class, and then from the overall 160Z gains for the other assessable income class [new subsection 124ZZB(3)];
(7)
if there is an overall 160Z gain of a class remaining after the above reductions, the amount of the gain will be included in assessable income [new subsection 124ZZB(1)].

6.71 If the overall 160Z gain of both classes is reduced to nil, any remaining loss will be able to be carried forward as a "prior year Part IIIA loss" and available to reduce capital gains derived in future years.

6.72 The above rules for calculating assessable capital gains will apply to a company for a year of income if:

·
the company is a PDF for the whole of the year of income; or
·
the company becomes a PDF during a year of income and is still a PDF at the end of the year of income. [New section 124ZX]

6.73 All the assessable income of a PDF will be divided into two classes for the purposes of allocating capital gains and losses to a particular component of taxable income. These classes are:

·
SME assessable income; and
·
other assessable income. [New subsection 124ZY(2)]

6.74 The SME assessable income in new Subdivision C will have the same meaning as in new Subdivision B (see notes on "SME assessable income" above).

Other assessable income

6.75 The other assessable income of a PDF will be the sum of:

·
any non-CGT assessable income (see above) that is not included in the company's SME assessable income of that year of income; and
·
any assessable income allocated to the PDF under new section 124ZZB. [New subsection 124ZY(2)]

6.76 Net capital gains are included in assessable income under section 160ZO of the ITAA. However, for the 1994-95 and future years of income any net capital gains derived by a PDF will be included in the assessable income of a PDF under Division 10E and not under section 160ZO. [New section124ZZ]

Disposals of SME investments

6.77 If a company disposes of an SME investment and it is a PDF at the time of the disposal, the overall 160Z gain or overall 160Z loss for the SME class of assessable income will be calculated by taking .into account any ordinary 160Z gain or an ordinary 160Z loss (see notes above) arising on the disposal of the SME investment. [New subsection 124ZZA(1)]

Disposals of assets that are not SME investments

6.78 If a PDF disposes of an asset that is not an SME investment, any ordinary 160Z gain or an ordinary 160Z loss (see notes above) will be taken into account in calculating the overall 160Z gain or overall 160Z loss for the other class of assessable income. [New subsection 124ZZA(2)]

Section 51AAA - deductions

6.79 Section 51AAA of the ITAA operates to deny a deduction that would otherwise be allowable under the general deduction provisions of the ITAA (Subdivision A of Division 3 of Part III) where the deduction is allowable only because a capital gain has been included in the taxpayer's assessable income under section 160ZO.

6.80 Where a capital gain is included in the assessable income of a PDF under (new subsection 124ZZB(1)) but not under section 160ZO, the scope of section 51AAA will be extended to deny deductions that would otherwise be allowable under the general deduction provisions. [New section 124ZZC]

Section 160ZC - capital losses

6.81 Section 160ZC provides for the calculation of the capital losses that may be taken into account in calculating the net capital gains that are included in assessable income under section 160ZO. Net capital losses incurred by a PDF for the 1994-95 and future years of income will be taken into account in calculating the capital gains to be included in assessable income under Division 10E. Accordingly, for the purposes of section 160ZC a PDF will be taken not to have incurred a capital loss. [New section 124ZZD]

Income Tax Rates Act 1986

6.82 As a consequence of the announcement in the Working Nation Statement the taxable income of a PDF will be divided into two components:

·
the SME component which will be taxed at the rate of 15 per cent; and
·
the unregulated investment component which will continue to be taxed at the rate of 25 per cent.

6.83 The object of the proposed amendments to the Rates Act is to give effect to this announcement by reducing the rate of tax on the income a PDF derives from its investments in small and medium enterprises (SME income) from 25 per cent to 15 per cent. [Item 1 of Schedule 2]

6.84 Definitions of the following new terms will be included in subsection 3(1):

·
'SME income component'
·
'unregulated investment component'

6.85 These new terms will have the same meaning as in Subdivision B of the ITAA (see earlier notes). [Item 2 of Schedule 2]

6.86 The rate of tax payable by a PDF is specified in subsections 23(4C) and (4D). These provisions will be replaced by new provisions which will declare the rates of tax on the components of taxable income of a PDF. [Item 3 of Schedule 2]

6.87 For full-year PDFs, new subsection 23(4D) provides separate rates for the two possible components of their income:

(1)
15 per cent in relation to the SME component; and
(2)
25 per cent in relation to the unregulated investment component, which must be the balance of their income.

6.88For part-year PDFs, new subsection 23(4C) provides separate rates for the three possible components of their income:

(1)
15 per cent in relation to the SME component;
(2)
25 per cent in relation to unregulated investment component, which must be the balance of their PDF component; and
(3)
33 per cent in relation to the difference between the taxable income for the whole of the year of income and the PDF component.


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