House of Representatives

Income Tax Assessment Bill 1996

Income Tax Assessment Act 1997

Income Tax (Consequential Amendments) Bill 1996

Income Tax (Transitional Provisions) Bill 1996

Income tax (Transitional Provisions) Act 1997

Explanatory Memorandum

(Circulated by authority of the Treasurer,the Hon. Peter Costello, MP)

Chapter 11 - Dictionary

This chapter explains how the Income Tax Assessment Bill 1996 deals with definitions, and the role of the Dictionary in helping readers to find defined terms.

Overview of this chapter

This chapter explains Chapter 6 of the Income Tax Assessment Bill 1996 - The Dictionary.

It discusses in general terms how the Bill proposes to deal with defined terms.

It then explains changes that the Bill proposes to make to terms defined in the Bill compared with present definitions.

A. Summary of the new law

Background

The Income Tax Assessment Act 1936 has nearly 5000 defined terms spread throughout the Act. The main problems for readers in following the definitions have been:

·
the large number of terms which have been given a meaning other than their ordinarily understood meaning;
·
knowing whether a term used in the law is a defined term;
·
if a term is defined, knowing where to find the definition;
·
some terms (such as 'associate' which is given many separate definitions in the present law) have a different meaning depending on where they appear in the Act.

Aims of the Bill

The Bill will:

·
provide a central point where readers can readily find, or be directed to, definitions of terms used in the Bill;
·
clearly identify defined terms wherever they are used in the law;
·
avoid giving an expression or word a different meaning in different parts of the Act;
·
avoid defining terms unnecessarily if their underlying meaning is clear;
·
attempt to ensure that terms used in the law are reasonably indicative of underlying meanings or concepts; and
·
remove duplication by ensuring that a term is defined only once.

The Dictionary

The Dictionary, located at the end of the Bill (in Chapter 6), will be the central reference point for locating the meaning of defined terms used in the new law.

All defined terms used in the Bill will be listed in clause 995-1. Each listed term will either:

·
be accompanied by its defined meaning; or
·
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.

How to identify a defined term

All defined terms (except for a small number of frequently used basic terms) will be identified by the symbol *, which will appear in front of the term the first time it is used in each subclause. However, a defined term will not be asterisked in non-operative material for example, headings, Guides, notes, examples, or navigational help [clause 2-15] .

There will be a note, at the foot of each page of the new Act, telling readers that the asterisked terms are located in the Dictionary, at section 995-1.

The basic terms

Some terms are used so frequently in the law that it would distract readers if their status as a defined term is highlighted by an asterisk each time they are used.

These basic terms fall into 2 categories:

·
Key participants in the income tax system: you, Commissioner, person, entity, individual, company, partnership, trustee and Australian resident.
·
Core concepts: income tax, this Act, income year, taxable income, assessable income, deduct/deduction, assessment and amount .

Application of defined terms

Definitions in the Dictionary apply only to the Income Tax Assessment Bill 1996, and not to the Income Tax Assessment Act 1936, unless the 1936 Act expressly says otherwise [clause 995-1(2)].

Conversely, definitions in the 1936 Act will not apply to the 1996 Bill, except where a definition in the Bill expressly adopts the meaning in the 1936 Act.

Reducing the number of defined terms

The Bill will omit a number of definitions which are unnecessary because their ordinary meaning can be relied on. These terms are: agreement, expenditure, expense, land, market value, paid, property and provide .

B. Discussion of changes

The rest of this chapter discusses the commonly used definitions listed in the Dictionary.

If this Bill will change a term's meaning, there is an explanation of the effect of the change. A change in a term's meaning has no effect on parts of the law which have not yet been rewritten.

In the following explanations:

No change means no change in meaning from the 1936 Act, although the words may have been changed to use a clearer or simpler style.

New label, previously '[word or expression]' means that a concept called '[word or expression]' in the 1936 Act has been given a new label in the 1996 Act.

New term means the term is not defined in the 1936 Act.

100% subsidiary

New label, previously subsidiary company which is defined in subsections 80G(2) and (3) of the 1936 Act. The concept is unchanged.

adopted child

No change.

amount

Will specifically include a 'nil amount'. This is a drafting device to avoid expressly mentioning zero or nil when referring to amount .

arrangement

In the existing law, arrangement is used in a defined sense predominantly for anti-avoidance purposes but also in non-avoidance provisions.

The Bill will adopt the most modern definition in the 1936 Act, from the reportable payments system (section 220AC).

Unlike the most common definition of arrangement (eg. see subsection 26AJ(11) in the 1936 Act), the definition will not mention any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise . When this wider concept is relevant, which is usually in an avoidance context, the defined term scheme will be substituted.

In this Bill, arrangement is used in the capital works provisions [clauses 43-55 and 43-170] and in the losses provisions [Subdivision 165-D] .

When it is used in this Bill, the term will now include a reference to a promise or undertaking . Very few, if any, kinds of arrangements will be affected by standardising the definition which, like the main provisions of the Bill, applies on a fully prospective basis.

assessment

No change.

assessable income

No change.

associate

There are 15 different definitions of associate in the 1936 Act. To standardise them, the Bill will adopt the definition in section 318 of the 1936 Act, which has generally been adopted in new provisions since it was enacted in 1991.

In this Bill, associate is used in 2 capital works provisions [Division 43] . It has a wider meaning than the current definition in subsection 124ZF(1). For example, for an individual the current definition only includes a spouse, parent or child of that person but the proposed definition would also include other relatives, a partner, a spouse or child of a partner and a trustee of a trust if the person benefits under the trust .

However, this will have no significant practical effect because:

·
Clause 43-170, which will effectively deny a deduction for capital works used mainly for residential accommodation by you or an associate, contains an exception for arm's length dealings.
·
Subclause 43-75(3) is a new rule and, therefore, the meaning of associate does not alter the existing law.

Australian law

New term, replaces the often used phrase law of the Commonwealth, a State, or a Territory , which is not defined in the 1936 Act.

Australian resident

New label, previously resident/resident of Australia.

Australian source

New term. Used instead of phrases like derived from a source in Australia .

business

No change.

car

There are 4 different definitions in the 1936 Act, notably those in sections 82KT(1) and 11-1 of Schedule 2A.

The definition used in the Bill distils the main ideas in those definitions. However, it doesn't mention the specific forms of car those definitions refer to (eg. station wagons and panel vans) because they are all within the general description of a motor vehicle designed to carry a load of less than 1 tonne or fewer than 9 passengers .

Car is used in the Bill only in the context of car expenses [Division 28] and substantiation provisions [Division 900] . Rather than define car to exclude taxis taken on hire and other vehicles taken on hire under particular agreements, as does the present law, clause 28-165 will provide that the methods used for deducting car expenses don't apply to cars that are taxis or such vehicles taken on hire. The effect of those provisions will not be changed by the new definition.

child

No change.

Commissioner

No change.

Commonwealth law

New term, used instead of law of the Commonwealth which is not defined in the 1936 Act. Used in defining Australian law .

company

No change.

constitution

New label, previously constituent document .

deduct

New term. Explained in Chapter 4 of this Explanatory Memorandum.

deduction

New label, previously allowable deduction .

derive

In the 1936 Act, derive is formally defined only in Division 13 and that inclusive definition does not extend its ordinary meaning. However, section 19 deems a person to derive income or money, although it is not actually received, if it is dealt with at the person's direction or on their behalf.

In the Bill, derive is not given a particular meaning. However, in working out when an entity derives an amount of ordinary income, the constructive receipt rule in subclause 6-5(2) - which corresponds to section 19 - must be considered. This causes no change to the law.

dividend

No change.

dual resident investment company

No change.

entity

This term will be used as a catch all for any individual or body. It will be used in contexts where it is appropriate to refer to such a wide grouping. For example, entity can be used in phrases such as the assets were acquired from another entity or income from the provision of services by the company to an entity .

New Division 9 lists those entities that must pay income tax.

The definition will bring together the elements of entity in the different definitions throughout the 1936 Act. Most of these definitions cover:

·
a company;
·
a partnership;
·
a person in the capacity of trustee; and
·
any other person.

Although not specifically stated, the definitions also include unincorporated associations (which are included within the definition of a company), individuals (who are persons), and bodies politic (who are also legal persons). The new definition will specifically include these.

In addition, the new definition will include:

·
a trust; and
·
a superannuation fund.

The concept of an entity also distinguishes between the different capacities in which a legal person may act. For example, an individual acting in the capacity of a trustee will be treated as a separate entity from that individual acting in a personal capacity. This will remove the necessity to continually state that a particular provision only applies to an individual otherwise than in the capacity of trustee.

exempt Australian government agency

New term. It will cover the Commonwealth, States and Territories. It will include Australian government agencies which are exempt from income tax because of a provision listed in the definition of relevant exempting authority (section 160K) of the capital gains provisions, eg. a municipal authority, a local governing body, a public authority constituted under an Australian law.

This will cause no change to the law.

exempt foreign government agency

This is a new term covering foreign governments and foreign government agencies, similar in scope to exempt Australian government agency (see above).

exempt income

The meaning will be clarified. See the detailed explanation in Chapter 4 of this Explanatory Memorandum.

financial year

New label, previously year of tax.

foreign law

New label, will replace law of a foreign country , which is not defined in the 1936 Act.

in a position to affect rights

New term, formally defines the concept (in subsection 80G(4) of the 1936 Act) of a subsidiary company for the purposes of transferring losses within company groups. It explains when a person is in a position to affect any rights of a company in relation to another company.

The concept is unchanged.

in existence

New term, formally defines the concept (in subsections 80G(5), (5A) and (5B) of the 1936 Act) of when a shelf company is taken to exist for the purposes of transferring losses within company groups. The concept is unchanged.

income tax

It will refer to annual taxes imposed as income tax and assessed under the Assessment Acts. Narrower than the definition in subsection 6(1) of the 1936 Act, which includes all taxes imposed as income tax and assessed under the 1936 Act.

Income tax will be used when it is necessary to refer only to annual income taxes, eg. it will be used in the core provisions on how to work out the income tax payable on your taxable income [Division 4] .

This will cause no change to the law.

income tax return

New label, previously return of income.

income year

New label, previously year of income .

individual

New term, means natural person.

leasing company

No change.

legal personal representative

Adopts the definition in subsection 27A(1) of the 1936 Act, so that it can apply generally where the concept of a legal personal representative is relevant.

This will cause no change to the law.

member

New label, previously shareholder. Member is a more logical label because currently shareholder is defined to include members of companies which do not have shares. Furthermore, member is the term used in the Corporations Law.

motor vehicle

This term is defined in 3 different ways in the 1936 Act (subsections 57AF(1), 82KT(1) and 82AF(2)) and differently again in the Income Tax Regulations. The definition in the Bill is slightly broader than some of those definitions, because it adopts the ordinary meaning of 'motor vehicle' with the clarification that it includes 4-wheel drive vehicles.

'Motor vehicle' is used in the Bill only in the car expenses and substantiation provisions and in the definition of car . The new definition does not change those provisions at all, because it is no wider than the definition already applying to those provisions.

ordinary income

New term, explained in Chapter 4 of this Explanatory Memorandum.

partnership

No change.

PAYE earner

New label, previously employee as defined in section 221A. Where employee is used in the Bill, it has its ordinary meaning.

PAYE earnings

New label, previously salary or wages as defined in section 221A. Where salary or wages is used in the Bill, it has its ordinary meaning.

PDF

No change.

person

No change.

plant

Same as the definition in subsection 54(2) (Depreciation) of the 1936 Act. The use of that definition in this Bill will result in no change to the law.

pooled development fund

No change.

private company

Same as the general definition in subsection 6(1) of the 1936 Act, which has the meaning explained in section 103A of that Act.

This causes no change to the law.

public company

This causes no change to the law in this Bill.

purpose of producing assessable income

New term. It will be used for brevity in place of the two limb test:

·
for the purpose of gaining or producing assessable income; or
·
in carrying on a business for the purpose of gaining or producing assessable income.

The use of this new term causes no change to the law.

quasi-ownership right

New term, used to describe the rights over land that were previously covered by the definition of Crown lease in section 54AA. The term will be introduced so that Crown lease can have its ordinary meaning, rather than an extended artificial meaning.

The existing definition of Crown lease is an inclusive definition which extends the ordinary meaning of Crown lease to include interests over land which do not come within the ordinary meaning of lease or Crown lease , eg. easements and other rights, powers or privileges over land and extends the categories of entities who may grant such a right or interest.

The term quasi-ownership right will be used to cover leases, easements and other rights, powers or privileges over land granted by certain government bodies.

The government bodies that grant the interests are described in two other definitions - exempt Australian government agency and exempt foreign government agency .

redeemable shares

New term. Formally defines a concept explained in subsection 50K(4) but does not change its meaning.

relative

No change.

research and development activities

Adopts the meaning in section 73B (expenditure on research and development) of the 1936 Act. This causes no change to the law in this Bill.

scheme

In the existing law, scheme is used in a defined sense predominantly for anti-avoidance purposes. It will be used in the proposed Act in anti-avoidance provisions.

The Bill adopts the definition which has been used in anti-avoidance provisions since Part IVA was enacted in 1981 (see section 177A). In 2 losses provisions of the Bill [clauses 175-15 and 175-30] , scheme replaces the words agreement, scheme, arrangement, understanding, transaction, course of conduct or course of business .

The only potential difference between the definition in the Bill and the relevant definitions in the 1936 Act is that the new definition will include any promise or undertaking (because it includes the defined term arrangement ). Very few, if any, arrangements will fall within the definition in the Bill and outside those in the existing law. Thus, standardising the definition of scheme will have no significant practical effect in this Bill, which is to have only a future application.

share

No change.

spouse

No change.

State law

New term, used instead of law of a State which is not defined in the existing law. Used in defining Australian law .

statutory income

New term, explained in Chapter 4 of this Explanatory Memorandum.

tax

No change. In the existing law it is synonymous with income tax but that term will have a narrower meaning in this Bill (see discussion of income tax above).

Tax will be used where it is necessary to refer to all income taxes assessed under the Assessment Acts.

tax loss

New term explained in chapter 6 of this Explanatory Memorandum.

tax offset

New term replacing 'rebate' and 'credit' used in the 1936 Act. Explained in Chapter 4 of this Explanatory Memorandum.

taxable income

No change.

termination value

New term. It will formally define a significant concept already present in the capital allowance provisions of the existing law. The termination value will be used in calculating any balancing adjustment on the disposal, loss or destruction of the property on which you incurred the expenditure which entitled you to a deduction.

Although it is a single concept, the value will be calculated in different ways, depending on the capital allowance and the circumstances. Defining this concept causes no change to the law.

Territory law

New term, used instead of the phrase law of a Territory which is not defined in the existing law. Used in defining Australian law.

this Act

Will include not only the 1936 Act but also the proposed 1996 Act and the objection, review and appeal provisions of the Taxation Administration Act 1953 (so far as they relate to the other 2 Acts). However, in Division 950 (Rules for interpreting this Act ), this Act means only the proposed 1996 Act.

trustee

No change.

wholly-owned group

New term. Will formally define and re-label the notion of group company in relation to another company . The concept is important to the provisions governing transfer of losses within a company group in section 80G of the 1936 Act.

The concept is unchanged.

written down value

New term. It will formally define a significant concept in the capital allowance provisions of the existing law which is presently undefined. The written down value will be used in calculating any balancing adjustment on the disposal, loss or destruction of the property on which you incurred the expenditure which entitled you to a deduction.

Although it is a single concept, the value will be calculated in different ways, depending on the capital allowance and the circumstances. Defining this concept causes no change to the law.

you

New term. The existing law is written in the third person but much of the Bill is written in the second person. The reasons for using the second person are explained in Chapter 1 of this Explanatory Memorandum.

The word you will be extensively used in the proposed new Act, except in provisions which apply only to entities other than individuals, eg. the company loss provisions.

You refers to entities generally, unless its meaning is expressly confined.


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