Senate

Taxation Laws Amendment Bill (No. 2) 1995

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

CHAPTER 1 - State and Territory Bodies

Overview

1.1 As a result of an agreement between the Commonwealth and the States and Territories, the income tax and sales tax laws will be amended by Schedule 1 of the Bill to provide exemption for most state and territory bodies.

Summary of the amendments

Purpose of the amendments

1.2 The proposed amendments arise out of a desire on the part of the Commonwealth, State and Territory governments to clarify the tax treatment of wholly-owned state and territory bodies as part of the reform process to which all those governments are agreed. The amendments will:

exempt the income of wholly-owned state and territory bodies, except those specified in regulations, from income tax.
exempt goods for use by wholly-owned state and territory bodies from sales tax, unless the body is listed in regulations.

Date of effect

1.3 Income tax: The amendments will apply in respect of income of state and territory bodies for the year of income ended 30 June 1995 and subsequent years.

1.4 Sales tax: The amendments will apply to dealings with goods on or after the date that the Bill receives Royal Assent. Credits will be available for the period from 1 July 1994 to the date of Royal Assent.

Background to the legislation

1.5 Under the terms of an agreement between the Commonwealth and the States and Territories reached at the March 1994 Premiers' Conference, State and Territory governments are committed to introducing tax equivalent regimes for their trading enterprises. The Commonwealth has therefore undertaken to exempt them from Commonwealth income and sales taxes. The amendments will introduce greater certainty in the tax treatment of wholly-owned state and territory bodies (STBs) generally.

1.6 There will be one set of legislative amendments, but some specific STBs will be excluded from exemption by regulations. Different rules will apply for 1994-95 and for subsequent income years. The combined effect of the amendments and the regulations during the period 1 July 1994 to 30 June 1995 will provide clarity in the operation of the law but is not expected to change the tax status of many STBs. Generally, bodies which were exempt on 25 March 1994 (the date of the 1994 Premiers' Conference) will remain exempt, and bodies which were taxable at the date, mainly trading enterprises, will remain taxable. From 1 July 1995, regulations will no longer prescribe as taxable certain previously taxable STBs, those that can be regarded as trading enterprises subject to a tax equivalent regime.

Existing law

1.7 Many wholly-owned state and territory bodies are already exempt from income tax or sales tax, or both.

1.8 Paragraph 23(d) of the Income Tax Assessment Act 1936 exempts the revenue of 'public authorities' from income tax. Many public authorities are wholly-owned state or territory bodies. However, wholly-owned state or territory bodies are not necessarily public authorities.

1.9 Public authorities carry on some undertaking of a public nature for the benefit of the community or some section of it. They have some power or authority conferred on them by law in relation to their public undertaking that enables them to do things which those not so authorised cannot do. An entity which can make a profit for private interests, or contribute to a private gain, is never a public authority. (Renmark Hotel Incorporated v. FC of T (1949) 79 CLR 10; West Australian Turf Club v. FC of T (1978) 139 CLR 288, 78 ATC (4133). So no company with any shareholder representing private interests is ever a public authority. No entity whose assets can be distributed to private interests on a winding-up is ever a public authority.

1.10 Uncertainty has arisen in relation to the 'public authority' exemption in several ways. For example, as part of the process of micro-economic reform, states may wish to corporatise their STBs. The process of corporatisation could lead to liability to Commonwealth taxation for an otherwise wholly owned State or Territory body where the objects of the body no longer embrace 'public' purposes, or where the body no longer has any special power or authority denied to others.

1.11 Privatisation is not a source of uncertainty. Any degree of private interest in the entity means the entity is not a public authority.

1.12 Item 126 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Exemptions and Classifications Act) exempts goods for use by government authorities which are completely controlled by, and whose expenditure is exclusively borne by, an Australian government or governments. Paragraph 127(c) in Schedule 1 exempts goods for use by harbour boards, harbour trusts and maritime boards.

Explanation of the amendments

Income tax amendments

Scheme of Division 1AB

1.13 New Division 1AB contains a key principle [new section 24AK] which summarises the operation of the Division. Broadly, the division will exempt the income of wholly-owned State and Territory bodies (STBs) from income tax unless they are excluded STBs. New section 24AM will provide that the income of an STB will be exempt from income tax unless new section 24AN applies. New section 24AN removes excluded STBs and State Government Insurance Offices (SGIOs) from the income tax exemption.

1.14 An SGIO is generally exempt from income tax except on its life insurance and superannuation business (see subsection 112A(1A)).

1.15 A diagram or decision tree has been inserted into the Act. It helps in determining whether a body is exempt from tax under new Division 1AB. [New section 24AL]

State and Territory bodies

1.16 The new income tax exemption will apply to STBs. An STB will be a body which is 'controlled' by one or more government entities. In essence, such bodies are wholly creatures of the States or Territories.

1.17 For the purposes of this legislation, a body will be 'controlled' by one or more State or Territory governments, if it satisfies one of the following tests:

the body is a company solely limited by shares and all of the shares are beneficially owned by one or more States or Territories, including any entities that are themselves exempt because they are controlled by the States or Territories [new section 24AO] . This will include the situation where a Governor, Minister or head of a department holds all the shares on behalf of the government, or where a body is a wholly owned subsidiary of another STB. The requirement of new paragraph 24AO(b) that all shares be beneficially owned by one or more government entities is not limited to voting shares. The issuing of preference shares to the public, for example, will disqualify a body from being an STB under new section 24AO . The body will also not be exempt under paragraph 23(d) as it is making profits for private interests.
the body is established by State or Territory legislation and is not a company solely limited by shares. If the Act establishing the body covers the following matters, it must do so in particular terms:

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where the Act refers to distribution of profits, it provides that profits must be distributed only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory. If the Act also refers to distribution of net assets on dissolution, it provides that assets must be distributed similarly [new section 24AP] . If the enabling legislation provides for profits to go to government but assets on dissolution to go to private interests then the body is not an STB under new section 24AP ;
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if the Act refers to the power to appoint and dismiss the board, directors or other governing persons of the body, it gives that power only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory [new section 24AQ] ; and
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if the Act refers to the power to direct the conduct of affairs of the body, it gives that power only to one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory [new section 24AR] . This requirement has a very broad ambit and has been intentionally given that broad ambit. The power need not be a specific power to give operational directions, as a more general power of direction of the conduct of the body's affairs is sufficient.

the body is not a company solely limited by shares and is not established by a State or Territory Act - for instance, a body owned by another STB which was set up without specific legislation, or a trust fund set up under a deed, rather than legislation. For a body which is not established by State or Territory legislation to qualify as an STB, it will have to be shown that all legal and beneficial interests, and all rights and powers (if any) to direct the affairs of the body, including appointments and dismissals, belong to one or more States or Territories, including any entities that are exempt themselves because they are controlled by a State or Territory [new section 24AS] .

Power to appoint or dismiss

1.18 The requirement in new sections 24AQ and 24AS that one or more States or Territories, including any entities that are themselves exempt because they are controlled by a State or Territory, have the power to appoint or dismiss a governing person or body would be satisfied, for example, if members of the governing body had to be nominees of such governments or entities. It would not be satisfied where, for example, a member of a governing body must be a person occupying a particular position (eg. the president of a State Law Society) and no such government or entity could reject that person.

1.19 There may be cases where the concepts of 'governing person' and 'governing body' overlap. For example, where a government entity is able to appoint only one director of a governing body but that director has overriding powers (eg. power of direction of board decisions) then that government entity has the power to appoint the 'governing person' of that STB.

Government entity

1.20 New sections 24AO, 24AP, 24AQ, 24AR and 24AS use the concept of 'government entity' to ensure that entities not directly government controlled will themselves be exempt only if any government controlled entities involved are themselves exempt under these provisions. In new Division 1AB a 'government entity' means a State or Territory ('Territory' means the Northern Territory and the Australian Capital Territory) or another STB that is exempt under these provisions. [New section 24AT]

1.21 In addition certain other bodies can be taken to be STBs where the STB is established by state or territory legislation and it is not a company solely limited by shares [new sections 24AQ, 24AR and 24AS] . In those cases, where the power to appoint, dismiss or direct the governing body of an STB is given to or held by a Governor, Minister or Department Head (or a combination of any of those people) then the power is taken to be given to or held by a government entity [new section 24AU] .

1.22 New section 24AU was inserted in order to put beyond doubt that such persons are acting as government entities when they exercise powers such as those of appointment, dismissal, voting and direction. Otherwise they could be misunderstood as exercising those powers personally rather than as agents of the State or Territory. It is not necessary to include similar provisions to apply to new sections 24AO and 24AP . Any such shares or interests in profits and assets would clearly be vested in those individuals in right of the State or Territory; in other words, the State or Territory would have the interest in the shares, profits or assets.

Excluded STB

1.23 Certain STBs have been excluded from the operation of new Division 1AB . These are known as excluded STBs and they are listed in new section 24AT .

1.24 The first type of excluded STB are STBs which have been prescribed as excluded STBs in relation to a particular time. An STB may be prescribed by regulation. However the Commonwealth will only prescribe an STB as an excluded STB if all States and Territories consent to the STB being prescribed [new subsection 24AV(1)] . That is, before an STB is prescribed not only must the State or Territory which "controls" that STB consent to it being prescribed but so must all other States and Territories. An STB so prescribed is subject to taxation unless the entity is exempt under another provision (except paragraph 23(d)).

1.25 The provision does not require the Commonwealth to prescribe an STB merely because all states and territories consent. New subsection 24AV(1) merely states the requirement to be satisfied before the Commonwealth may prescribe the STB. The Commonwealth must itself agree that an entity should be prescribed.

1.26 Because new Division 1AB will be effective from 1 July 1994, some regulations prescribing STBs to be excluded STBs may need to be retrospective. It is necessary, therefore, to insert a provision overriding the normal operation of Section 48 of the Acts Interpretation Act 1901 [new subsection 24AV(2)] . As far as is applicable, section 48 requires that regulations have no effect before the date of notification where the regulations would prejudice the rights of a person (where those rights existed at the date of notification) or would impose liabilities on a person in respect of anything done or omitted to be done before the date of notification.

1.27 The second type of excluded STB is a municipal corporation or other local governing body (within the meaning of paragraph 23(d)) [new section 24AT] . Local Government may be created or imposed by State or Territory legislation and local government entities may be creatures of a State or Territory. It was not the intention of the Commonwealth, States and Territories to subject such entities to tax equivalent regimes. Therefore, despite the fact that they may technically be STBs they have been excluded and their treatment will remain as if new Division 1AB had not been enacted.

1.28 Public educational institutions (within the meaning of paragraph 23(e)), public hospitals (within the meaning of paragraph 23(ea)) and superannuation funds are also excluded from the operation of new Division 1AB . Such bodies may otherwise be STBs because they are created under State or Territory legislation or are 'controlled' by State or Territory governments. The treatment of these entities under income tax and sales tax law will remain unchanged by the amendments contained in this Division.

1.29 Because an excluded STB is not a 'government entity', an entity wholly or partly owned or controlled by an excluded STB is also an excluded STB.

Consequential amendments to the Income Tax Assessment Act 1936

1.30 Because State and Territory bodies which used to claim income tax exemption under paragraph 23(d) will now claim exemption only under new section 24AM , paragraph 23(d) will have limited application. There are several sections in the Income Tax Assessment Act which have further tax effects because of the exemption provided by paragraph 23(d). The tax effect may be on the public authority itself or on persons who deal with that public authority. Those sections need to be amended to include STBs and new section 24AM .

SGIOs

1.31 Because SGIOs are to be taken to be STBs (and consequently so are any subsidiaries of SGIOs) but are subject to tax on certain income, special provision has to be made for them to ensure that their tax treatment remains the same. In order to ensure that where an SGIO changed its form (for instance by corporatising) its status as an SGIO would not be in doubt, it is necessary to amend the definition of SGIO in subsection 6(1). The reference to public authority is omitted and replaced with 'an STB (within the meaning of Division 1AB of Part III)' [item 2] . This gives SGIOs the benefit of the clarification of exempt status of all STBs.

Public authorities

1.32 Because the income of STBs is to become exempt from tax under new section 24AM , or taxable if they are excluded STBs, it is necessary to amend paragraph 23(d). Otherwise some excluded STBs might nevertheless be exempt as public authorities, contrary to the agreement between the Commonwealth, the States and Territories. The amendment will ensure that STBs obtain exemption from income tax only under new section 24AM and not paragraph 23(d). [Item 3]

Intercorporate dividend rebate

1.33 Where a company receives a dividend from a company the income of which is exempt under, amongst other provisions, paragraph 23(d) the rebate is disallowed. Because paragraph 23(d) will now have no application to most STBs it is necessary to include the new exemption provision, otherwise sub-sections 49(9) and 46A(16) will not apply correctly to dividends from STBs exempt from income tax under the new exemption provision. [Item 4]

Research and development

1.34 Section 73CB precludes a deduction for research and development expenditure where it is incurred to a government body and some return is guaranteed. To ensure that the provision covers all government bodies it is necessary to include STBs as defined in new Division 1AB in the definition of 'government body'. [Item 6]

1.35 Section 73C reduces a deduction for research and development expenditure where the taxpayer claiming the deduction receives or becomes entitled to receive a recoupment of or grant in respect of the whole or any part of that expenditure by or from the Commonwealth, a State or Territory or an authority constituted by or under a law of the Commonwealth, a State or a Territory. To ensure that the provision has its intended effect it is necessary to amend paragraph 73C(2)(b) to include an STB as a potential source of such a recoupment or grant. [Item 7]

Public trading trusts

1.36 Division 6C of the Act deals with the income of certain Public Trading Trusts. A unit trust may be a public unit trust for the purposes of these provisions where an entity which is exempt from income tax holds a beneficial interest in 20% or more of the property or income of the trust, or during the year concerned was paid 20% or more of the moneys paid by the trust to unit holders, or an arrangement exists whereby such an entity could have been given such a holding during the year or could have been entitled to 20% or more of any moneys paid to unit holders during the year concerned.

1.37 The definition of exempt entity in Division 6C includes a body to which paragraph 23(d) applies. With the introduction of new section 24AM that paragraph will not apply to most STBs. It is necessary therefore to amend the definition of 'exempt entity' in section 102M, to include STBs the income of which is wholly exempt. [Item 8]

Income diverted under tax avoidance schemes

1.38 Division 9C makes liable to tax, certain organisations and funds which would otherwise be exempt from income tax. The Division applies where an exempt entity derives income from property which it has acquired as part of a tax avoidance agreement. If the exempt entity provided consideration for the property which is greater than that which it would have provided had it been taxable as a public company then section 121G operates to include the income derived.

1.39 The Division applies to bodies which are exempt under 'relevant exempting provisions' which are listed in section 121F. Paragraph 23(d) is one such exempting provision. As new section 24AM largely supersedes paragraph 23(d) for STBs it is necessary to include new section 24AM in the list of relevant exempting provisions in section 121F. [Item 9]

Capital expenditure on traveller accommodation

1.40 Division 10C provides for write-off deductions for capital expenditure incurred on construction in Australia of buildings used to provide short-term accommodation for travellers where work commenced before 18 July 1985 or after 26 February 1992.

1.41 Subsection 124ZC(6) disallows that deduction where the taxpayer enters into an arrangement with a tax-exempt body to pay an amount or transfer property with the aim of reducing the taxpayer's tax liability. The definition of 'exempt body' in subsection 124ZA(1) includes a body association or fund to which paragraph 23(d) applies.

1.42 New section 24AM will apply to many entities to which paragraph 23(d) now applies. It is necessary therefore to include in the definition of 'exempt body' an STB the income of which is wholly exempt. [Item 10]

Capital gains tax

1.43 Part IIIA of the Act deals with capital gains and losses. Section 160K defines 'relevant exempting provision'. Part IIIA has certain consequences for bodies which are exempt under a 'relevant exempting provision'. For example, such bodies cannot accrue capital gains or losses. Paragraph 23(d) is included as a 'relevant exempting provision'. It is necessary to include new section 24AM as a 'relevant exempting provision' in order to ensure that the definition covers STBs which are exempt from tax. [Item 13]

Superannuation funds

1.44 Part IX of the Act deals with the taxation of superannuation funds. Section 269B provides that nothing in certain exempting provisions (including paragraph 23(d)) exempts a trustee of an eligible entity from liability to tax as provided by Part IX.

1.45 Section 269B should have the same effect on STBs. So the section will be amended to include a reference to new section 24AM. [Item 14]

Consequential amendment to the Development Allowance Authority Act 1992

1.46 Chapter 3 of the Development Allowance Authority Act 1992 deals with infrastructure borrowings. Paragraph 93I(2)(e) provides that a borrower must not be a government body or government owned at the time of the borrowing. Government body is defined in subsection 93D(1) to include 'a body to which paragraph 23(d) of the Tax Act applies'. With the introduction of new section 24AM there will be very few such bodies. It is necessary therefore to amend the definition to include STBs the income of which is wholly exempt from tax, in order to ensure that those bodies exempt from tax as STBs, like those exempt from tax as public authorities will be included in the definition of 'government body'. [Item 15]

Special consequential amendments

1.47 Some STBs may be prescribed as excluded STBs from 1 July 1995 onwards. Although these STBs will become taxable, certain restrictions are to be placed on these STBs in order to minimise possible costs to the revenue. The adverse revenue consequences of allowing STBs to be prescribed in the year ended 30 June 1995 are to be disregarded.

No carry forward losses

1.48 New Subdivision B of new Division 1AB has been inserted to ensure that any losses made by an STB in the period from 1 July 1995 until the body is sold to private interests, are extinguished when the body is privatised.

1.49 New section 24AY prevents an STB's losses being carried forward from any year of income after 1July 1995 for which the body is an STB to any later year for which the body is not an STB.

1.50 Special provisions have been inserted to deal with the situation where a body ceases to be an STB during a year of income. New section 24AW ensures that any losses incurred during that year, but before the body ceases to be an STB, are not used in the calculation of taxable income for the 'cessation year'. It does this by referring to certain sections of Subdivision B of Division 2A in Part III of the Act (the current year loss provisions).

1.51 The current year loss provisions (sections 50A-50N) are designed to prevent profits derived by a company in one part of a year of income when owned by one set of shareholders from being offset by losses incurred by the company during another part of the year of income when the company is owned by a different set of shareholders. Those provisions ensure that current year losses are not taken into account in calculating taxable income for the year unless the company satisfies a continuity of ownership test or continuity of business test.

1.52 In effect when a body ceases to be an STB during a year of income, that year of income is divided into 'relevant periods'. The 'relevant periods' are treated as if they are separate years of income. In the 'relevant period' in which the body is an STB the STB cannot make a loss. This is due to the operation of new paragraph 24AW(e) which states that the 'notional loss' in the 'relevant period' before cessation is nil.

1.53 The term 'relevant period' as used in new Subdivision B of new Division 1AB has the same meaning as in Subdivision B of Division 2A. [New section 24AZ]

1.54 The 'notional taxable income' of each 'relevant period' (or 'notional loss' in the case of the 'relevant period' after cessation) is calculated taking into account income and deductions attributable to each period, either specifically or by apportionment over the whole year. General domestic losses will be attributed to the relevant period before cessation rather than apportioned over the entire year [new paragraphs 24AW(f) and (g)] . This ensures that prior year losses do not contribute to the body making a loss in the 'cessation year'.

1.55 These amounts are then added together and from them are deducted the 'eligible notional loss' for the year (which, because of the operation of new paragraph 24AW(e) can only be a loss made in a 'notional period' after cessation) and certain full year deductions. The result is the taxable income of the year.

1.56 In order to ensure that new section 24AW has automatic operation, the discretion not to apply Subdivision B of Division 2A has been removed. [New paragraph 24AW(c)]

1.57 For former STBs that are companies, the current year loss provisions will apply normally to any periods after the cessation year. As general domestic losses are specially dealt with for the cessation year, the current year loss provisions are modified in that respect for any periods during that year that happen after the company ceases to be an STB.

Special CGT provisions

1.58 Because Subdivision B of Division 2A was enacted before Part 111A, special provision is necessary to ensure that capital gains and losses are correctly apportioned to each 'relevant period'. New section 24AX ensures that:

capital losses made in the relevant period before the body ceases to be an STB are disregarded [new subsection 24AX(2)] ; and
a capital loss for the 'cessation year' is not available to the body in a following year unless the loss for the 'relevant period' after cessation exceeds the gain for the 'relevant period' before cessation. [New subsection 24AX(5)]

No deduction for unfunded superannuation contributions

1.59 New section 24AYA is inserted to ensure that superannuation contributions made after such an STB is sold to private interests are not tax deductible to the extent that they are in respect of liabilities that had accrued during the period from 1 July 1995 until it is sold to private interests [new section 24AYA] . This is achieved in two steps. First, no deduction at all will be allowable to the body under section 82AAC of the Income Tax Assessment Act 1936 (the Act) unless it obtains a certificate from an actuary, stating the actuarial value of any unfunded superannuation liabilities which had accrued from 1 July 1995 until the time of the sale [new subsections 24AYA(2) and (3)] . The certificate must be obtained before the body lodges its tax return for the year in which it ceases to be an STB or within such further time as the Commissioner allows [new subsection 24AYA(4)] .

1.60 Secondly, if there is an amount of unfunded liabilities, deductions for superannuation contributions will be denied until, in total, they exceed the amount of the unfunded liabilities [new subsections 24AYA(5) and (6)] . This is achieved by providing for a threshold amount of superannuation contributions that must be made in a year before a deduction will be available. The threshold is called the 'unfunded liability limit' [new subsection 24AYA(7)] . In its first year of operation the limit will be the certified amount of unfunded liabilities. If the limit is not exceeded in the first year, it will be reduced in the second year by the amount of superannuation deductions denied under new section 24AYA in the first year. The limit will be progressively reduced in this way until it is extinguished.

1.61 Because it is possible to make more than one contribution in a year and each separate contribution is potentially deductible, where the sum of all superannuation contributions in a year exceeds the deduction limit new subsection 24AYA(6) allocates a part of the deduction limit to each superannuation contribution made in the year. This has been done purely as a technical matter and simply has the effect of allowing a deduction for the amount of contributions, in total, that exceeds the deduction limit. (The alternative, of denying deductions for contributions in a year until the deduction limit is reached, would be more complex and would be likely to produce undesirable timing and apportionment difficulties.)

Tax benefit transfers

Section 51AD

1.62 Section 51AD operates to deny depreciation and other deductions to the owner of an asset if a tax-exempt entity is leasing the asset, has the right to use the asset, or has effective control of the asset and the whole or predominant part of the purchase price or construction cost of the property is financed by non-recourse debt. Non-recourse debt is debt where the rights of the lender against the borrower in the event of default are limited wholly or predominantly to the property, mortgages or other securities over the property the subject of the lease or the income derived from that lease.

1.63 Amendments to section 51AD will ensure that excluded STBs which have been prescribed as taxable ('prescribed excluded STBs') will be taken to be exempt entities for the purposes of Section 51AD. [Item 5]

Division 16D

1.64 Division 16D (sections 159GE to 159GO) places restrictions on the tax advantages of certain non-leveraged finance leases. In these arrangements the lessor of property receives from an exempt public body lessee, some of the tax benefits that would have been available to the lessee if it had owned the property and been subject to tax. The exempt public body also assumes many risks and benefits associated with ownership of the leased property.

1.65 The effect of the provisions contained in Division 16D is that, amongst other things, tax deductions related to the property are not allowed to the taxable lessor. Instead the lessor's position for tax purposes is recast, broadly as if the arrangement were a loan.

1.66 The definition of 'exempt public body' in subsection 159GE will be amended to include an STB (within the meaning of Division 1AB) the income of which is exempt from tax [item 11] . This a necessary consequential amendment in order to ensure that Division 16D has its intended effect.

1.67 The Division will also be made to apply to STBs which have been prescribed as taxable ('prescribed excluded STBs'). [Item 12]

Definition of 'prescribed excluded STB'

1.68 Several provisions affect STBs which are remaining in the Commonwealth tax net after 1 July 1995. For convenience sake such entities are called 'prescribed excluded STBs' because they are excluded STBs which are prescribed as taxable by regulation. A definition of 'prescribed excluded STB' is contained in proposed new section 24AZ .

Sales tax amendments

1.69 A new exemption Item, Item 126A , will be inserted into Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (Exemptions and Classifications Act). The effect of the exemption Item will be that goods for use by certain wholly owned State and Territory bodies (STBs) will be exempt from sales tax. [Items 20 and 22]

1.70 The definition of an STB for sales tax purposes will be the same as the definition of an STB for income tax purposes. The tests discussed in paragraphs 1.16 to 1.22 will apply in relation to sales tax, as well as to income tax. [Item 19]

1.71 'Excluded STBs', including STBs prescribed by regulation, will not be eligible for exemption. The definition of 'excluded STB' for sales tax purposes will be the same as the definition for income tax purposes, except with regard to State and Territory superannuation funds (see paragraphs 1.23 to 1.25 and 1.27 to 1.29). Superannuation funds which are STBs will be 'excluded' under income tax law, but will qualify for sales tax exemption, if they are not prescribed or otherwise excluded. Regulations will be made separately under income tax and sales tax laws to prescribe 'excluded STBs', with the result that STBs which are taxable under sales tax law may be exempt from income tax, and vice versa.

1.72 The existing exemptions for government authorities and harbour boards and trusts and maritime boards will be unchanged, except that they will not apply to STBs. This will ensure that government authorities and harbour boards etc. which are not STBs will not lose their current exemptions. Nevertheless, 'excluded STBs' will have access to exemptions from which they have not been specifically excluded, so that, for instance, public educational institutions will still have access to the exemption for schools and universities. [Items 21 and 23]

1.73 The new exemption Item 126A will come into effect on the day that the Bill receives the Royal Assent. For the period from 1 July 1994 until Royal Assent, there will be transitional credit grounds which will apply to tax borne on dealings which would have been exempt, if the exemption for STBs had been in effect at the time of the dealings. Credits will not be available to prescribed STBs. There will be two separate credit grounds, to take account of the two different regulations which will be required - one to cover the period 1 July 1994 to 30 June 1995, and one to cover the period 1 July 1995 to the date of Royal Assent. Credits will not be paid until these regulations have been made, and a claimant will only be able to claim a credit if the tax borne has not been recouped from another person.

1.74 Many goods which are exempt under exemption Item 126 and paragraph (c) of subitem 127(1) of Schedule 1 to the Exemptions and Classifications Act will be exempt under the new exemption Item 126A when it takes effect. The Bill therefore contains a transitional provision which will translate periodic quotations under Items 126 and 127 into quotations under Item 126A, if Item 126A would have applied to the dealing if that Item had been in effect when the dealing occurred. [Item 25]


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