House of Representatives

Explanatory Memorandum

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

Chapter 12 - Consequential and Transitional Provisions

This Chapter describes the arrangements proposed by the Income Tax (Transitional Provisions) Bill 1996 and the Income Tax (Consequential Amendments) Bill 1996, consequent on the introduction of the Income Tax Assessment Bill 1996.

Overview of this Chapter

This Chapter explains the operation of the Income Tax (Consequential Amendments) Bill 1996 and the Income Tax (Transitional Provisions) Bill 1996.

A. Income Tax (Consequential Amendments) Bill 1995

This Bill will amend the Income Tax Assessment Act 1936 (the 1936 Act ), and other Commonwealth laws, to make changes that are necessary as a consequence of the introduction of the Income Tax Assessment Bill 1996(the 1996 Act ) and its intended progressive replacement of the 1936 Act.

The amendments will:

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close off the operation of parts of the 1936 Act that have been rewritten in the 1996 Act, so that they will not apply in the 1996-97 (and subsequent) income years; and

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omit references to the 1936 Act, a part of the 1936 Act or a term used in the 1936 Act and replace it with references to the 1996 Act, a part of the 1996 Act (corresponding to the part of the 1936 Act that is omitted) or a term used in the 1996 Act (corresponding to the term used in the 1936 Act); and

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insert, with existing references, additional references to the 1996 Act, a part of the 1996 Act or a term used in the 1996 Act.

Apart from the 1936 Act, the Bill will amend the following Acts:

Administrative Decisions (Judicial Review) Act 1977

Aussat Repeal Act 1991

Australian Industry Development Corporation Act 1970

Bank Integration Act 1991

Bounty and Capitalisation Grants (Textile Yarns) Act 1981

Child Support (Assessment) Act 1989

Commonwealth Funds Management Limited Act 1990

Commonwealth Serum Laboratories Act 1961

Consular Privileges and Immunities Act 1972

Crimes (Taxation Offences) Act 1980

Data-matching Program (Assistance and Tax) Act 1990

Diplomatic Privileges and Immunities Act 1967

Financial Corporations (Transfer of Assets and Liabilities) Act 1993

Fringe Benefits Tax Assessment Act 1986

Higher Education Funding Act 1988

Insurance (Agents and Brokers) Act 1984

International Tax Agreements Act 1953

Military Superannuation and Benefits Act 1991

Parliamentary Contributory Superannuation Act 1948

Petroleum Resource Rent Tax Assessment Act 1987

Pooled Development Funds Act 1992

Snowy Mountains Engineering Corporation Act 1970

Snowy Mountains Engineering Corporation Limited Sale Act 1993

Social Security Act 1991

Stevedoring Industry Charge Assessment Act 1947

Student and Youth Assistance Act 1973

Superannuation Act 1976

Superannuation Act 1990

Superannuation Industry (Supervision) Act 1993

Taxation (Interest on Overpayments and Early Payments) Act 1983

Taxation (Unpaid Company Tax) Assessment Act 1982

Telecommunications Act 1991

Trust Recoupment Tax Assessment Act 1985

Veterans' Entitlements Act 1986

Wool International Act 1993

all amendments of these Acts are of a minor, drafting nature, except for the changes to the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 which result in no substantive change but require significant drafting changes as referred to below.

There are, however, some additional amendments of the 1936 Act, and the Taxation Administration Act 1953 , that will result in substantive change to the law. These changes are explained below.

Amendments of the Financial Corporations (Transfer of Assets and Liabilities) Act 1993 (FCA)

The amendments of the FCA, while purely formal, are extensive. For this reason they have been placed in a separate schedule [Schedule 4 to the Bill] .

Division 8 of the FCA contains the variations to the tax losses provisions of the 1936 Act that must be made when applying them for the purposes of the FCA. As the losses provisions of the 1936 Act will be replaced by the losses provisions of the 1996 Act, Division 8 needs to be amended to incorporate an appropriately adapted version of the relevant losses provisions of the 1996 Act.

This could have been done by specifying the required variations to the losses provisions of the 1996 Act in Division 8 of the FCA. However, instead of this, to improve the readability of the FCA, Division 8 is made to refer to a schedule to the FCA (Schedule 1) which contains the relevant tax losses provisions of the 1996 Act with the required variations made to them.

The changes do not alter the operation of the FCA.

Substantive changes

Public and private rulings [Schedule 2 to the Bill]

Proposed change

Public and private rulings issued by the Commissioner of Taxation will continue to apply where provisions of the 1936 Act are rewritten in the 1996 Act, to the extent that the rewritten provisions express the same ideas as the provisions in the 1936 Act.

The present law

The income tax and fringe benefits tax laws authorise the Commissioner to issue public and private rulings. The rulings are legally binding on the Commissioner.

A public ruling is the Commissioner's opinion about the way a tax law applies to:

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any person in relation to a class of arrangements; or

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a class of persons in relation to an arrangement or class of arrangements.

A private ruling is the Commissioner's opinion about the way a tax law applies to a person in relation to an arrangement for an income year.

A tax law is a provision of an Act or a regulation which works out the liability for income tax, withholding tax, franking deficit tax, Medicare levy, or fringe benefits tax. In the absence of the proposed change, if a provision in the 1936 Act is rewritten and included in the 1996 Act, any ruling given before the re-enactment would apply only to the old provision. It would not be a ruling on the new provision.

Explanation of proposed amendments

If the Commissioner has made a ruling on a provision which is re-enacted or remade, the ruling will be treated as also applying to the corresponding new provision to the extent that the ideas in the two provisions are the same [Schedule 2, Part 1, items 2 and 3 - new sections 14ZAAM and 14ZAXA of the Taxation Administration Act 1953] .

To the extent that the ideas in the new provision are different from those in the old law, a ruling on the old provision is not a ruling on the new law.

The amendments will not be limited to rulings on provisions in the 1936 Act rewritten as part of the Tax Law Improvement Project. They will extend to any rewriting of a tax law from the date of effect.

Date of effect

The amendments will apply:

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regardless of when a ruling is made [Schedule 2, Part 2, items 1 and 2] . Thus, the amendments will apply to rulings made at any time since 1 July 1992, when the system of public and private rulings provisions was established; and

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only if the re-enacted or remade law commences on or after 1 July 1996, the proposed commencement date for the Income Tax (Consequential Amendments) Act 1996 [Schedule 2, Part 2, items 1 and 2] .

This item will replace paragraph 23(r) of the 1936 Act, which explains in what circumstances income derived by non-residents is exempt from income tax, with a rewritten paragraph having the same effect. The item is discussed under Consequential amendments in Chapter 4.

Losses: Inter-corporate dividend rebate [Schedule 1, item 16]

This item will omit subsection 46(6A) of the 1936 Act, which modified the operation of section 46 for companies affected by the current year loss provisions. The item is discussed under Consequential amendments in Chapter 7.

Losses: Dividend stripping [Schedule 1, items 17 to 21]

These items will replace subsections 46A(8A) and (8B) of the 1936 Act, which modified the operation of section 46 for companies affected by the current year loss provisions, with the insertion of subsection 46A(3A). The items are discussed under Consequential amendments in Chapter 7.

Losses: Section 63CA [Schedule 1, items 50 and 76]

By this item, a new section 63CA will replace section 80F of the 1936 Act, which describes the circumstances where a loss from a bad debt is not to be taken into account. The item is discussed under Consequential amendments in Chapter 7.

Losses and foreign income [Schedule 1, item 70]

This item will add a new section 79DA to the 1936 Act to preserve the effect of subsections 79E(5) and (6), which describe the circumstances in which a post 1988-89 loss is deductible from assessable foreign income. The item is discussed under Consequential amendments in Chapter 6.

Record keeping [Schedule 1, Item 264]

This item will add a new subsection 262(4AJA) to the 1936 Act to impose the same record keeping obligations for proposed Division 43 of the 1995 Act as already exist in subsections 262A(4AF) to (4AJ) for Divisions 10C and 10D of the 1995 Act of Part III of the 1936 Act. This item is discussed under Consequential amendments in Chapter 9.

B. Income Tax (Transitional Provisions) Bill 1995

The Income Tax (Transitional Provisions) Bill 1996 contains measures needed for the transition from the existing law to the new law.

The general rule in the Bill is that the provisions in the Income Tax Assessment Bill 1996 will apply to assessments for the 1996-97 income year and later income years [clause 4-1]. There are exceptions to this rule in specific transitional provisions and in some operative provisions in the new law.

Substituted accounting periods

Some entities have a substituted accounting period, ie. the Commissioner has approved them using an income year that does not start on 1 July.

For those whose 1996-97 income year commences before 1 July 1996, the new law would apply from that earlier date when their 1996-97 income year starts.

For those whose 1996-97 income year commences after 1 July 1996, the new law would not apply until that later date when their 1996-97 income year starts.

Core provisions

No double deductions [clause 8-10]

This clause will ensure that in moving from the existing law to the new law a taxpayer cannot obtain two deductions for the same amount, one deduction under the current law and one under the proposed new law.

Substantiation

Car expenses [clause 28-100]

This clause will ensure that log books kept to substantiate car expenses under the 1936 Act will also be log books under the 1996 Bill. That is discussed under Transitional arrangements in Chapter 10.

Losses

1996-97 and later tax losses and film losses [clause 36-100]

This clause will apply the provisions of the 1996 Bill to tax losses for the 1996-97 and later income years.

1989-90 to 1995-96 tax losses and film losses [clause 36-105]

This clause will apply the provisions of the 1996 Bill to undeducted tax losses for the 1989-90 to 1995-96 income years, as discussed under Transitional arrangements in Chapter 6.

Pre-1990 losses [clause 36-110]

This clause will apply the provisions of the 1996 Bill to undeducted primary production losses for the 1957-58 to 1988-89 income years, as discussed under Transitional arrangements in Chapter 6.

Deductions for capital works

Quasi-ownership rights [clause 43-100]

This clause will identify holders of quasi-ownership rights over land on which capital works are constructed who will be entitled to deduct amounts under proposed Division 43 of the 1996 Bill. The matter is discussed under Transitional arrangements in Chapter 9.

Exclusive deduction provision [clause 43-105]

This clause will limit the application of subclauses 43-50(1) and (2) of the 1996 Bill to particular buildings, as discussed under Transitional arrangements in Chapter 9.

Mining and quarrying

Pre-19 July 1982 mining capital expenditure [clause 330-1]

This clause will make undeducted pre-July 1982 mining capital expenditure deductible in the 1996-97 income year. It is discussed under Transitional arrangements in Chapter 8.

Post-19 July 1982 mining capital expenditure and post-15 August 1989 quarrying capital expenditure [clauses 330-5 and 330-60]

These clauses will make amounts of undeducted post-19 July 1982 mining capital expenditure, post-15 August 1989 quarrying capital expenditure and pre-July 1996 transport capital expenditure deductible in the 1996-97 income year. This is discussed under Transitional arrangements in Chapter 8.

Undeducted pre 1 July 1975 general mining exploration expenditure [clauses 330-10, 330-15 and 330-20]

These clauses will treat undeducted pre-1 July 1975 mining exploration expenditure as being incurred in the 1996-97 income year, as discussed under Transitional arrangements in Chapter 8.

Old mining capital expenditure on plant [clause 330-25]

This clause will limit the transferability under the 1996 Bill of deductions for pre-July 1996 general mining and petroleum mining expenditure on plant. This is discussed under Transitional arrangements in Chapter 8.

Undeducted old exploration expenditure [clauses 330-30, 330-35 and 330-40]

These clauses will treat undeducted amounts of old petroleum exploration expenditure, general mining exploration expenditure and quarrying exploration expenditure as incurred in the 1996-97 income year. They are discussed under Transitional arrangements in Chapter 8.

Old undeducted mining and quarrying amounts [clause 330-45]

This clause will treat some undeducted pre-July 1996 mining and quarrying amounts as having been incurred in the 1996-97 income year, as discussed under Transitional arrangements in Chapter 8.

Preserving old election rules [clause 330-50]

This clause will preserve in part the operation of the old law if you make an election under clause 330-315 of the 1996 Bill. The circumstances are discussed under Transitional arrangements in Chapter 8.

Elections for pre 1 July 1985 allowable capital expenditure [clause 330-55]

This clause will limit the right to make an election under clause 330-315 of the 1996 Bill, as explained under Transitional arrangements in Chapter 8.

Balancing adjustments where old roll-over relief [clause 330-65]

This clause will modify a balancing adjustment where roll-over relief was obtained before the 1996-97 income year. This is explained under Transitional arrangements in Chapter 8.

Corresponding previous law [clause 330-70]

This clause will explain the meaning of the expression 'corresponding previous law' which is used in the balancing adjustment provisions and in some modifications to the common rules.

Modifying Common rule 1 [clause 330-75]

This clause will modify the common rule about roll-over relief for related entities if certain amounts were deducted in respect of a property before the 1996-97 income year. This is discussed under Transitional arrangements in Chapter 8.