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House of Representatives

Taxation Laws Amendment Bill (No. 6) 2000

Explanatory Memorandum

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

General outline and financial impact

CDEP Scheme Participant Supplement

Schedule 1 to this Bill amends the Income Tax Assessment Act 1936,the Taxation Administration Act 1953 and the Income Tax Rates Act 1986 to provide for the same income tax treatment of the CDEP Scheme Participant Supplement as the equivalent payment made to Newstart and Youth Allowance recipients involved in labour market programs. Recipients of the CDEP Scheme Participant Supplement will be eligible for a beneficiary rebate in respect of that payment. The payment will also be subject to the pay as you earn and pay as you go withholding systems.

Date of effect : The amendments will apply to payments made on or after 11 November 1999 and to assessments for the 1999-2000 year of income and all later years of income.

Proposal announced : The introduction of the CDEP Scheme Participant Supplement was announced in the 1998-1999 budget.

Financial impact : The amendments will have an insignificant revenue impact.

Compliance cost impact : Compliance costs will be minimal.

Exempt income from GST direct assistance certificates

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to ensure that GST direct assistance certificates are exempt from income tax that may arise from the receipt or redemption of the certificates.

Date of effect :The amendments apply to the 1999-2000 and 2000-2001 income years.

Proposal announced : This measure has not been previously announced.

Financial impact :The measure is expected to cost the revenue $70 million over the 1999-2000 and 2000-2001 income years.

Compliance cost impact : Nil.

Chapter 1 - CDEP Scheme Participant Supplement

Outline of Chapter

1.1 Schedule 1 to this Bill will amend the Income Tax Assessment Act 1936 (ITAA 1936),the Taxation Administration Act 1953 (TAA 1953) and the Income Tax Rates Act 1986 (ITRA 1986) to provide for the same income tax treatment of the Community Development Employment Projects (CDEP) Scheme Participant Supplement as the equivalent payment made to Newstart and Youth Allowance recipients involved in labour market programs.

Background to the legislation

1.2 The Further 1998 Budget Measures Legislation Amendment (Social Security) Act 1999, which received Royal Assent on 11 November 1999, provided CDEP scheme participants with a new supplement. The CDEP Scheme Participant Supplement is paid at the rate of $20 per fortnight and is designed to provide an equivalent payment to that received by Newstart and Youth Allowance recipients involved in labour market programs.

1.3 The proposed amendments will ensure that the CDEP Scheme Participant Supplement receives the same income tax treatment to the equivalent payments received by Newstart and Youth Allowance recipients.

Summary of new law

1.4 The following amendments will be made to the ITAA 1936:

·
paragraph (a) of the definition of 'rebatable benefit' and paragraph (b) of the definition of 'rebatable pension' in subsection 160AAA(1) will be amended so that the CDEP Scheme Participant Supplement will be beneficiary rebatable;
·
paragraphs 202CB(6)(a) and 202CE(7)(a), which cover the quotation of tax file numbers (TFNs) on employment declarations and TFN declarations, will be amended to ensure that recipients of the CDEP Scheme Participant Supplement are treated in a similar fashion to recipients of other similar Government benefits; and
·
new paragraph (h) in the definition of 'salary or wages' in subsection 221A(1) will be inserted to make CDEP Scheme Participant Supplement payments subject to the current pay as you earn (PAYE) withholding arrangements.

1.5 The following technical amendment will be made to the ITRA 1986:

·
to exclude the CDEP Scheme Participant Supplement from paragraph (c) of the definition of 'eligible pensioner' in subsection 16(1).

1.6 The following amendment will be made to the TAA 1953:

·
new paragraph 12-110(1)(d) will be inserted to make CDEP Scheme Participant Supplement payments subject to the new pay as you go (PAYG) withholding arrangements.

Comparison of key features of new law and current law

New law Current law
Recipients of the CDEP Scheme Participant Supplement will be entitled to a beneficiary rebate on the amount they receive under subsection 160AAA(3) of the ITAA 1936. In the absence of amendments to provide for the specific income tax treatment of the CDEP Scheme Participant Supplement, recipients would be entitled to a pensioner rebate under subsection 160AAA(2) of the ITAA 1936.
The CDEP Scheme Participant Supplement will be subject to the current PAYE and the new PAYG withholding arrangements. In the absence of amendments to provide for the specific income tax treatment of the CDEP Scheme Participant Supplement, recipients may be liable to the PAYG instalment arrangements.

Detailed explanation of new law

What is the income tax treatment of the CDEP Scheme Participant Supplement?

1.7 The CDEP Scheme Participant Supplement, which is paid under Part 3.15A of the Social Security Act 1991, is income according to ordinary concepts. Therefore the payment is presently assessable under section 6-5 of the Income Tax Assessment Act 1997.

1.8 The amendments to the definitions of 'rebatable benefit' and 'rebatable pension' in subsection 160AAA(1) will ensure that payments of the CDEP Scheme Participant Supplement will be subject to the beneficiary rebate under subsection 160AAA(3) on the same basis as equivalent payments made to Newstart and Youth Allowance recipients involved in labour market programs. [Schedule 1, items 1 and 2, subsection 160AAA(1)]

1.9 As a consequence of the beneficiary rebate being extended to the CDEP Scheme Participant Supplement, a technical amendment is required to paragraph (c) of the definition of 'eligible pensioner' in subsection 16(1) of the ITRA 1986. The exclusion of the CDEP Scheme Participant Supplement from the definition of 'eligible pensioner' will ensure that CDEP participants, who are not residents for the full year of income, will have their tax-free threshold pro-rated under section 20 of the ITRA 1986. [Schedule 1, item 6, subsection 16(1)]

Will the CDEP Scheme Participant Supplement be subject to withholding?

1.10 The CDEP Scheme Participant Supplement will be subject to the current PAYE and the new PAYG withholding arrangements on the same basis as equivalent payments made to Newstart and Youth Allowance recipients involved in labour market programs.

Amendments to the PAYE provisions

1.11 This Bill proposes to insert new paragraph (h) in the definition of 'salary or wages' in subsection 221A(1) of the ITAA 1936 to make payments of the CDEP Scheme Participant Supplement subject to the PAYE arrangements. [Schedule 1, item 5, subsection 221A(1)]

Amendments to the PAYG provisions

1.12 This Bill replaces section 12-110 in Part 2-5 of Schedule 1 to the TAA 1953 as a consequence of the insertion of new paragraph 12-110(1)(d) which provides for payments of the CDEP Scheme Participant Supplement to be subject to the PAYG withholding arrangements. [Schedule 1, item 7, paragraph 12-110(1)(d)]

1.13 As a consequence of the CDEP Scheme Participant Supplement being subject to the withholding arrangements, the rules covering the quotation of TFNs on employment declarations and TFN declarations also require amendment. Paragraphs 202CB(6)(a) and 202CE(7)(a) of the ITAA 1936 are being amended to have the same TFN quotation rules for recipients of the CDEP Scheme Participant Supplements as that applying to Newstart and Youth Allowance recipients. [Schedule 1, item 3, paragraph 202CB(6)(a); Schedule 1, item 4, paragraph 202CE(7)(a)]

Application

1.14 The amendments will apply to payments made on or after 11 November 1999 and to assessments for the 1999-2000 year of income and all later years of income. [Schedule 1, item 8]

Chapter 2 - Exempting value received from GST Direct Assistance Certificates

Outline of Chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt any income attributable to GST direct assistance certificates from income tax.

Summary of the amendments

Purpose of the amendments

2.2 The purpose of the amendments is to ensure that the value of GST direct assistance certificates is exempt from income tax which may arise from the receipt or redemption of the certificates.

Date of effect

2.3 The amendments apply to the income years 1999-2000 and 2000-2001.

Background to the legislation

GST direct assistance certificates

2.4 The Government is providing redeemable direct assistance certificates to small and medium businesses and community sector bodies to aid in the implementation of GST. The certificates have a maximum value of $200 and are issued by the GST Start-Up Assistance Office to eligible enterprises which register for GST by 31 May 2000. An enterprise may redeem the certificate with a registered supplier in exchange for goods and services that will assist with the implementation of GST, for example, computer software or accounting services.

Assessable income

2.5 Subsection 6-1(1) of the ITAA 1997 provides that assessable income consists of ordinary income and statutory income. Ordinary income is defined in section 6-5 as income according to ordinary concepts, for example, salary or wages, or proceeds from carrying on a business. Statutory income is defined in section 6-10 as amounts that are not ordinary income but are included in assessable income by the operation of a provision of the law about assessable income. Section 10-5 lists particular classes of assessable income that are not ordinary income, for example, capital gains. A net capital gain is included in assessable income by section 102-5.

2.6 Exempt income is not assessable income under section 6-15. Exempt income is an amount of ordinary income or statutory income that is expressly made exempt by a provision of the ITAA 1997 or another Commonwealth law. Division 11 lists classes of exempt income and Division 51 specifies amounts of ordinary income and statutory income that are exempt income.

Ordinary income

2.7 If a GST direct assistance certificate is a benefit that can be turned to pecuniary account, the value of the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business. In FC of T v Cooke & Sherden
80 ATC 4140;
10 ATR 696 the Full Federal Court said (at 4148; 704) that a benefit to be enjoyed by a taxpayer will often be turned to pecuniary account if the benefit be given up, or if it be employed in the acquisition of some other right or commodity. Although the certificate cannot be exchanged for cash, it may be argued that as the certificate is used in acquiring products or services from registered suppliers, it may be a benefit which can be turned to pecuniary account. If so, the certificate would be assessable as ordinary income to a taxpayer engaged in the conduct of a business.

Statutory income

2.8 Section 15-10 provides that assessable income includes a bounty or subsidy that is received in the course of carrying on a business and that is not assessable as ordinary income. Where the certificates are provided by the Government to small businesses to assist them with the implementation of GST, it might be argued that the value of the certificates, if of a pecuniary nature, may be assessable as bounties or subsidies.

2.9 It could also be argued that the taxpayer receives a payment when the certificate is redeemed in that the certificate is used to pay part or all of the expenditure incurred on the GST related item. If so, when the certificate is redeemed the taxpayer may receive a bounty or subsidy which would be assessable under section 15-10.

Capital gains and losses

2.10 When an eligible enterprise receives a GST direct assistance certificate, the recipient acquires the rights contained in the certificate on the happening of CGT event D1. When the certificate is redeemed, CGT event C2 happens. The taxpayer makes a capital gain if the capital proceeds from the ending of the asset exceed the cost base of the asset (subsection 104-25(3)).

2.11 If the payment received on redemption of the certificate were assessable as ordinary income or statutory income, section 118-20 would apply to reduce the capital gain by the amount of assessable income.

Explanation of the amendments

Exempt income

2.12 Schedule 2 to this Bill inserts new section 51-60 in Division 51 (exempt amounts) of the ITAA 1997. New section 51-60will exempt ordinary income and statutory income from income tax for the 1999-2000 and 2000-2001 income years where the income is attributable to a certificate issued by the GST Start-Up Assistance Office, that is, a GST direct assistance certificate. [Schedule 2, item 2]

2.13 GST direct assistance certificates are issued by the GST Start-Up Assistance Office in the Department of the Treasury. The certificates have a maximum value of $200 which may be used by the recipient to purchase goods or services for the implementation of GST.

2.14 The effect of new section 51-60 will be that any income arising from a GST direct assistance certificate, regardless of the nature of that income, will not be assessable. For example, if the income from the certificates is ordinary income, it is expressly exempt from tax under newsection51-60. Likewise, if the income is assessable as a bounty or subsidy - which is statutory income - it is exempt from tax.

2.15 The table in section 11-15 is being updated as a consequence of new section 51-60 [Schedule 2, item 1] . The amendment will guide GST direct assistance certificate recipients to the new section 51-60.

Capital gains and losses

2.16 New section 118-14 is inserted in Division 118 (capital gains and losses - exemptions) of the ITAA 1997. New section 118-14 will operate to disregard a capital gain or capital loss made in the 1999-2000 or 2000-2001 income years from the redemption of a GST direct assistance certificate. [Schedule 2, item 3]

Index

Schedule 1: CDEP Scheme Participant Supplement
Bill reference Paragraph no.
Items 1 and 2, subsection 160AAA(1) 1.8
Item 3, paragraph 202CB(6)(a) 1.13
Item 4, paragraph 202CE(7)(a) 1.13
Item 5, subsection 221A(1) 1.11
Item 6, subsection 16(1) 1.9
Item 7, paragraph 12-110(1)(d) 1.12
Item 8 1.14

Schedule 2: Exempting value received from GST Direct Assistance Certificates
Bill reference Paragraph no.
Item 1 2.15
Item 2 2.12
Item 3 2.16


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