House of Representatives

Taxation Laws Amendment Bill (No. 5) 2000

Explanatory Memorandum

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

General outline and financial impact

Amendment of the Sales Tax Assessment Act 1992

This Bill amends the Sales Tax Assessment Act 1992 to exclude from sales tax that part of the taxable value of a vehicle that represents the additional cost attributable to making the vehicle suitable to be driven by, or used to transport, a person suffering from a physical impairment.

Date of effect: The amendment applies to dealings on or after 26 June 1998.

Proposal announced: The amendment was announced in the Assistant Treasurers Press Release No. 52 on 5 November 1999.

Financial impact: Estimated cost is up to $7.4 million for the period 26June 1998 to 30 June 2000.

Compliance cost impact: Negligible. Manufacturers of affected vehicles will need to determine that part of the taxable value that is not subject to sales tax.

Summary of Regulation Impact Statement

A regulation impact statement is not required for this measure.

Employee share schemes

The employee share scheme (ESS) provisions in Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) explain how employees are assessed on the shares and rights acquired under an ESS. The concept of market value is used to determine the discount received by the employee and the amount included in the employees assessable income. For example, if the share is a non-qualifying share or if it is a qualifying share and the employee elects to have the discount assessed immediately, the discount equals the market value of the share minus the consideration paid.

This Bill amends Division 13A by inserting an alternative method (public offer price) to determine market value of shares. The amendments will overcome the inequitable and uncertain consequences which result from using the existing weighted average price formula to determine market value. The new rules will apply to shares acquired under an ESS in association with a subsequent public offer of shares in a listed public company.

Date of effect: The amendment will apply from 2 September 1999.

Proposal announced: Treasurers Press Release No. 54 of 2 September 1999.

Financial impact: Negligible.

Compliance cost impact: Negligible.

Summary of Regulation impact statement

Regulation impact on business

Impact: Low

Main points:

·
Employees will receive a cash flow benefit.
·
It will be easier for employers to explain the taxation consequences of participation in an ESS. It is expected that this will increase participation in the schemes.
·
The ATO will not incur any additional administrative costs.
·
There will be a cost to the revenue in situations where the weighted average formula would have resulted in a higher assessable discount than the public offer price.

Closely held trusts

This Bill amends Division 6D of the Income Tax Assessment Act 1936 (ITAA 1936) and other tax laws by:

·
allowing the Commissioner to permit extensions of time for lodgment of ultimate beneficiary statements;
·
allowing ultimate beneficiary statements to be corrected in certain circumstances;
·
providing trustees of closely held trusts with the power to recover the ultimate beneficiary non-disclosure tax they paid (including any additional tax or penalty) from ultimate beneficiaries, trustee beneficiaries or interposed trustees or partnerships whose provision of incorrect information or refusal to provide information, led to the liability to ultimate beneficiary non-disclosure tax, but only where the gross amount has been distributed; and
·
making it clear that section 254 of the ITAA 1936 extends to ultimate beneficiary non-disclosure tax and related interest charge obligations.

Some clarificatory amendments are also being made.

Date of effect: The amendments apply to present entitlements created after 4.00 pm on 13 August 1998 Australian Eastern Standard Time.

Proposal announced: 4 February 2000.

Financial impact: The amendments have no financial impact.

Compliance cost impact: There are no net compliance costs because these amendments are meant to ease the compliance burden on trustees.

Summary of Regulation impact statement

The Office of Regulation Review have advised that a Regulation impact statement is not required for these amendments.

Chapter 1 - Amendment of the Sales Tax Assessment Act 1992

Outline of Chapter

1.1 Schedule 1 to this Bill will insert new section 49A in the Sales Tax Assessment Act 1992 (STAA 1992), dealing with motor vehicles for transporting disabled persons. It will provide for an exempt part of the taxable value for certain vehicles that have been:

·
designed or adapted for driving by a person who is suffering from a physical impairment; or
·
designed or adapted for transporting a person who is suffering from a physical impairment.

Summary of the amendments

Purpose of the amendments

1.2 The amendment will overcome an inconsistency in the sales tax treatment of modifications to vehicles to adapt them for driving by, or the transporting of, disabled persons. The exemption contained in item 98 in Schedule 1 to the Sales Tax (Exemptions and Classifications) Act 1992 (ST(E&C)A 1992) allows goods used in such modifications to be purchased free of sales tax. However, in some cases this benefit is effectively removed as the modifications constitute manufacture, resulting in sales tax being payable on the value of the modifications.

Date of effect

1.3 The amendment will apply to any dealing on or after 26 June 1998.

Background to the legislation

1.4 On 5 November 1999 the Government announced that it would amend the sales tax law to encourage the increased construction of purpose-built vehicles that are used to provide transport for disabled persons.

1.5 One particular benefit of these amendments will be to ensure that the transportation needs of disabled participants at the Sydney Paralympic Games in 2000 are met. This has particular application to taxis designed for transporting wheelchair passengers.

1.6 The Government announced that the amendment would apply to dealings on or after 26 June 1998, the date the NSW Government announced the release of 400 additional wheelchair accessible taxi licences.

Detailed explanation of new law

1.7 Item 1 adds new section 49A to Division 4 of Part 3 of the STAA1992. Division 4 deals with exempt parts of the taxable value of goods. Exempt parts are deducted from the taxable value before applying the appropriate rate of sales tax.

1.8 New section 49A relates to motor vehicles for transporting disabled persons. The section will apply to motor vehicles that are:

·
designed or adapted for driving by a person who is suffering from a physical impairment; or
·
designed or adapted for transporting a person who is suffering from a physical impairment.

1.9 This will have application to vehicles that are specifically designed for disabled persons and existing vehicles that are modified to make them suitable for use by disabled persons.

1.10 The exempt part of the taxable value of these vehicles is the amount of the taxable value that represents the additional cost of manufacturing the vehicle that relates solely to the vehicle being designed or adapted for the purpose of:

·
making it suitable to be driven by a person who is suffering with a physical impairment; or
·
making it suitable to be used for the transportation of a person who is suffering from a physical impairment.

1.11 Modifications envisaged by the new section 49A will be consistent with the types of modifications covered by item 98 in Schedule1 to the ST(E&C)A 1992. For example, a modification made solely to make a vehicle suitable for wheelchair access and carriage would fall within the scope of new section 49A . Modifications of a general nature would not be covered by this section.

Example 1.1 A motor vehicle manufacturer designs a vehicle based on one of their existing station wagon models. The design alters the station wagon by making provision for a wheelchair passenger to be accommodated in the rear cargo section of the station wagon. The vehicles are manufactured on the production line with the additional design features incorporated. The manufacturer sells the modified vehicle for $30,000 (wholesale). The ordinary station wagon model sells for $20,000 (wholesale).The taxable value of the modified vehicle is $30,000. The additional $10,000 relates solely to the changes required to make the vehicle suitable for transporting wheelchair passengers. The section 49A exempt part of the taxable value in this case will be $10,000. Sales tax will be payable on $20,000 ($30,000 - $10,000).

Example 1.2 A standard motor vehicle is purchased (sales tax included) by a motor vehicle dealer and sent to a company for conversion to enable it to accommodate 2 wheelchair passengers. The conversion involves extending the wheel-base and including a high roof section incorporating an extra side door. Brackets and anchorage points are installed to secure a wheelchair carried with the vehicle. The conversion process constitutes manufacture and sales tax is payable under assessable dealing AD4a in Table 1 of Schedule 1 to the STAA1992. In this case the taxable value will be the amount charged by the conversion company.As the modifications relate solely to the purpose of making the vehicle suitable to transport persons suffering from a physical impairment, the whole amount of the taxable value is the section 49A exempt part. Consequently, no sales tax is payable.Note: sales tax was included in the purchase price of the original vehicle purchased by the dealer. Under AD4a the value of goods supplied by the customer is not included in the taxable value unless the goods are always-exempt goods.

Luxury motor vehicles

1.12 Schedule 6 to the ST(E&C)A 1992 imposes a higher rate of sales tax on motor vehicles that have a taxable value that is above the luxury vehicle threshold. In some cases the taxable value of a motor vehicle that has been modified for use by disabled persons may exceed the luxury vehicle threshold. New subsection 49A(3) ensures that, for the purpose of Schedule 6, the taxable value of vehicles covered by section 49A is taken to be reduced by the exempt part. This will ensure that Schedule 6 will only apply in those situations where the taxable value, after deducting the exempt part, exceeds the luxury vehicle threshold.

Refunds of sales tax

1.13 As the amendments apply to dealings with goods on or after 26June 1998 there may be situations where sales tax has been overpaid. Sales tax refunds can be claimed where all the conditions of the relevant credit ground are met. For example, if the sales tax has been passed on to another person, a refund cannot be claimed unless the sales tax is refunded to that person.

Chapter 2 - Employee share schemes

Outline of Chapter

2.1 Schedule 2 to this Bill will amend Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with employee share schemes (ESSs). The amendments insert an alternative method (public offer price) for determining the market value of shares acquired under an ESS. This method will be used when a public offer is made in a listed public company and an offer of shares or unlisted rights to acquire shares, under an ESS, is made in association with that public offer.

Background to the legislation

What is the relevance of market value?

2.2 Division 13A of the ITAA 1936 sets out how employees are assessed on the shares and rights that they acquire under an ESS. The concept of market value is used to determine the discount received by the employee and the amount included in the employees assessable income. For example, if the share is a non-qualifying share, or if it is a qualifying share and the employee elects to have the discount assessed immediately, the discount equals the market value of the share minus the consideration paid.

2.3 Market value is also relevant for determining whether a scheme falls under Division 13A. To acquire a share under an ESS the consideration paid must be less than the market value of the share. In other words, there must be a discount which is assessable to the employee. Otherwise, assessment of the shares falls outside Division 13A and employees will not be eligible for certain concessions that are otherwise available.

2.4 Subdivision F of Division 13A sets out how to determine the market value of a share or right. Broadly, market value of a listed share or right is determined by reference to the weighted average of the prices at which the shares were traded during the one week period up to and including the day of acquisition (paragraph 139FA(1)(a)).

Why is the rule for determining market value being changed?

2.5 Where an ESS is associated with a public offer of shares in a public company, the weighted average price method of determining market value gives rise to uncertainty and an inequitable taxation treatment for employees. The alternative method (public offer price) for determining market value overcomes 2 problems:

·
It prevents the artificial discount which occurs where the weighted average price is greater than public offer price. Artificial discounts (created under the current law) are included in the employees assessable income. (Paragraph 2.24 explains how artificial discounts are created under the current law).
·
It also removes uncertainty as employees and employers will be able to assess if the scheme falls under Division 13A and is eligible for the concessions under this Division and the capital gains tax exemption for transferring shares held by a trust to an employee (section 130-90 of the Income Tax Assessment Act 1997). Employees will be in a better position to assess the tax implications of their investment decision as it will be easier to anticipate the amount of assessable discount.

Summary of new law

2.6 The amendments will provide an alternative method (public offer price) for determining market value where shares or unlisted rights are acquired by an employee in association with a public offer of shares in a listed public company. The discount which is assessable to the employee will be calculated using the more equitable public offer price, rather than the weighted average price.

2.7 The new method of calculating market value will apply only in certain circumstances. An ESS must be offered in association with a public offer of shares in a listed public company.

2.8 In other circumstances market value will continue to be determined under sections 139FA or 139FB of the ITAA 1936. This is because, in situations where shares are not acquired in association with a public offer, the weighted average price, or the arms length value, of shares reasonably reflects the market value. Market value calculated in this way gives rise to a realistic and equitable discount which is assessable to the employee.

2.9 No change to the law is necessary for ESSs offered in association with an initial public offer of shares. This is because market value is determined in accordance with public offer price via section 139FB of the ITAA 1936.

Comparison of key features of new law and current law

Table 2.1
New Law Current Law
When an employee acquires a share or unlisted right, under an ESS, that is offered in association with a subsequent offer of shares in a listed public company, the market value of those shares and rights will be determined by reference to the public offer price. Currently, the market value of shares or unlisted rights, acquired under an ESS, in association with a public offer of shares by a listed public company is determined by reference to the weighted average of the prices at which those shares or rights are traded on the stock market during the one week period up to and including the day of acquisition.
If there are no transactions in that period (and there were no offers to buy such a share or right) then the market value is calculated in accordance with a method approved by the Commissioner under s139FB of the ITAA 1936 (usually the public offer price).

Detailed explanation of new law

2.10 Division 13A of the ITAA 1936 explains how employees are assessed on shares and rights acquired under an ESS. Division 13A applies if shares are acquired at a discount to their market value. To calculate the discount it is necessary to ascertain the market value of shares. Under the Division, the market value of listed shares on a particular day is determined with reference to the weighted average price of shares traded on the stock market during the week up to and including that day.

2.11 The employee is assessed on the difference between the market value of the shares or rights and the consideration paid or given in 3situations:

·
When the share is not a qualifying share (as defined by section 139CD). In this case, it is assessable in the year of acquisition (subsection 139B(2)).
·
When the share is qualifying and the taxpayer elects to have it assessed in the year of acquisition (section 139E).
·
When the share is qualifying and taxation is deferred until the cessation time (section 139CA) and the share is not disposed of within 30 days of the cessation time (subsection 139CC(4)).

2.12 Where shares or unlisted rights are offered to employees, in association with a subsequent public offer of shares in a listed public company, using the weighted average price under existing law as market value results in inequitable tax treatment for employees. This is because the weighted average price may be higher than the public offer price and produces an artificial discount which is assessable to the employee. Using the public offer price as market value provides a more equitable result because where an ESS is linked with a secondary or subsequent public offer of shares, the public offer price more appropriately reflects the true market value of the share or unlisted right.

When is the alternative method for determining market value used?

2.13 The alternative method, where the lowest price paid by members of the Australian public is taken to be the market value of a share, is used if:

·
an employee acquires a share or unlisted right in association with a public offer of shares; and
·
the company has been a listed public company for a period of 6 months before the public offer.

If these conditions are not satisfied, market value of a share is calculated in accordance with section 139FA using the weighted average price method. [New subsection 139FA(3), item 1 of Schedule 2]

When is a share acquired in association with a public offer?

2.14 A share is offered in association with a public offer of shares if the share is acquired within a period of 7 days before or after the first day on which shares are first acquired under the public offer. This condition ensures that shares acquired by employees at about the same time as the public will have their market value determined by reference to the public offer price. A period of 7 days, prior to and after the closing date for application for acquisition of shares under the public offer, allows for some flexibility where certain restrictions may prevent the ESS acquisitions occurring on the same day as the public offer acquisitions. [New paragraph 139FAA(1)(a), item 2 of Schedule 2]

2.15 A further test, which establishes an association with a public offer, is incorporated in the reference to certain rights attached to the share. Broadly, if the share acquired under the ESS has the same rights attached to it as the share acquired by the public the second test is satisfied. New paragraph 139FAA(1)(b) lists these rights. The practical effect of this test is to ensure that shares under the public offer are of the same class as those offered to employees under the ESS. Where shares acquired under the ESS are of a different class it would not be appropriate to use the public offer price because the shares are not linked or associated.

Why does the company have to be listed for 6 months?

2.16 The alternative method for determining market value will only apply to a subsequent issue of shares where the company has been a listed public company for at least 6 months immediately before the share is acquired. [New paragraph 139FAA(1)(d), item 2 of Schedule 2]

2.17 The 6 month rule ensures that employees who acquire shares in a company engaged in conditional trading immediately prior to a public float will not be able to use the public offer price to calculate the discount received.[F1]

2.18 It is not appropriate that the new method of calculating market value apply when unlisted companies make initial public offers. This is because current practice is that market value in these situations is already determined in accordance with the public offer price via section 139FB of the ITAA 1936.

The alternative method for determining market value will use the lowest price at which shares were sold under the public offer

2.19 The alternative method for determining market value ensures that the lowest price paid by at least 1,000 Australian residents, where the total cost of shares acquired by such persons was at least $1million is taken to be market value. [New subsection 139FAA(2), item 2 of Schedule 2]

2.20 The effect of the new subsection is that where shares under a public offer are offered at more than one price, the lowest price paid by a significant number of residents is taken to be the public offer price. For example, where institutional shareholders acquire shares at a higher price than retail shareholders, market value is determined by reference to the lowest price (i.e. the retail price).

2.21 New paragraph 139FAA(1)(c) also ensures that the lowest price is a realistic market value which has been accepted by a significant number of residents. The requirement that the total cost of shares must be at least $1 million again ensures the authenticity of the public offer.

What is a public offer of shares?

2.22 For the purposes of new section 139FAA , a public offer of shares is made in a company when the company or a person, who owns at least 20% of the shares with rights in respect of voting in the company, makes an offer to at least 10,000 Australian residents. [New subsection 139FAA(3), item 2 of Schedule 2]

2.23 The 20% ownership rule ensures that the public offer can only be made by a person (including a company) with a major holding in the company. The $1 million and the 10,000 residents rules ensure that the offer is a large public offering made widely to members of the Australian public. This requirement is to overcome the potential for making an offer of shares, for example, only to a limited section of the public with an artificially low public offer price so as to reduce the discount assessable under Division 13A of the ITAA 1936. The definition also excludes (from the 10,000 resident threshold) residents who are employees or existing share holders of the company.

Diagram 2.1: Calculation of assessable discount, under Division 13A, using public offer price

Diagram 2.1:  Calculation of assessable discount, under Division 13A, using public offer price

How will the change prevent the creation of an artificial discount?

2.24 When an ESS is offered in association with a public offer, the price paid by employees is usually lower than the public offer price. However, under the current law, the discount that is assessable is determined on the basis of weighted average price. The problem with the existing legislation is highlighted when the weighted average price exceeds the public offer price. An artificial discount accrues to employees who elect to be assessed on the discount received in the year of acquisition of the shares.

Example 2.1: How Division 13A currently creates artificial discounts A listed public company makes a public offer of shares where the public offer price is $8.00. Shares are offered to employees under an associated ESS for $7.80. The assessable discount for employees who elect to be assessed in the year of acquisition is the difference between the market value of shares and the consideration paid or given (subsection 139CC(2)).If there was at least one transaction on the stock market during the one week period up to and including the day of valuation, the market value of the shares acquired is the weighted average of the prices at which the shares were traded. If the weighted average price of the companys shares is $8.30 then the discount that will accrue to the employees will be:

Market value (i.e. weighted average price) - Consideration = Discount
$8.30 - $7.80 = $0.50

As the price paid by the employee was determined with reference to the public offer price, a discount of $0.50 is not commercially realistic as the weighted average price is $0.30 higher than the public offer price. This results in artificial income, of $0.30, accruing to the employee.Under the new law, the employee will be assessed on the discount calculated by reference to the public offer price (rather than the weighted average price):

Market value (i.e. public offer price) - consideration = Discount
$8.00 - $7.80 = $0.20

This is a much more equitable result and realistically reflects the true market value of the share.

New method for determining market value may apply to only some shares acquired in association with a secondary or subsequent public offer of shares

2.25 As part of a public offer of shares, employees of a company may acquire a number of shares in the company at the public offer price and on the same terms as the shares offered to the public. In some cases, employees may, under an ESS, be eligible for a certain number of additional shares (at no cost to the employees). The number of additional shares an employee may be eligible for is determined by the number of shares the employee purchased at the public offer price. Division 13A will only apply to the additional shares as the purchased shares were not acquired at a discount to market value (i.e. the purchased shares were acquired at public offer price).

Example 2.2 The existing majority shareholder in Mousetrap Ltd makes a public offer of shares in Mousetrap Ltd. The purchase price for the shares is payable in 2 instalments. These are often known as instalment receipts (IRs). The first instalment, due on 15 August 2000, is $4.00. The second instalment, due on 15 September 2001, varies. If the instalment receipts are held by the person who acquired the shares under the public offer until 15 September 2001 the amount due is $2.80. In other cases the amount due is $3.00. The public offer price is the lowest price at which shares are offered to the public, i.e. $6.80.Employees of Mousetrap Ltd may purchase shares at the same price as they are offered to the public. In addition, employees who purchase shares will receive, without cost to them, additional shares (1 for every5, with a maximum of 100) and, rights to loyalty shares (1 for every 10, with a maximum of 70). The additional shares are qualifying shares and the loyalty shares (which are actually rights) are qualifying rights.Marg purchases 1,000 shares. The following timeline illustrates Margs transactions:

Marg's Transactions timeline

How will the change promote certainty for employees and employers?

2.26 By using the public offer price as market value it will be easier to anticipate the amount of discount assessable to the employee. This will encourage greater participation in ESSs as employees will be able to assess the tax implications of their investment decision. The commercial reality of most public offers made in Australia is that due to their size and value of shares sold, it will be clear at the outset that the requirements specified in the amendments will be satisfied. This certainty will allow employers to explain, in their employee share documents, the tax implications of employee participation.

2.27 The increased certainty will mean that employers will not have to consider the fringe benefit tax implications which would arise if the scheme fell outside the ESS provisions.

How does the change affect the market value of unlisted rights acquired under an ESS?

2.28 If an employee acquires unlisted rights to shares, the market value of the rights is calculated with reference to the market value of the share (section 139FC of the ITAA 1936). The new provisions provide that where an unlisted right is acquired under an ESS in association with a secondary or subsequent public offer, the market value of the unlisted right will be calculated by reference to the public offer price of the share. [New section 139FAA, item 2 of Schedule 2]

2.29 Existing section 139FC explains how to calculate the market value of an unlisted right to a share that may be acquired by exercising that right. The new section 139FAA deals with the concept of using public offer price where shares have been acquired under a public offer. The new subsections 139FC(2), 139FE(2) and 139FK(2) have been inserted to ensure that where the rights to the shares have been acquired, market value of those rights is calculated by reference to the market value (public offer price) of the shares as if the shares were acquired on the day that the rights were acquired.

2.30 In order for the new subsections to apply, the rights must be acquired within the period prescribed by the new section 139FAA and the shares to be acquired on exercise of those rights must have the same rights attached to them as the shares offered under the public offer (refer paragraph 2.15). For example, when the right is exercised, the share acquired as a result of the exercise of the right must have the same rights to dividends as other shares offered to the public.

Application and transitional provisions

2.31 The amendment will apply from 2 September 1999.

Regulation impact statement

Policy objective

2.32 The policy objective of the amendment is to insert an alternative method (public offer price) for determining the market value of shares acquired by employees. This method will be used when a public offer is made in a listed public company and an offer of shares or unlisted rights to acquire shares is made, to employees, in association with that public offer. The existing method of determining market value produces unintended consequences in the application of the law, giving rise to uncertainty and inequitable taxation treatment for employees.

Implementation option

Background

2.33 Division 13A of the ITAA 1936 sets out how employees are assessed on the shares and rights that they acquire under an ESS. The concept of market value is used to determine the discount received by the employee and the amount included in the employees assessable income. For example, if the share is a non-qualifying share, or if it is a qualifying share and the employee elects to have the discount assessed immediately, the discount equals the market value of the share minus the consideration paid.

2.34 Market value is also relevant for determining whether a scheme falls under Division 13A. To acquire a share under an ESS the consideration paid must be less than the market value of the share. In other words, there must be a discount which is assessable to the employee. Otherwise, assessment of the shares falls outside Division 13A and employees will not be eligible for certain concessions that are otherwise available.

2.35 Subdivision F of Division 13A sets out how to determine the market value of a share or right. Broadly, market value of a listed share or right is determined by reference to the weighted average of the prices at which the shares were traded during the one week period up to and including the day of acquisition (paragraph 139FA(1)(a)).

2.36 Where an ESS is associated with a subsequent public offer of shares in a listed public company, the weighted average price method of determining market value gives rise to uncertainty and an inequitable taxation treatment for employees. The new method for determining market value overcomes 2 problems:

·
it prevents the artificial discount which occurs where the weighted average price is greater than public offer price. Artificial discounts (created under the current law) are included in the employees assessable income; and
·
it also removes uncertainty as employees and employers will be able to assess if the scheme falls under Division 13A of the ITAA 1936 and is eligible for the concessions under this division and the capital gains tax exemption for transferring shares held by a trust to an employee (section 130-90 of the Income Tax Assessment Act 1997). Employees will be in a better position to assess the tax implications of their investment decision as it will be easier to anticipate the amount of assessable discount.

2.37 The amendment will also apply to unlisted rights acquired in these circumstances. This is because the market value of the right will be calculated with reference to the market value of the share.

Implementation Option

2.38 The only implementation option which achieves the policy objective is introducing a new concept of market value to apply in situations where an ESS is offered in association with a subsequent public offer of shares in a listed public company.

2.39 This option would require an amendment to Division 13A of the ITAA 1936 so that the market value in this situation is equal to the public offer price (the public offer price will reflect the lowest price paid by a broad range of people to acquire shares under the associated public offer).

2.40 The amendment is necessary only where an ESS is offered in association with a secondary or subsequent issue of shares. Where an ESS is associated with an initial public offer of shares in a company that is not yet listed, market value is determined in accordance with public offer price by virtue of section 139FB of the ITAA 1936. In situations where an ESS is offered but not associated with a public offer of shares then the weighted average market value reasonably reflects the market value of shares.

Assessment of impacts

Impact group identification

2.41 The proposal will affect the following groups:

·
employees who participate in the ESSs;
·
employers and their advisers who promote ESSs; and
·
the Australian Taxation Office (ATO).

Analysis of costs

Compliance costs

Employees

2.42 The compliance cost to employees will be minimal and will be limited to learning about the new method for calculating market value.

Employers

2.43 The compliance costs to employers and their advisers will be minimal and will be limited to explaining how the new method affects tax liability to potential participants in an ESS.

Benefits

Employees

2.44 Employees of companies who participate in an ESS will be in a better position to assess the taxation consequences of participation in the scheme before making the decision to participate. By using the public offer price as market value it will be easier to anticipate the amount of discount which will be assessable to the employee.

2.45 Employees will also receive a cash flow benefit from the proposal to the extent that the creation of artificial income is prevented and the assessment of any net capital gain is deferred.

Employers

2.46 The certainty provided by determining market value with reference to the public offer price will mean that the affected employers will not have to consider the fringe benefit tax implications which would arise if the scheme fell outside the ESS provisions. The greater certainty offered is also likely to encourage a greater number of employees to participate in ESSs in such situations.

Administrative costs

2.47 The ATO will not incur any additional costs beyond those already allocated to processing returns.

2.48 The amount of material needed to explain the change will be very small.

Government revenue

2.49 The number of ESSs offered in association with a second or subsequent public offer of shares is likely to be small. There will be a cost to the revenue in situations where the weighted average formula would have resulted in a higher assessable discount than the public offer price. The size of the impact is not known.

2.50 The cost to the revenue for the 2000-2001 year is estimated to be less than $1 million.

Consultation

2.51 Following the issue of Treasurers Press Release No. 54 on 2September 1999 the Government received representations regarding the proposed amendment. The Government has considered those representations in drafting the amendment. The representations supported the proposed amendments.

Conclusion

2.52 The proposal will provide more equitable tax treatment for participating employees and greater certainty for affected employees and employers.

2.53 It is expected that there will be some compliance costs but these will be offset by the benefits of increased certainty. Administrative costs for the ATO will be broadly unchanged.

Chapter 3 - Closely held trusts

Outline of Chapter

3.1 The amendments to the Income Tax Assessment Act 1936 (ITAA1936) and associated tax laws:

·
allow the Commissioner to permit extensions of time for lodgment of ultimate beneficiary;
·
allow ultimate beneficiary statements to be corrected in certain circumstances;
·
provide trustees of closely held trusts with the power to recover the ultimate beneficiary non-disclosure tax they paid (including any additional tax or penalty) from ultimate beneficiaries, trustee beneficiaries, or interposed trustees or partnerships whose provision of incorrect information, or refusal to provide information, led to the liability to ultimate beneficiary non-disclosure tax, but only where the gross amount has been distributed;
·
make it clear that section 254 extends to ultimate beneficiary non-disclosure tax and related interest charge obligations; and
·
make some minor clarificatory changes.

Background to the legislation

3.2 A New Tax System (Closely Held Trusts) Act 1999 inserted Division 6D into the ITAA 1936 to amend the tax laws to ensure that the trustee of a closely held trust with a trustee beneficiary presently entitled to net income or tax-preferred amounts discloses to the Commissioner of Taxation (Commissioner) the identity of the ultimate beneficiaries within a specified period after the end of the year of income.

3.3 Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified period, the measures specifically impose taxation on the trustee at the top marginal rate plus Medicare levy, in the case of net income. Offences under the Taxation Administration Act 1953 (TAA 1953) may arise if known information is not provided, or if reasonable effort to obtain information is not made, in the case of tax-preferred amounts.

3.4 A number of amendments will be made to the Division to improve its practical operation.

Summary of new law

Outline of amendments

3.5 The following amendments will be made to Division 6D and section 254 of the ITAA 1936:

·
section 102UH will be amended so as to grant the Commissioner the power to give extensions of time to lodge ultimate beneficiary statements;
·
new subsection 102UK(2A) will be inserted and will permit trustees to make corrections to incorrect ultimate beneficiary statements in certain circumstances;
·
new subsection 102USA will be inserted and will give trustees and members of the trustee group a right to recover ultimate beneficiary non-disclosure tax in certain circumstances;
·
subsections 102UE(3) and (4) will be amended to ensure that the provisions operate as intended;
·
paragraphs 254(1)(d), (e) and (h) will be amended to ensure that they extend to ultimate beneficiary non-disclosure tax obligations; and
·
new section 102URA will be inserted and will provide trustees with the formal ability to require a notice of ultimate beneficiary non-disclosure tax liability.

Detailed explanation of new law

Extension of time to lodge

3.6 Section 102UH is being amended to give the Commissioner the discretion to extend the ultimate beneficiary statement period. For example, the Commissioner might, in genuine cases, allow a trustee an extension of time to lodge a ultimate beneficiary statement in circumstances where the trustee cannot obtain the required information from the ultimate beneficiary because the ultimate beneficiary is temporarily overseas. [Item 3 of Schedule 3, new paragraph 102UH(b)]

3.7 The Commissioner will have the power to give a further ultimate beneficiary statement period in those cases where the year of income in question ended before the commencement of Schedule 3, and so the ultimate beneficiary statement period may have already expired without a request to extend the period. [Subitem 9(2) of Schedule 3]

Amendment of incorrect ultimate beneficiary statements

In what circumstances will amendments to ultimate beneficiary statements be permitted?

3.8 New subsection 102UK(2A) enables trustees of closely held trusts to amend incorrect ultimate beneficiary statements about amounts of net income outside the ultimate beneficiary statement period where certain conditions are satisfied. These conditions are as follows:

·
the correction must be made before the ultimate beneficiary non-disclosure tax becomes due and payable or within 4 years of any such tax becoming due and payable;
·
the trustee must have believed on reasonable grounds that the statement was a correct ultimate beneficiary statement when it was made in respect of the amount that the correction relates to; and
·
the event that led to the need to correct the original statement could not reasonably have been foreseen by the trustee.

[Item 5, new subsection 102UK(2A)]

3.9 New subsection 102UK(2A) is only meant to apply in those cases where the trustee has lodged a ultimate beneficiary statement in the mistaken belief that it is correct, and has found out at some later time that the statement is incorrect. Where a trustee has lodged a ultimate beneficiary statement which he or she knows to be incorrect, or could reasonably have foreseen might be incorrect, then the trustee may not amend the ultimate beneficiary statement under new subsection 102UK(2A) . These requirements are intended to ensure that the correction provision will not encourage or permit unreasonable behaviour by trustees, as otherwise the main purpose of obtaining full and accurate information from trustees promptly could be jeopardised.

3.10 The trustee may amend the entire amount subject to error or only part of the amount subject to error. Therefore, the trustee does not have to get everything right in order to make a valid correction of what the trustee does get right.

3.11 An example of a situation where a trustee of a closely held trust may wish to amend an ultimate beneficiary statement is where that trustee has relied on information provided to it by the trustee beneficiary that has later proven to be incorrect because of an amendment to the return of that trustee beneficiary. If the trustee of the closely held trust had reasonable grounds to believe that the original statement was a correct ultimate beneficiary statement, and he or she could not reasonably have foreseen the amendment to the trustee beneficiarys return, then the ultimate beneficiary statement for the closely held trust can be amended to reflect the changes that arise as a result of the changes made to the return of the trustee beneficiary. However, this can only be done within 4 years of the ultimate beneficiary non-disclosure tax becoming due and payable. This period is consistent with a range of other tax amendment provisions.

What are the consequences of amending an incorrect ultimate beneficiary statement under subsection 102UK(2A)?

3.12 If the conditions outlined in paragraph 3.8 are satisfied, the trustee will be treated as having always made a correct ultimate beneficiary statement under section 102UK of the ITAA 1936. This means that ultimate beneficiary non-disclosure tax will not be payable under the section and will never have been payable under the section in respect of the particular amount of income for which the statement has been corrected.

Power for trustees to recover ultimate beneficiary non-disclosure tax

3.13 New section 102USA provides trustees of closely held trusts (including directors where the trustee of the closely held trust is a company) with a power to sue relevant ultimate beneficiaries, trustee beneficiaries or interposed trustees or partnerships for damages recovering the ultimate beneficiary non-disclosure tax (and any general interest charge) paid by them where the trustee beneficiary has received the full distribution. The effect is to enable the trustee of the closely held trust to recover the tax to the extent that they have actually distributed the gross entitlement (including the tax).

What are the conditions that must be satisfied before a trustee (or a member of a trustee group) may sue for recovery of ultimate beneficiary non-disclosure tax under this provision?

3.14 Broadly, there are 4 requirements that must be satisfied before the trustee may sue for recovery of ultimate beneficiary non-disclosure tax under this provision:

·
the trustee must pay ultimate beneficiary non-disclosure tax;
·
an amount in respect of which ultimate beneficiary non-disclosure tax has to be paid has been fully distributed (i.e. not net of the ultimate beneficiary non-disclosure tax);
·
there must be an incorrect statement by the trustee or a refusal or failure to provide information by the trustee because of a person failing or refusing to provide the information or providing incorrect information which the trustee reasonably believed; and
·
the person failing or refusing to provide the information or providing incorrect information to be an ultimate beneficiary, or a trustee beneficiary, or the trustee of an interposed trust, or a partner in an interposed partnership through which an ultimate beneficiary is presently entitled to some or all of the head trust amount concerned.

[Item 7, new section 102USA]

Requirement for payment of ultimate beneficiary non-disclosure tax

3.15 Ultimate beneficiary non-disclosure tax will have been paid for the purposes of this provision if:

·
the trustee of a closely held trust does not make a correct ultimate beneficiary statement during the ultimate beneficiary statement period in relation to a year of income;
·
as a result, the trustee becomes liable, or the persons in the trustee group become jointly and severally liable under section 102UK, to pay ultimate beneficiary non-disclosure tax; and
·
the trustee or any of the persons pays an amount being some or all of the tax or any additional tax under section 102UP by way of general interest charge in relation to the tax.

[Item 7, new subsection 102USA(2)]

3.16 An example of a case where this may happen is where the trustee does not make a correct ultimate beneficiary statement and becomes liable to and pays ultimate beneficiary non-disclosure tax.

Requirement for full distribution

3.17 The trustee of the closely held trust must have fully distributed some, or all, of the share of the net income to the trustee beneficiary. If the trustee has withheld an amount under section 254 of the ITAA 1936 or otherwise in respect of the recoverable amount, then this requirement will not be satisfied. If the trustee has not yet paid out the amount in full, and so can retain part of the amount to cover the tax liabilities, the trustee has no need and no right to recover. [Item 7, new paragraph 102USA(3)(b)]

Requirement for refusal or failure to provide information or for an incorrect statement

3.18 If the trustee of the closely held trust:

·
was unable to make a correct ultimate beneficiary statement because another person refused or failed to give information to the trustee; or
·
the trustee of the closely held trust made an incorrect ultimate beneficiary statement because it contained incorrect information given to the trustee of the closely held trust by another person (referred to as the information source) and the trustee honestly believed on reasonable grounds that the information was correct,

then the requirement in subsection 102USA(3) will be satisfied. [Item 7, new paragraph 102USA(3)(a)]

3.19 For example, if a trustee beneficiary has failed to provide the details of a ultimate beneficiary to a head trustee, and the head trustee was therefore unable to make a correct ultimate beneficiary statement, then this requirement will be satisfied.

Requirement for person refusing or failing to provide information, or providing incorrect information, to be a ultimate beneficiary, trustee beneficiary or a trustee or partner of an interposed trust or partnership

3.20 The person failing or refusing to provide the information or providing incorrect information to be an ultimate beneficiary, or a trustee beneficiary, or the trustee of an interposed trust, or a partner in an interposed partnership through which an ultimate beneficiary is presently entitled to some or all of the head trust amount concerned. This person is described as the information source. [Item 7, new subsection 102USA(4)]

3.21 So, if the trustees error was due to some other information source, one outside the chain of trustee beneficiary, interposed trust or partnership, or ultimate beneficiary, the trustee cannot recover from such a source under this special provision.

What are the consequences of section 102USA applying?

3.22 If section 102USA applies, the trustee or the person in the trustee group that paid the recoverable amount may sue for that amount in a court of competent jurisdiction and recover it from the information source. If there is more than one information source, then the recoverable amount may be recovered from those persons jointly and severally.

3.23 In most cases, the information source will be the trustee beneficiary to whom the gross amount was paid. However, the information source is liable even if the gross amount has not gone to the source but elsewhere in the chain to the ultimate beneficiary.

Clarificatory amendments

3.24 A number of minor clarificatory amendments will be made to Division 6D to ensure that it operates as intended. These are as follows:

·
section 254 of the ITAA 1936 will be amended to ensure that it extends to ultimate beneficiary non-disclosure tax obligations;
·
the full absorption test for determining whether a lower level trust is an ultimate beneficiary, in subsection 102UE(4) of the ITAA 1936, will be amended so that it operates as intended; and
·
an amendment will be made to enable trustees to request a notice of ultimate beneficiary non-disclosure tax liability.

Extension of section 254 of the ITAA 1936 to ultimate beneficiary non-disclosure tax and related interest charge obligations

3.25 Amendments will be made to section 254 of the ITAA 1936 to put it beyond doubt that section 254 of the ITAA 1936 extends to ultimate beneficiary non-disclosure tax.

3.26 Paragraphs 254(1)(d), (e) and (h) of the ITAA 1936 will be amended to make it clear that both ultimate beneficiary non-disclosure tax and the general interest charge payable under section 102UP in respect of ultimate beneficiary non-disclosure tax fall within the definition of tax for the purposes of those provisions. [Item 8 of Schedule 3, new subsection 254(3)]

3.27 This ensures that trustees are required to retain amounts from present entitlements to income on account of ultimate beneficiary non-disclosure tax liabilities and authorised to account to beneficiaries on the basis of such deductions.

Full absorption test

3.28 Existing paragraph 102UE(4)(c) of the ITAA 1936 will be replaced and the following new formula will be substituted.

The head trust amount is not greater than the amount worked out using the following formula:

lower level trust deductions - lower level trust assessable income

3.29 Lower level trust assessable income is defined to mean the assessable income of the lower level trust (not including any amount attributable to the head trust amount) taken into account in working out the net income of the lower level trust for the year of income. The existing paragraph could have been read as including the head trust amount in the net lower level loss to which it was being compared.

3.30 Lower level trust deductions is defined to mean the allowable deductions that are taken into account in working out the net income of the lower level trust for the year of income.

Example 3.1 The head trust amount is $500. The lower level trust assessable income is $1,000. The lower level trust deductions are $1,800. The lower level trust will be an ultimate beneficiary under subsection 102UE(4) because the head trust amount of $500 is less than the amount worked out using the formula ($800).

3.31 Subsection 102UE(4) is meant to apply to those cases where the head trust amount is fully absorbed by a lower level trust generally because that lower level trust is a loss trust. [Item 2, new paragraph 102UE(4)(c)]

3.32 If a person is an ultimate beneficiary in respect of a particular head trust amount under subsection 102UE(4), then they will not be an ultimate beneficiary in respect of that same head trust amount under subsection 102UE(3). At present the 2 subsections overlap, making it difficult for trustees to state correctly the basis for an intermediary trust to be considered an ultimate beneficiary. [Item 1, new paragraph 102UE(3)(c)]

Request for notice of liability

3.33 The current administrative position is that the Commissioner will provide trustees with a notice of ultimate beneficiary non-disclosure tax liability if requested. However, trustees do not have the formal right to compel the Commissioner to issue such a notice.

3.34 New section 102URA gives trustees this formal right. The Commissioner must comply with the request unless he considers that the notice cannot be given because he requires further information. If the Commissioner does consider that the notice cannot be given without further information, he must request that the trustee provide the requisite information. If such information is not provided, the Commissioner does not need to comply with the trustees request. [Item 6, new section 102URA]

Application and transitional provisions

General

3.35 These provisions will apply as if they had been part of Division 6D of the ITAA 1936 when that Division was originally inserted. [Subitem 9(1) of Schedule 3]

Extension of time for lodgment of ultimate beneficiary statement

3.36 New paragraph 102UH(b) gives the Commissioner the power to extend the time for lodgment of a ultimate beneficiary statement. Subitem 9(2) of Schedule 3 makes it clear that the Commissioner may allow a further period under new paragraph 102UH(b) in respect of a year of income that ended before the commencement of this Schedule.

General interest charge

3.37 Amounts for which a trustee can make retentions under section 254 of the ITAA 1936, and which a trustee may recover under new section 102USA , include both ultimate beneficiary non-disclosure tax and general interest charge under section 102UP. Possible substituted accounting periods including 13 August 1998 and only before 1 July 1999 could have triggered general interest charge under item 93 of Schedule 2 of the A New Tax System (Pay As You Go) Act 1999 and additional tax under section 102UP of the ITAA 1936. Item 10 ensures that retentions and recovery by trustees include these possible amounts.


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