Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 14 - Related and consequential amendments
14.1 A number of related and consequential amendments are made to the following Acts:
- the ITAA 1936;
- the ITAA 1997;
- the Fringe Benefits Tax Assessment Act 1986 ;
- the Superannuation Contributions Tax (Assessment and Collection) Act 1997 ;
- the Medicare Levy Act 1986 .
14.2 The Bill also makes a number of amendments to the ITAA 1936 and ITAA 1997 consequential on the insertion of Schedule 2F. The consequential amendments integrate Schedule 2F into the ITAA 1936 and ITAA 1997.
Amendments to the ITAA 1936
14.3 Amendments are made to sections 79E and 79F of the ITAA 1936. These amendments make it clear that, if a trust has a loss calculated under the current year loss rules (Division 268) for an income year, that is the relevant loss for that year for the purposes of sections 79E and 79F. [Item 3, subsection 79E(2A); item 4, subsection 79F(5A)]
14.4 An amendment is also made to section 95 of the ITAA 1936. Section 95, among other things, outlines the method by which a trust's net income is calculated. The amendment made by the Bill to section 95 will make it clear that a trust may be required to work out its net income and tax loss in a special way if the relevant rules in the Bill are triggered. A similar amendment is also being made to sections 102D and 102M which deal with the calculation of the net income of corporate unit trusts and public trading trusts. These amendments integrate the proposed current year loss rules for trusts into the ITAA 1936. [Items 5, 6 and 7]
Amendments to the ITAA 1997
14.5 Section 25-35 of the ITAA 1997 contains the general provision for deductibility of bad debts and contains a table that points readers to provisions in the income tax law that may affect the deductibility of losses. The Bill inserts items into the table to direct readers to the debt deduction provisions that may affect the deductibility of bad debts of trusts. [Item 26]
14.6 Section 36-10 of the ITAA 1997 contains the general provision for calculation of a tax loss for an income year and section 36-25 contains tables that point readers to provisions in the income tax law that may affect the deductibility of losses. The Bill inserts a table to direct readers to the prior and current year loss rules and income injection test that may affect the deductibility of trust losses. [Item 27]
14.7 Subsection 995-1(1) of the ITAA 1997 contains a definition of film component of a tax loss. The Bill inserts a note in this definition to make it clear that the film component of a tax loss of a trust may need to be calculated under the current year loss rules applying to trusts (see section 268-65 discussed in paragraph 8.46). [Item 28]
14.8 In similar fashion, a note is added at the end of the definition of tax loss in subsection 995-1(1) to indicate that a tax loss of a trust may need to be calculated under the current year loss rules applying to trusts (see section 268-60 discussed in paragraph 8.46). [Item 29]
14.9 The Bill inserts a provision into the ITAA 1936 to provide that a deduction for a bad debt or deduction under section 63E in respect of an extinguished debt is not allowable to a trust in certain circumstances. This is where the debt is incurred and written off as bad or extinguished on the last day of an income year. This provision is an anti-avoidance measure and is intended to bring the deductibility of the relevant amounts by trusts into line with the provisions that apply to companies under subsection 63A(11) of the ITAA 1936. [Item 2, section 63G]
14.10 Amendments are being made to section 160AFD of the ITAA 1936 in order to prevent the transfer of the tax benefit of quarantined foreign losses of trusts to those who did not suffer them. Broadly, section 160AFD quarantines certain classes of overall foreign losses and allows them to be deducted only against assessable foreign income of the same class. Section 160AFD limits the use of quarantined foreign losses of companies by saying that the company must meet the relevant loss deductibility tests in relation to the overall foreign loss. A similar amendment is being made for overall foreign losses of trusts.
14.11 The Bill provides that a trust may not use an overall foreign loss if, on the assumption that the overall foreign loss was a tax loss, Divisions 266 and 267 of Schedule 2F would prevent its deduction. Divisions 266 and 267 deal with changes in ownership and control of trusts. [Item 9, subsection 160AFD(6A)]
14.12 The Bill also provides that a trust may not use a foreign loss if the income injection test (Division 270 of Schedule 2F) would apply on the assumption that:
- the overall foreign loss was a deduction allowable in the particular year of income; and
- the assessable foreign income of the same class as the foreign loss is the scheme assessable income. [Item 9, subsection 160AFD(6B)]
14.13 Section 170 of the ITAA 1936 provides rules dealing with how assessments can be amended by the Commissioner. An assessment can normally only be amended within 4 years. However, in the case of many anti-avoidance rules, the amendment period is longer.
14.14 An amendment has been made to subsection 170(10) so that section 170 does not prevent the amendment of an assessment for the purposes of giving effect to section 271-105 which operates to exempt a person from income tax on amounts subject to family trust distribution tax (see paragraphs 11.29 to 11.34). The amendment is necessary because a trustee may pay tax, under section 99A, on an amount of net income and more than 4 years later may distribute that income to a non-family member. If the assessment could not be amended double taxation would be caused as a result of the trustee's liability to pay family trust distribution tax on the amount distributed. [Item 10]
14.15 Subsection 170(13) has also been amended in order to allow for a trust's assessment to be amended for the purpose of the income inject test if the amendment is made within 6 years after the date upon which the tax became due and payable under the assessment. Subsection 170(13) already applies in this way to the income injection test applying to companies. [Item11]
14.16 Family trust distribution tax may be payable by a family trust or by an entity that has made an interposed entity election. This will be where the trust or entity has made a distribution of income or capital outside the family group (see Chapter 11). A number of consequential amendments are being made to ensure that:
- double taxation will not arise where the tax is paid; and
- the income tax exemption for amounts on which family trust distribution tax has been paid cannot be used as a tax planning tool to avoid the superannuation contributions tax and Medicare levy.
14.17 Section 271-105 provides an exemption from income tax for amounts on which family trust distribution tax has been paid (see paragraphs 11.29 to 11.34).
Prevention of double taxation
14.18 Subsection 128B(3) of the ITAA 1936 is being amended so that a liability to non-resident withholding tax does not arise on an amount of income or capital that is exempt from income tax under section 271-105. [Item 8]
14.19 Section 136 of the Fringe Benefits Tax Assessment Act 1986 is being amended so that an exempt fringe benefit includes any fringe benefit that is a distribution of income or capital on which family trust distribution tax has been paid. [Item 30]
Prevention of avoidance of Medicare levy and superannuation contributions tax
14.20 The exemption from income tax for amounts that have been subject to family trust distribution tax is intended to ensure that there is no double taxation of income. It is not intended to be a means for avoidance of the superannuation contributions tax or increased Medicare levy for those high income earners without private health insurance. In the absence of any special provision, tax planning opportunities could arise under which distributions are deliberately made subject to family trust distribution tax in order to reduce the taxable income of an individual to a level where the superannuation contributions tax and Medicare levy could be avoided. Accordingly, amendments are being made to the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and the Medicare Levy Act 1986 .
Superannuation contributions tax
14.21 An amendment is made to the definition of 'adjusted taxable income' in section 43 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 so that this amount will also include amounts that would have been in the taxable income of a person if it were not for the operation of section 271-105. [Item 32]
14.22 An amendment is also made to the Medicare Levy Act 1986 so that, for the purposes of sections 8B to 8G, taxable income will include an amount that has been exempted from income tax under section 271-105. Sections 8B to 8G are the sections of the Medicare Levy Act that deal with the private health insurance incentives. [Item 1 of Schedule 1 of the Medicare Levy Consequential Amendment (Trust Loss) Bill 1997]
Distributions through interposed trusts or partnerships
14.23 The amendments to the superannuation contributions tax and Medicare levy legislation will ignore section 271-105 for all purposes in calculating the taxable income of a person for the purposes of that legislation. This includes the case where an amount that has been subject to family trust distribution tax is distributed to a person through interposed trusts or partnerships.