Explanatory Memorandum
(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)Chapter 10 - Substantiation
This chapter explains how the rewritten substantiation provisions will be included in the Income Tax Assessment Bill 1996.
Overview of this chapter
This chapter discusses the rewrite of the rules for substantiating work-related expenses and the rules for calculating deductions for car expenses.
These rules have already been rewritten by the Tax Law Improvement Project and are currently in the Income Tax Assessment Act 1936 . They are being relocated in the new Income Tax Assessment Act.
This chapter discusses the minor changes that are proposed to make them consistent with the style of the new Act.
Background
The substantiation provisions of the Income Tax Assessment Act 1936 were the first to be rewritten by the Tax Law Improvement Project, in 1994. The rewritten provisions were included in the existing Act by the Tax Law Improvement (Substantiation) Act 1995 and apply from the 1994-95 income year.
In rewriting the substantiation provisions, it was noted that they serve two quite different functions.
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- They detail the records that a taxpayer must keep to claim a deduction for work-related expenses.
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- For car expenses, they contain the methods from which a taxpayer must choose to calculate deductions.
These distinct functions made it impracticable to rewrite the provisions as one subject matter. As a consequence, the car expenses and substantiation provisions were separated and placed in separate Schedules to the Income Tax Assessment Act 1936 . The car expenses rules are in Schedule 2A and the substantiation rules are in Schedule 2B.
The provisions were placed in Schedules to the existing Act to facilitate their relocation as soon as the new Act was available. That opportunity is now being taken.
Transferring the substantiation and car expenses rules to the new law
The Income Tax Assessment Bill 1996 includes the rewritten car expenses rules [ Division 28 in the Bill] and the rewritten substantiation rules [Division 900] .
In transferring them from the Schedules in the existing Act to the proposed new Act, some minor changes were required to reflect further drafting and design improvements developed since they were rewritten.
Guides to the new law
Schedules 2A and 2B to the existing Act use key principles statements to summarise the main features of each segment of the law. Some of the key principles include operative provisions (that is, provisions which have legal effect rather than being only a summary). As it is intended that the new law will adopt explanatory Guides, which are not operative provisions, rather than key principles statements, it is necessary for consistency to transfer any operative provisions into the main body of the law. Some explanatory material is also being relocated.
The following table shows the relocation of provisions:
| Section of existing Assessment Act | Clause of this Bill |
|---|---|
| 1-3 (Overall key principle) | 28-12 (Car expenses) |
| 7-1 (Key principle - Keeping a log book) | 28-110 (Steps for keeping a log book) |
| Section of existing Assessment Act | Clause of this Bill |
|---|---|
| 6-1
(Key principle - Travel records)
|
|
| 7-1 (Key principle - Retaining records) | 900-165 (Retain records for 5 years) |
| 9-1 (Key principle - Award transport payments) | 900-215 (deducting an expense related to an award transport payment) |
Use of terms expense, expenditure and loss or outgoing
Before the changes made by the Tax Law Improvement (Substantiation) Act 1995, the substantiation provisions defined an expense as including a loss or outgoing . This extended meaning of expense was not carried into the Schedules to the present Act, but will now be restored by this Bill.
Placement of definitions
All defined terms used in the Bill will be listed in clause 995-1. Each listed term will either:
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- be accompanied by its defined meaning; or
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- direct the reader accurately to where the term is defined.
The detail of many definitions will be found outside the Dictionary. This is because they are specific to only a particular segment of the law, and it is more convenient and helpful to understanding of readers if the definition is located where it is most relevant.
Some definitions about car expenses have been relocated. The following table shows the placement of relocated definitions.
| Definition, and location in existing Act | Location in this Bill |
|---|---|
| Car | |
| subsections 11-1(1) and (2)(a) | Dictionary |
| subsections (2)(b) and (3) | Clause 28-164 |
| Car expense - section 11-2 | Clause 28-13 |
| Holding a car - section 11-3 | Subclause 28-90(6) |
| Owning a car - section 11-4 | Clauses 28-1, 28-12, 28-45 and 28-90 |
Transitional arrangements
The changes will apply from the 1996-97 income year [clause 4-1 of the Income Tax (Transitional Provisions) Bill 1995].
Clause 28-100 of the Income Tax (Transitional Provisions) Bill 1995 will ensure that taxpayers who complied with log book requirements of Schedule 2A of the 1936 Act, or with the provisions it replaced, are treated as:
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- having used the log book method; and
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- having kept a log book
for the purposes of the 1996 Bill.
Log books are available as one method of substantiating the deductibility of car expenses. The pattern of use that a log book shows can be used to substantiate the deductibility of car expenses for up to 5 income years. Clause 28-100 will mean that taxpayers won't have to keep a new log book until the 5th year after they kept their last one, even if it was kept under the previous law.