House of Representatives

Taxation Laws Amendment Bill (No. 5) 2001

Explanatory Memorandum

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

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation Definition
ABN Australian Business Number
ABN Act A New Tax System (Australian Business Number) Act 1999
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
Constitutionally Protected Funds Act 1997 Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997
ETP eligible termination payment
FBT fringe benefits tax
FBTAA 1986 Fringe Benefits Tax Assessment Act 1986
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax) Act 1999
ICT information and communications technology
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
PAYG pay as you go
TAA 1953 Taxation Administration Act 1953

General outline and financial impact

Religious practitioners

Schedule 1 to this bill amends the TAA 1953, the ITAA 1997, the FBTAA 1986, the GST Act and the ABN Act to clarify the treatment of religious practitioners under the new tax system. The amendments will broadly ensure that religious practitioners who are not employees are treated in the same way as employees and office holders.

The amendments do not affect the legal status of religious practitioners. Those who are not employees continue not to be employees.

Under the new rules an entity will be required to withhold, under the PAYG withholding system, from payments to a religious practitioner for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution.

In addition, there will be amendments so that:

religious practitioners will not be eligible for (or need) an ABN for activities done in pursuit of a vocation as a religious practitioner, and as a member of a religious institution;
payments to a religious practitioner for activities done in pursuit of a vocation as a religious practitioner, and as a member of a religious institution will not be subject to the No ABN withholding arrangements;
benefits provided by a religious institution to a religious practitioner for pastoral or related duties will continue to be exempt from tax under the FBT law; and
activities done in pursuit of a vocation as a religious practitioner, and as a member of a religious institution will not be subject to GST.

The amendments also include a number of minor consequential amendments about the tax treatment of religious practitioners.

Date of effect: The PAYG withholding obligations will apply to payments made on or after 1 July 2002. The amendments to the GST, ABN and FBT law will apply from 1 July 2000.

Proposal announced: The proposal was announced in Assistant Treasurers Press Release No. 33 of 28 June 2000.

Financial impact: The amendments are expected to have no effect on estimated revenue.

Compliance cost impact: The amendments will reduce the compliance costs of religious practitioners and institutions by:

clarifying the tax treatment of the activities of practitioners; and
ensuring that practitioners do not need to obtain and quote an ABN, or register for GST, in relation to activities done in the pursuit of a vocation of a religious practitioner, and as a member of a religious institution.

Change in status of constitutionally protected superannuation funds

Schedule 2 to this bill amends the income tax law and the superannuation surcharge legislation to facilitate the change in status of constitutionally protected superannuation funds that elect to become taxed superannuation funds. The amendments will ensure that members of constitutionally protected superannuation funds which have changed status, are treated similarly for income tax and superannuation surcharge purposes with members who rollover benefits from an untaxed source to a taxed source.

Date of effect: 1 July 2000.

Proposal announced: Assistant Treasurers Press Release No. 27 of 16 June 2000.

Financial impact: Revenue of $25 million will be brought forward in the 2001-2002 year. Consequently, there will be a loss to revenue of $1 million per annum from 2002-2003.

Compliance cost impact: There will be some compliance costs associated with determining the amount to be included in assessable income of the fund when it ceases to be a constitutionally protected superannuation fund. In addition, the fund will need to lodge income tax returns as it has to pay tax. The superannuation provider will also have to calculate certain benefit components for each member and report for superannuation surcharge purposes accordingly. However, the amendments will apply only if a fund that is a constitutionally protected superannuation fund elects to change its status.

CGT event E4

Schedule 3 to this bill amends the ITAA 1997 to ensure that CGT event E4:

does not apply to payments of CGT discount amounts made by trustees to beneficiaries;
does not apply to payments of CGT discount amounts made by trustees to beneficiaries that are trustees of trusts in chains of trusts;
applies to payments associated with building allowances made by trustees to beneficiaries; and
has its intended effect by making minor amendments.

Date of effect: A transitional measure that corrects the chain of trusts deficiencies applies to payments made by trustees on or after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2001. The remaining amendments apply to payments made by trustees on or after 1 July 2001.

Proposal announced: That part of the proposal relating to payments of CGT discount amounts and payments associated with building allowances was announced in Treasurers Press Release No. 16 of 22 March 2001. That part of the proposal relating to chains of trusts was detailed in Assistant Treasurers Press Release No. 33 of 31 July 2001. The technical amendments have not previously been announced.

Financial impact: The financial impact of this measure as it relates to payments of CGT discount amounts was included in the estimates for providing CGT concessions in the New Business Tax System (Integrity and Other Measures) Act 1999.

This measure, as it relates to payments associated with building allowances, is estimated to raise revenue of $5 million in 2002-2003, rising to $40 million per annum after 10 years.

Compliance cost impact: There will be minimal compliance costs for investors associated with this measure. There may be some additional costs for managed funds from implementing changes to their systems.

Summary of regulation impact statement

Regulation impact on business

Impact: The measure contained in this bill provides taxpayers with greater access to the benefits of the CGT discount.

Main points:

The measure has the support of industry who have been consulted during ongoing development and finalisation of the measure.
Compliance costs for investors will be minimal. There may be additional compliance costs for managed funds associated with implementing the changes.
This change provides for increased levels of investment and diversification of investment for Australian investors.

Gifts or contributions

Schedule 4 to this bill amends the ITAA 1997 to allow income tax deductions for certain gifts of $2 or more made to the organisations listed below.

Date of effect: Applies to gifts made to:

Southcare Helicopter Fund after 11 September 2000;
Breast Cancer Network Australia after 22 May 2001;
Australian Nuffield Farming Scholars Association after 16 April 2001;
Dymocks Literacy Foundation Limited after 4 January 2001;
The Sir Earl Page Memorial Trust after 6 May 2001;
Research Australia Limited after 26 June 2001;
Reconciliation Australia Limited after 6 December 2000;
The RSL Foundation after 20 September 2000;
Australian Chinese Ex-Services National Reunion War Memorial Fund after 14 December 2000 and before 16 December 2002;
Royal Australian Airforce (RAAF) Memorial Trust Fund after 16 November 2000 and before 18 November 2001;
Voluntary Service to Indigenous Communities Foundation after 16 April 2001;
Australia for UNHCR after 27 June 2001 and before 28 June 2002;
The Bradman Memorial Fund after 24 February 2001;
The Foundation for Young Australians after 6 May 2001; and
Visy Cares after 19 June 2001.

Proposal announced: The Prime Minister announced in Parliament on 7 December 2000 income tax deductibility for certain gifts of $2 or more made to Reconciliation Australia Limited. The Assistant Treasurer announced the other organisations by Press Releases during 2000 and 2001.

Financial impact: Unquantifiable, but insubstantial, cost to the revenue.

Compliance cost impact: Nil.

Information and communications technology, etc

Schedule 5 to this bill amends the ITAA 1997 to exempt from income tax the income of a non-profit society or association established for the purpose of promoting the development of Australian ICT resources.

This bill also amends the FBTAA 1986 to provide a rebate of FBT to an employer which is a non-profit society or association established for the purpose of promoting the development of the ICT, aquaculture and fishing resources of Australia.

Date of effect: The exemption of income tax for a society or association engaged in ICT applies from 1 July 2000. The FBT rebate for such employers applies from 1 April 2000, and the amendments in relation to the aquaculture and fishing resources apply from 1 April 1999.

Proposal announced: The measures in relation to the ICT resources were announced in a joint press release by the Assistant Treasurer and the Minister for Communications, Information Technology and the Arts on 29 March 2001. The rebate from FBT for non-profit employers engaged in the development of Australian aquaculture and fishing resources has not previously been announced.

Financial impact: Unquantifiable, but insubstantial, cost to the revenue.

Compliance cost impact: Nil.

Chapter 1 - Religious practitioners

Outline of chapter

1.1 Schedule 1 to this bill explains proposed amendments to clarify the treatment of religious practitioners under the new tax system. Amendments are proposed to the TAA 1953, the ITAA 1997, the FBTAA 1986, the GST Act and the ABN Act to ensure that religious practitioners are treated similarly to office holders (such as judges and parliamentarians) and common law employees. Consequently, religious practitioners who are not employees of religious institutions will be treated in the same way as those who are for tax purposes.

1.2 The amendments are intended to apply to religious practitioners in any religion.

Context of reform

Different conclusions about whether religious practitioners are employees

1.3 The tax treatment of religious practitioners has differed under the existing law. These differences arise because the courts have reached different conclusions (in matters other than taxation) on whether religious practitioners are common law employees.

1.4 For example, in The Greek Orthodox Community of South Australia Inc v His Grace Archbishop Spyridon Ermogenous
[1998] SAIRC 30, the Archbishop was held to be an employee of the Church. In contrast, in Reverend Howard Ian Knowles and the Anglican Property Trust, Diocese of Bathurst
[1999] NSWIRComm 157, it was held that Reverend Knowles was not an employee because there was no common law contract between the parties.

1.5 The current taxation treatment of religious practitioners has created a number of areas of uncertainty in the new tax system, as outlined in paragraphs 1.6 to 1.8.

GST and ABN law

1.6 Under the existing GST and ABN law, religious practitioners that are not employees are treated in the same way as businesses. The reason is that the definition of business includes any vocation or calling, and therefore includes a religious practitioner. In contrast, any religious practitioners who are employees are outside the GST and ABN systems for their activities as religious practitioners.

PAYG withholding

1.7 Religious practitioners who are employees are required to have amounts withheld under the PAYG withholding event for employees. There is currently no specific withholding event for religious practitioners who are not employees. Religious practitioners who are not employees, and do not have an ABN, are subject to withholding for failure to provide an ABN. In line with Assistant Treasurers Press Release No. 33 of 28 June 2000, the Commissioner has, as an interim measure, varied to nil the amount to be withheld in these circumstances.

FBT

1.8 Under the current law, a benefit provided by a religious institution to a religious practitioner who is an employee is exempt if it is provided principally in relation to pastoral or related duties. Under Taxation Ruling TR 92/17, the Commissioner has accepted that the concept of employee extends to religious practitioners who receive a stipend or other form of remuneration, including non-cash benefits. A religious practitioner who is not an employee under the FBTAA 1986 is not covered by the exemption, the result being that benefits provided may be assessable income.

Summary of new law

1.9 Under the ABN and GST law, activities performed by a religious practitioner, as a religious practitioner of a religious institution, will be taken to be the activities of the religious institution (and not the activities of the religious practitioner). Consequently, a religious practitioner will not carry on an enterprise by performing these activities. The result will be that these religious practitioners will not be eligible (or need) to register for GST or an ABN for these activities.

1.10 Under the PAYG withholding arrangements, an entity will be required to withhold from payments made to a religious practitioner for any activity or series of activities done as a religious practitioner of a religious institution. This will only apply if the paying entity makes the payment in the course or furtherance of an enterprise.

1.11 Benefits provided to a religious practitioner by a religious institution for the performance of pastoral or related duties will be an exempt benefit under the FBTAA 1986, regardless of whether the religious practitioner is an employee of the religious institution.

1.12 This treatment under the taxation laws will not affect the legal status of a religious practitioner. If a religious practitioner is not an employee at common law, they will continue not to be an employee.

Comparison of key features of new law and current law
New law Current law
Religious practitioners will not be subject to GST for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. Religious practitioners will not be required or entitled to register for GST for these activities. However, these activities will still be the activities of the religious institution for GST purposes, and the religious institution may be subject to GST. The non-employee religious practitioners are subject to GST law. Consequently, they would have to register for GST if their annual turnover exceeded $50,000. If their annual turnover does not exceed $50,000, registration is optional. The activities of religious practitioners who are employees are not subject to GST law.
Activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, will not entitle a religious practitioner to an ABN. Religious practitioners will not require an ABN for these activities. The activities will still be the activities of the religious institution. Religious practitioners that are not employees are eligible to obtain an ABN. Where religious practitioners are employees, their activities as a religious practitioner do not entitle them to an ABN.
Payments to a religious practitioner for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, will be subject to PAYG withholding. This will only apply if the entity making the payment does so in the course or furtherance of an enterprise. Religious institutions are required to withhold amounts from the remuneration paid to any religious practitioners that are employees. In practice, some religious institutions withhold amounts from the remuneration of their practitioners, although not considering them to be employees. However, some practitioners pay their income tax under the PAYG instalment system.
Religious practitioners will be considered employees of their religious institution for the purposes of the FBTAA 1986. This will maintain the existing FBT exemption for a benefit provided by a religious institution to a religious practitioner that is principally for pastoral or other activities directly related to the practice, study, teaching or propagation of religious beliefs. A benefit provided by a religious institution to a religious practitioner, who is an employee of the institution, is an exempt benefit provided it is principally for pastoral or other religious duties. In practice, the Commissioner has accepted this exemption extends to religious practitioners who receive a stipend, or other form of remuneration. Benefits that are not for the performance of pastoral or related duties are liable to FBT. Benefits subjected to the FBTAA 1986, exempt or assessable, are treated as exempt income under income tax law.
No-ABN withholding arrangements will not apply to a payment by an entity to a religious practitioner for activities done in pursuit of a vocation as a religious practitioner, and as a member of a religious institution. No-ABN withholding arrangements currently apply to a payment, for services of a religious practitioner, by a religious institution to the practitioner, who is not an employee and who does not quote an ABN to the religious institution. However, the Commissioner has varied the amount to be withheld in these circumstances to zero.

Detailed explanation of new law

Main terms

Religious practitioner

1.13 A definition of religious practitioner will be inserted in the ABN Act, the GST Act and the ITAA 1997. The ITAA 1997 definition also applies to Schedule 1 to the TAA 1953 (which contains the new PAYG withholding provision for religious practitioners). [Schedule 1, item 5, section 195-1 of the GST Act, item 2, section 41 of the ABN Act and item 16, subsection 995-1(1) of the ITAA 1997]

1.14 The definition mirrors the definition of religious practitioner in subsection 136(1) of the FBTAA 1986. Religious practitioner is defined to mean:

a minister of religion;
a student at an institution who is undertaking a course of instruction in the duties of a minister of religion;
a full-time member of a religious order; or
a student at a college conducted solely for training persons to become members of religious orders.

1.15 The definition uses the terms minister of religion and member of a religious order. These terms are intended to include a person of the described kind in any religion.

Activities done by a religious practitioner in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution

1.16 The amendments in this bill generally apply where a religious practitioner is undertaking activities in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. The object of these words is to describe the activities that the practitioner does as a religious practitioner of a religious institution. [Schedule 1, item 1, section 5A of the ABN Act, item 4, section 50-5 of the GST Act and item 24, section 12-47 of Schedule 1 to the TAA 1953]

1.17 The term vocation is currently used in the definition of business in the ITAA 1936, the ITAA 1997, the GST Act and the ABN Act. A business is defined as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. The idea that a vocation covers a wider range of circumstances than the term employee is used in these amendments.

1.18 In addition to duties directly related to religion, a religious practitioner may undertake a range of activities within a religious institution and the wider community. This could include, for example, administration of a parish or teaching in a school. The amendments aim to treat all activities done by a religious practitioner as a representative of a religious institution in the same way. The term vocation is intended to facilitate this.

1.19 As the words link a religious practitioner to a religious institution, religious practitioners who do not belong to a religious institution will not be covered by the amendments. Religious practitioners who are affiliated with a religious institution will only be within the scope of the amendments for activities undertaken in the pursuit of a vocation.

Example 1.1 A religious practitioner who plays professional golf or conducts farming activities will not be within the amendments for these activities.

1.20 Where a religious practitioner does an activity that, although perhaps within their calling, has no connection to the religious institution with which they are practitioners, that activity is also outside the proposed amendments.

1.21 In some circumstances, a religious practitioner may undertake an activity that is connected to the skills they have developed as a religious practitioner, but is nevertheless outside the scope of a vocation.

Example 1.2 A religious practitioner is engaged by a large company to be a facilitator at a meeting. The religious practitioners skill in facilitation has been developed through a vocation as a religious practitioner. This particular meeting, however, is about secular issues. In this case, the religious practitioner is not undertaking an activity in pursuit of a vocation as a religious practitioner.

Religious institution

1.22 The term religious institution will not be used in a defined sense in the amendments in this bill. This follows the existing income tax, FBT and GST laws which use the term in its ordinary sense.

1.23 Taxation Ruling TR 92/17 discusses the meaning of religious institution for the purposes of the ITAA 1997 and the FBTAA 1986. That ruling says that a body is a religious institution if its objects and activities reflect its character as a body instituted for the promotion of some religious object, and the beliefs and practices of the members of that body constitute a religion.

1.24 The High Court in The Church of the New Faith v. Commissioner of Pay-roll Tax (Vic)
83 ATC 4652; (1983)
14 ATR 769 (the Scientology case) established that the 2 most important factors in deciding whether a particular set of beliefs and practices constitute a religion are:

belief in a supernatural being, thing or principle; and
acceptance of canons of conduct which give effect to that belief, but which do not offend against the ordinary laws.

1.25 Generally, private schools, private universities and residential university colleges will not be considered religious institutions. However, Bible colleges, seminaries and theological colleges may come within the definition of religious institution. This decision must be made having regard to the primary or dominant object of the body as stated in its constituent documents.

ABN

1.26 If a religious practitioner undertakes activities in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution, these activities will be taken to be the activities of the religious institution, and not the activities of the religious practitioner, for the purposes of the ABN law. As a result, the religious practitioner will not be carrying on an enterprise and will not be entitled to an ABN for these activities (although these activities will form part of the enterprise of the religious institution of which the practitioner is a member). [Schedule 1, item 1, section 5A]

1.27 The amendments will not apply to a religious practitioner who is acting as an employee or agent. The application of the ABN law to employees and agents is already clear. Employees are not carrying on an enterprise and do not need an ABN, for their activities as an employee. Employees and agents are specifically excluded from the operation of the amendments to ensure that a double credit or double taxation situation does not arise under the GST law. In the case of an employee under the current law, a credit arises when the employer reimburses the employee for an expense incurred in relation to activities as an employee. If employees were not excluded from the definition, it would be possible for the religious institution to also claim an input tax credit for any expense incurred by the religious practitioner, as the expense would be considered the expense of the religious institution. This would lead to a possible double credit situation.

1.28 This will ensure that there is no difference between religious practitioners who are employees (who do not require an ABN for their activities) and those who are not.

1.29 Religious practitioners may be entitled to an ABN for other activities they carry on, if those activities satisfy the definition of enterprise. For example, if a religious practitioner were also a successful writer of crime fiction, the practitioner would be entitled to an ABN for that activity.

1.30 In some situations there may be a fine line between an activity pursued as part of a vocation, and one that is outside the bounds of a vocation. Individual circumstances and factors within each religion will need to be considered in each case.

Example 1.3 A religious practitioner writes a book on the history of a particular religion. If the book is not for general distribution, and the intended audience are followers of the religion, it will probably be considered part of a vocation. If the book is widely circulated and the intended audience is the general public, it may be considered beyond the scope of a vocation, and an ABN may be required.

GST

1.31 Activities undertaken by a religious practitioner (other than as an employee or agent) in pursuit of their vocation as a religious practitioner and as a member of a religious institution will be treated for GST purposes as though they were the activities of the religious institution. [Schedule 1, item 4, section 50-5]

1.32 This means that these activities will not be part of any enterprise carried on by the religious practitioner and that the practitioner will not be entitled to register for GST in relation to these activities (although these activities will form part of the enterprise of the religious institution of which the practitioner is a member).

1.33 However, if a religious practitioner undertakes other activities that are not in pursuit of their religious vocation or that are not done as a member of a religious institution, then that practitioner may be entitled to GST registration, or may be required to register for GST.

Example 1.4 Mr Goodwin makes supplies amounting to $32,000 per annum for his activities as a religious practitioner for his religious institution. He is not an employee or agent of the religious institution. Mr Goodwin also carries on a small farming business, which has an annual turnover of $51,000.Supplies made by Mr Goodwin as part of his religious activities do not form part of his enterprise and therefore will not be included in his annual turnover. These supplies will be included in the annual turnover of his religious institution.However, his farming activities are not related to his religious vocation, nor are they done as a member of a religious institution. Therefore, these activities will form part of an enterprise that Mr Goodwin carries on. He will be required to register for GST for his farming activities as his annual turnover for these activities meets the registration turnover threshold.

1.34 If a religious practitioner (other than an employee or agent) makes supplies in the pursuit of a vocation as a religious practitioner and as a member of a religious institution, the religious institution will be liable for any GST payable on those supplies. The religious practitioner will not be liable for any such GST. This is because for GST purposes, the religious institution is taken to have made those supplies.

Example 1.5 Mr Kennedy sells prayer books to members of his religious institution in the course of his activities as a religious practitioner. He will not be liable for any GST payable on the supply of these books, but his religious institution will be liable for any GST if that institution is GST registered.1.35 Similarly, if a religious practitioner that is not an employee or agent makes acquisitions or importations in the pursuit of their vocation as a religious practitioner and as a member of a religious institution, the religious institution will be entitled to claim any input tax credits allowable for those acquisitions or importations. The religious practitioner will not be entitled to any input tax credits on any such activities.

Example 1.6 When Mr Kennedy buys his prayer books, GST is included in the price of the supply to him. Mr Kennedy will not be entitled to claim any input tax credits on the acquisition of the prayer books. However, if his religious institution is GST registered, it will generally be entitled to claim input tax credits for the GST included in the price of the prayer books.

New PAYG withholding event for religious practitioners

1.36 A new withholding requirement (usually referred to as a PAYG withholding event) will be introduced into the PAYG withholding system to cover payments received by religious practitioners for activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. All entities who make payments to religious practitioners in the course or furtherance of an enterprise will be required to withhold. This will ensure that religious practitioners who are not employees are treated under the PAYG law in the same way as those who already are. [Schedule 1, item 24, section 12-47]

1.37 Under this approach, payments to religious practitioners will be treated in a similar way to payments made to office holders such as members of the Commonwealth, State and Territory judiciaries and members of Australian Parliaments.

1.38 The new withholding event is contained in section 12-47 of Schedule 1 to the TAA 1953 which deals with payments for work or services. It applies to activities done in the pursuit of a vocation as a religious practitioner, and as a member of a religious institution. The limitation of this provision to payments from entities in the course of carrying out an enterprise of that entity will ensure that an entity making a payment to a religious practitioner in a private capacity (e.g. as a member of a wedding party or a congregation) will not be required to withhold.

1.39 The Commissioner will continue to consult with representatives of religious institutions to determine whether there are any payments (especially of an irregular or unusual nature) for which the amount to be withheld should be varied to zero.

Priority rule

1.40 The withholding events in sections 12-35 (payments to employees) and 12-45 (payments to office holders) will have priority over the new withholding event in section 12-47 in Schedule 1 to the TAA 1953. This is consistent with the effect of the amendments to the ABN and GST law, which ensure that taxation treatment does not change for religious practitioners who are common law employees. [Schedule 1, item 23, subsection 12-5(2)]

1.41 The withholding event for religious practitioners has priority over withholding events in sections 12-60 (payments under labour hire arrangements) and 12-190 (recipient does not quote an ABN) in Schedule 1 to the TAA 1953. This is achieved by inserting a reference to the new withholding event, section 12-47, into the table in section 12-5, which explains what to do if more than one provision requires a withholding. This will ensure that religious practitioners covered by the new withholding event are not liable to withholding for failure to provide an ABN (under section 12-190 of Schedule 1). [Schedule 1, item 22, subsection 12-5(2)]

FBT

1.42 The amendments to the FBTAA 1986 ensure that fringe benefits provided by a religious institution to a religious practitioner in respect of pastoral or related duties continue to be exempt regardless of whether or not the religious practitioner is a common law employee of the religious institution. [Schedule 1, item 7, paragraph 136(1)]

1.43 Broadly, a fringe benefit is defined in subsection 136(1) of the FBTAA 1986 to be a benefit provided to an employee, or an associate of an employee, by an employer, or an associate of the employer, in respect of the employment of the employee, but does not include salary or wages or exempt benefits. Subsection 136(1) defines employee by reference to the definition of current employee, that is, a person who receives, or is entitled to receive, salary or wages. Salary or wages means a payment from which an amount must be withheld under a provision in Schedule 1 to the TAA 1953, including payments to employees, company directors and office holders.

1.44 As a result of the insertion of section 12-47 in Schedule 1 to the TAA 1953 by this bill, the definition of salary or wages in subsection 136(1) is also amended. The definition of salary or wages is extended to include a payment from which an amount must be withheld, regardless of whether the amount is actually withheld, under section 12-47 where:

the payment is made to a religious practitioner by a religious institution; and
the activity, or activities, for which the payment is made is done by the religious practitioner as a member of the religious institution (see explanation in paragraphs 1.16 to 1.25).

1.45 Therefore, a religious practitioner may receive salary or wages for the purposes of the FBTAA 1986 through the operation of section 12-35 as an employee or through section 12-47 as a religious practitioner receiving payment from a religious institution.

1.46 However, where benefits are provided principally in respect of the pastoral or related duties of a religious practitioner by a religious institution, the benefits are exempt benefits under section 57 of the FBTAA 1986.

Application and transitional provisions

1.47 The new PAYG withholding event for religious practitioners will apply to payments made to religious practitioners by a religious institution or by an entity carrying on an enterprise other than a religious institution. The requirement to withhold will commence on 1 July 2002. [Schedule 1, item 25]

1.48 The amendments which exclude activities done as a religious practitioner of a religious institution from the definition of an enterprise for both ABN and GST purposes, will apply from 1 July 2000. This will ensure that a religious practitioner will not have been required to have an ABN or be registered for GST as announced by the Government in Assistant Treasurers Press Release No. 33 of 28 June 2000. [Schedule 1, items 3 and 6]

1.49 The amendments to the FBTAA 1986 will apply to benefits provided to a religious practitioner by a religious institution on or after 1 July 2000. This will be achieved by a transitional provision applying from 1 July 2000 until the date that the PAYG withholding event commences on 1 July 2002 [Schedule 1, item 9] . From 1 July 2002, the PAYG withholding event will ensure that payments by a religious institution to a religious practitioner will come within the definition of salary or wages for the purposes of the FBTAA 1986. Consequently, benefits provided by a religious institution to a religious practitioner or to their spouse or child, in respect of pastoral duties or directly related religious activities, will be exempt benefits [Schedule 1, item 8] .

Consequential amendments

Amendments to the ITAA 1997

1.50 The following sections of the ITAA 1997 are amended to include a reference to the new PAYG withholding event for religious practitioners in the tables of withholding events. These amendments will commence when the new PAYG withholding event in section 12-47 commences on 1 July 2002. [Schedule 1, item 17]

1.51 New subsections 28-185(3), 130-90(5) and 900-12(3) include a reference to the new withholding event for religious practitioners in the tables of withholding events in those sections. Section 28-185 is about the 4 methods of calculating motor vehicle expenses, section 130-90 is about the capital gains implications of shares or rights acquired under an employee share trust and section 900-12 is about the application of the substantiation rules. [Schedule 1, item 11, subsection 28-185(3), item 14, subsection 130-90(5) and item 15, subsection 900-12(3)]

1.52 These amendments will ensure that these provisions will apply to religious practitioners receiving withholding payments covered by the new withholding event in section 12-47 in the same way as they apply to employees and office holders.

1.53 Item 10 amends section 26-30, which is about deducting relatives travel expenses, to refer to payments by a religious institution which are covered by the new withholding event in section 12-47. This means that, for the purposes of this section, a religious practitioner will only be equated to an employee when receiving a payment from a religious institution. [Schedule 1, item 10, subsection 26-10(6)]

1.54 Item 13 amends section 85-35 to ensure that the deduction limitation rules for individuals earning personal services income do not apply to payments to religious practitioners covered by the new PAYG withholding event. Consequently, religious practitioners will have the same exclusion as employees and office holders from these rules. [Schedule 1, items 12 and 13, section 85-35]

Amendments to Schedule 1 to the TAA 1953

1.55 Items 17 to 20 amend Schedule 1 to the TAA 1953 to include reference to the new PAYG withholding event for religious practitioners in relevant sections.

1.56 Subsection 10-5(1) will be amended to include the new withholding event in the general summary of withholding payments. [Schedule 1, item 18, subsection 10-5(1)]

1.57 Subsection 12-1(1) will be amended to ensure withholding is not required from a religious practitioner if the income is exempt income. [Schedule 1, item 19, subsection 12-1(1)]

1.58 Subsection 12-2(2) will be amended to ensure that withholding will not be required from a payment to a religious practitioner that is a living away from home allowance. [Schedule 1, item 20, subsection 12-1(2)]

1.59 Subsection 12-1(3) will be amended to ensure that withholding will not be required from a payment to a religious practitioner that is an expense payment fringe benefit. [Schedule 1, item 21, subsection 12-1(3)]

Chapter 2 - Change in status of constitutionally protected superannuation funds

Outline of chapter

2.1 Schedule 2 to this bill amends the income tax law and the superannuation surcharge legislation to facilitate the change in status of constitutionally protected superannuation funds that elect to become taxed superannuation funds. The amendments will ensure that members of constitutionally protected superannuation funds which have changed status are treated similarly for income tax and superannuation surcharge purposes with members who rollover benefits from an untaxed source to a taxed source.

Context of reform

2.2 Section 271A of the ITAA 1936 exempts from tax the income of superannuation funds that are listed as constitutionally protected superannuation funds in Schedule 14 to the Income Tax Regulations.

2.3 ETPs paid from constitutionally protected superannuation funds are paid from an untaxed source. That is, if the benefit is paid to a member who is aged 55 or more, the post-June 1983 component of the ETP is taxed at a maximum rate of 15% (plus the Medicare levy) up to the low rate threshold ($105,843 in the 2001-2002 income year) and 30% (plus the Medicare levy) on the excess. Similarly, pensions paid from constitutionally protected superannuation funds do not receive the 15% pension rebate.

2.4 However, if the member rolls over the ETP to, for example, a taxed superannuation fund, the assessable income of the taxed superannuation fund includes the specified rollover amount - that is, the post-June 1983 component of the rolled over ETP. If an ETP is subsequently paid from the fund to a member who is aged 55 or more, the post-June 1983 component of the ETP is tax free up to the low rate threshold. The excess is taxed at a maximum rate of 15% (plus the Medicare levy). Similarly, if a pension is subsequently paid from the fund to the member, the member is entitled to the 15% pension rebate.

2.5 Under the Constitutionally Protected Fund Act 1997, a member of a constitutionally protected superannuation fund is required to pay any superannuation surcharge debt either periodically or when he or she receives a benefit from the fund. However, if the member rolls over the benefit to, for example, a taxed superannuation fund, the member can direct the trustee of the taxed fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

2.6 Currently the income tax and superannuation surcharge laws do not deal with the removal of a fund from the list of constitutionally protected superannuation funds. However, the Electricity Industry Superannuation Fund (formerly known as the Electricity Trust of South Australia Superannuation Fund) has sought to change its status to a taxed superannuation fund with effect from 1 July 2000.

Summary of new law

2.7 The amendments to the ITAA 1936 will ensure that where a constitutionally protected superannuation fund changes its status and becomes a taxed superannuation fund, the assessable income of the fund will include the amount that would be assessable if member benefits were rolled over from an untaxed source to a taxed source.

2.8 That is, the assessable income of the fund will include the amount that would be the specified rollover amount if all the benefits in the fund were paid out and rolled over to the fund.

2.9 Benefits subsequently paid from the fund will be treated as though they are paid wholly from a taxed source. However, a pension that commenced to be paid from the fund before the fund changed its status will not qualify for the 15% pension rebate.

2.10 The amendments to the Constitutionally Protected Fund Act 1997 will ensure that a member is liable to pay any outstanding superannuation surcharge debt when a constitutionally protected superannuation fund changes its status to a taxed superannuation fund. However, the member will be able to direct the trustee of the fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

Comparison of key features of new law and current law
New law Current law

Amendments to the ITAA 1936

If a complying superannuation fund is removed from the list of constitutionally protected superannuation funds in the Income Tax Regulations, the assessable income of the fund will include the sum of the specified rollover amounts that would be included in assessable income if member benefits were rolled over to the fund from an untaxed source at the time the fund changed its status.

Any benefits paid from the fund after it ceases to be a constitutionally protected superannuation fund will be taxed as though they came wholly from a taxed source.

However, a member who receives a pension from the fund that commenced to be paid when the fund was constitutionally protected superannuation fund will not be entitled to the 15% pension rebate.

No amount would be included in the assessable income of a complying superannuation fund if it were removed from the list of constitutionally protected superannuation funds in the Income Tax Regulations.

However, any benefits paid from the fund after it ceased to be a constitutionally protected superannuation fund would be taxed as though they came wholly from a taxed source.

A member who received a pension from the fund that commenced to be paid when the fund was constitutionally protected superannuation fund would be entitled to the 15% pension rebate.

Amendments to the Constitutionally Protected Fund Act 1997

A member of a constitutionally protected superannuation fund will be liable to pay any outstanding superannuation surcharge debt at the time the fund changes status to a taxed superannuation fund. However, the member will be able to direct the trustee of the fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

A member of a constitutionally protected superannuation fund is required to pay any superannuation surcharge debt either annually or when he or she receives a benefit from the fund. However, if the member rolls over the benefit to, for example, a taxed superannuation fund, the member can direct the trustee of the taxed fund to pay some or all of the outstanding surcharge debt on the members behalf and reduce his or her benefits accordingly.

Detailed explanation of new law

Amendments to the ITAA 1936

2.11 The assessable income of a complying superannuation fund that ceased to be a constitutionally protected superannuation fund at any time during the current income year or at the end of the previous income year will include the sum of the specified rollover amounts that would be included in assessable income if accumulated member benefits were:

paid out of the fund immediately before it ceased to be a constitutionally protected superannuation fund; and
rolled over to the fund immediately after it ceased to be a constitutionally protected superannuation fund.

[Schedule 2, item 2, section 281A]

2.12 Subsection 267(1) defines a specified rollover amount to mean the untaxed element of the post-June 1983 component of an ETP.

2.13 The accumulated member benefits are the amounts of contributions and earnings accumulated in the fund at the time it ceases to be a constitutionally protected superannuation fund. Accumulated member benefits do not include:

unfunded benefits accrued on behalf of the member; and
contributions that are due but not yet paid to the fund - employer contributions that are due but not yet paid to the fund will be taxable contributions at the time they are paid to the fund.

2.14 This amendment will ensure that a constitutionally protected superannuation fund that changes its status will be in broadly the same position that it would have been had it paid tax since 1988.

2.15 Consequently, unless the fund uses the subsection 274(7) transfer mechanism to transfer from the fund to the member the tax on contributions made in the year a benefit is paid from the fund, future lump sum benefits paid by the fund will be paid as ETPs coming wholly from a taxed source. That is, if the benefit is paid to a member who is aged 55 or more, the post-June 1983 component of the ETP will be tax free up to the low rate threshold. The excess will be taxed at a maximum rate of 15% (plus the Medicare levy).

2.16 Similarly, the 15% rebate that applies to superannuation pensions paid from taxed superannuation funds will apply to pensions that commence to be paid from the fund after it changes status. However, the rebate will not be available in respect of a pension that commenced to be paid when the fund was a constitutionally protected superannuation fund. [Schedule 2, item 1, subsection 159SM(3)]

Amendments to the Constitutionally Protected Funds Act 1997

2.17 A member will be liable to pay any outstanding superannuation surcharge debt when a constitutionally protected superannuation fund changes its status. The amount of the members liability will be the lesser of:

the outstanding amount in the members surcharge debt account; and
15% of the employer-financed component of that part of the value of the age retirement benefits of the member at the time when the fund ceases to be a constitutionally protected superannuation fund that accrued in the period between 20 August 1996 and the time when the fund changes its status.

[Schedule 2, item 6, subsection 15(6A)]

2.18 However, if a member is liable to pay any outstanding superannuation surcharge debt when the constitutionally protected fund changes status, the member may choose to direct the trustee to pay the whole or any part of the debt and to reduce the members benefits accordingly. The trustee is required to comply with the members direction. [Schedule 2, items 7 and 8, subsections 15(8AA) and (8B)]

2.19 In addition, the amendments ensure that where a superannuation surcharge assessment covers the period when a superannuation fund was a constitutionally protected superannuation fund and the assessment is made after the fund loses its constitutionally protected fund status, the Commissioner must issue the assessment to the superannuation provider rather than to the member. [Schedule 2, item 5, subsection 14(3)]

Example 2.1 Alex is a member of a constitutionally protected superannuation fund which changes its status to a taxed superannuation fund on 1 July 2002. A superannuation surcharge liability for the year ending 30 June 2002 is raised in respect of Alex on 30 November 2002. The surcharge assessment will issue to the trustee of the fund (as the superannuation provider) rather than to Alex.As the fund is no longer a constitutionally protected superannuation fund, the trustee of the fund will need to comply with the requirements of the Superannuation Contributions Tax (Assessment and Collection) Act 1997. Therefore:

the trustee of the fund will be liable to pay the assessment unless Alexs benefits have been rolled over to another superannuation provider or paid to Alex;
if Alexs benefits have been rolled over to another superannuation provider, that other superannuation provider will be liable to pay the assessment; or
if the benefits have been paid to Alex, Alex will be liable to pay the assessment.

2.20 The amendments also correct a grammatical error in paragraph 9(2)(b). [Schedule 2, item 4, paragraph 9(2)(b)]

Application and transitional provisions

2.21 The amendments apply from 1 July 2000.

2.22 The Electricity Industry Superannuation Fund has sought to have its constitutionally protected superannuation fund status removed with effect from 1 July 2000. Therefore, as a transitional measure, the amendments ensure that subsection 48(2) of the Acts Interpretation Act 1901 (which provides that regulations generally have no effect prior to their date of notification) does not apply to regulations that are introduced to omit the following items from Schedule 14 to the Income Tax Regulations with effect from 1 July 2000:

item 501 - Electricity Corporations Act 1994;
item 502 - Electricity Trust of South Australia Act 1946; and
item 509 - Superannuation (Benefit Scheme) Act 1992.

[Schedule 2, item 3]

Chapter 3 - CGT event E4

Outline of chapter

3.1 A payment by the trustee to a beneficiary of a trust, that is not assessable income of the beneficiary, may reduce the cost base of the beneficiarys unit or interest in the trust. The amendments in Schedule 3 to this bill replace sections 104-70 (CGT event E4), 104-71 and 104-72 of the ITAA 1997, prevent CGT event E4 applying to payments out of the CGT discount, and correct the treatment of certain capital gains passing through a chain of trusts. Amendments dealing with payments of non-assessable amounts associated with building allowances and minor amendments are also made.

Context of reform

3.2 In Treasurers Press Release No. 16 of 22 March 2001 the Government announced that CGT event E4 will not apply to a payment of the CGT discount amount made on or after 1 July 2001 to a beneficiary with units or interests in a trust. The Government also announced that CGT event E4 will apply to payments associated with building allowances made on or after 1 July 2001. Details of the transitional rules for chains of trusts were announced in Assistant Treasurers Press Release No. 33 of 31 July 2001.

3.3 Schedule 3 to this bill gives effect to the Government announcements.

3.4 Payments of CGT discount amounts that pass through one or more trusts before being paid to the beneficiary at the end of the chain of trust, can have inappropriate tax consequences through the application of CGT event E4 for trusts in the chain and for the end beneficiary.

3.5 Schedule 3 addresses the chain of trusts deficiencies in CGT event E4 and also makes amendments that will improve the operation of CGT event E4 by clarifying the provision and ensuring that it has the intended effect.

Summary of new law

3.6 The main amendments to CGT event E4 will:

enable a payment of the CGT discount amount to be made by the trustee to a beneficiary on or after 1 July 2001 without triggering CGT event E4; and
treat a payment associated with building allowances made by the trustee to a beneficiary on or after 1 July 2001 as a non-assessable amount to which CGT event E4 applies.

3.7 The amendments correct deficiencies in the application of CGT event E4 where a payment of a CGT discount amount flows through a chain of trusts. Minor amendments also clarify certain aspects of the application of CGT event E4.

3.8 The amendments relating to the chain of trust corrections include a transitional measure and will apply to payments made after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. The remaining amendments apply to payments made on or after 1 July 2001.

Comparison of key features of new law and current law
New law Current law
CGT event E4 no longer applies to a payment of a CGT discount amount made by the trustee on or after 1 July 2001 to a beneficiary with a unit or interest in a trust. CGT event E4 may apply to a payment of a CGT discount amount made by a trustee to a beneficiary with a unit or interest in a trust.
A payment associated with building allowances made on or after 1 July 2001 is a non-assessable part to which CGT event E4 applies. Subsection 104-70(7) excludes a payment associated with building allowances from the non-assessable part to which CGT event E4 applies.
New subsection 104-71(4) ensures that CGT event E4 does not apply if the non-assessable part is attributable to a CGT discount amount and is paid to the trustee of a trust. Adjustments to the cost base of interests in the trust are not required. Section 104-72 disregards a CGT event E4 capital gain made by the trustee of a fixed trust where a payment out of a CGT discount amount flows through a chain of trusts. Adjustments to the cost base of interests in the trust are still required.
Technical corrections ensure CGT event E4 operates as intended and clarify its operation.  

Detailed explanation of new law

Overview of the cost base adjustment rules

3.9 Section 104-70 (CGT event E4) of the ITAA 1997 reduces the cost base of a unit or interest in a trust if the trustee pays a non-assessable amount to a beneficiary of the trust. If the payment is more than the beneficiarys cost base, the beneficiary makes a capital gain. If the beneficiary has owned the unit or interest in the trust for at least 12 months, the beneficiary may claim the CGT discount on this capital gain.

3.10 CGT event E4 applies to non-assessable amounts which include CGT concession amounts. The following payments are CGT concession amounts:

the CGT discount;
frozen indexation; and
the small business 50% reduction.

3.11 The amendments remove the requirement to apply CGT event E4 to a CGT discount amount paid:

on or after 1 July 2001; and/or
before 1 July 2001 to a beneficiary that is the trustee of a trust in a chain of trusts.

3.12 The amendments ensure that CGT event E4 applies to an amount associated with building allowances paid on or after 1 July 2001.

3.13 A payment of other CGT concession amounts continues to be dealt with under CGT event E4.

Treatment of a payment to a beneficiary of a CGT discount amount

3.14 Under the current law, a payment of a CGT discount amount to a beneficiary to which CGT event E4 applies can have the effect of reducing the benefit of the CGT discount allowed in the trust.

3.15 These amendments recognise that a person investing through a managed fund should receive a similar CGT outcome to that of a person investing directly. This is achieved by reducing the non-assessable part to which CGT event E4 applies by the amount of the CGT discount allowed to the trustee that is paid to a beneficiary. [Schedule 3, item 1, subsection 104-71(4), item 1 in the table]

Example 3.1 On 15 August 2001, Sam received a payment of $100 from the Rowley Unit Trust. The trustee advised Sam that this amount comprised $50 from a discount capital gain included in the net income of the trust and $50 from the CGT discount allowed.In applying CGT event E4 to the payment, Sam first reduces the $100 payment by $50, being the amount of the net income assessed to him under section 97 of the ITAA 1936. Sam then reduces the remaining $50 balance by a further $50, being the amount that represents the CGT discount allowed to the trustee. Sams non-assessable part is nil. CGT event E4 does not apply to reduce the cost base of Sams units in the trust nor does he make a CGT event E4 capital gain.

3.16 Other amounts can also reduce the non-assessable part. This may happen if other CGT concessions are applied to a capital gain made by a trust.

Treatment of a payment to a beneficiary of other CGT concession amounts

3.17 CGT event E4 continues to apply to a payment to a beneficiary of other CGT concession amounts. With the modification to CGT event E4 for a payment of a CGT discount amount, new rules are required to reduce the non-assessable part where other amounts are paid.

3.18 Adjustments are required where CGT concessions allowed to a beneficiary are less than those allowed to the trustee. This may happen if:

capital losses are applied to the capital gain of the trust or a beneficiary; or
a beneficiary is not entitled to claim the full benefit of the CGT discount claimed by the trustee.

[Schedule 3, item 1, subsection 104-71(4), items 2 to 7 in the table]

Example 3.2 On 15 August 2001, Chris received a payment of $600 from the Adams Family Unit Trust. The trustee advised Chris that this amount comprised $150 that was included in the net income of the trust after claiming the 50% CGT discount and the small business 50% reduction. Also included in the payment was $300 from the CGT discount and $150 from the small business 50% reduction allowed against that capital gain.In applying CGT event E4 to the payment, Chris first reduces the $600 payment by $150, being the amount of the net income assessed to him under section 97. Chris then reduces the remaining $450 balance by a further $300, being the amount that represents the CGT discount allowed against the capital gain made by the trust. Chriss non-assessable part is $150, which represents the amount of the small business 50% reduction that Chris was allowed when applying the rules in Subdivision 115-C of the ITAA 1997.Assuming the cost base of Chriss units in the trust is nil, Chris makes a capital gain of $150 under CGT event E4. If Chris has owned his units in the trust for at least 12 months, the 50% CGT discount reduces this capital gain to $75.

3.19 As capital losses are offset against capital gains before certain CGT concessions are applied, the extent to which the non-assessable part is adjusted for capital losses applied depends on:

the type of entity receiving the payment - different entities are eligible for different CGT discount percentages; and
the combination of CGT concessions applied.

Chain of trusts

3.20 If a payment of the CGT discount amount passes through 2 or more trusts before being paid to the beneficiary at the end of the chain of trusts, cost base adjustments under CGT event E4 may be made to each of the trustees units or interests in the chain. A definition of a chain of trusts is provided. [Schedule 3, item 1, subsection 104-71(5)]

3.21 This inappropriate outcome is removed by reducing the non-assessable part by the amount of the CGT discount allowed against a capital gain made by a trust that is paid to the trustee of another trust. [Schedule 3, item 1, subsection 104-71(4), item 1 in the table]

3.22 CGT event E4 may still apply to a payment of other tax deferred amounts to each trustee in a chain of trusts. However, a payment of the small business 50% reduction amount will not generate a capital gain under CGT event E4. [Schedule 3, item 1, section 104-72]

Effect a capital loss applied by a trustee against a capital gain has on a non-assessable part for a beneficiary

3.23 If the trustee making a payment of a CGT concession amount applied a capital loss or net capital loss against the capital gain before applying the CGT concession, a further reduction may be made to the non-assessable part of the beneficiary. The amount of this reduction is that proportion of the loss reflected in the payment to the beneficiary. This reduction may also be made if a capital loss or net capital loss was applied against a concessionally treated capital gain by another trustee in a chain of trusts. In determining whether a capital loss is reflected in a payment to a beneficiary in a chain of trusts, a capital loss claimed by a trustee higher in the chain of trusts may be taken into account. [Schedule 3, item 1, subsection 104-71(4), item 7 in the table]

Example 3.3 In the 2000-2001 income year, the Ready Capital Unit Trust made a capital gain of $1,800. The trust also made a capital loss of $500. After offsetting the capital loss, the trustee applied the CGT discount to the balance of the gain ($1,300) resulting in the trust having a net capital gain of $650. Nahid, a beneficiary of the trust, was presently entitled to all the trust income.On 10 September 2001, the trustee paid Nahid $1,800. The trustee advised Nahid that this amount comprised $650 CGT discount, $650 net income and $500 that represented the capital loss applied by the trustee against the capital gain.In applying CGT event E4 to the payment, Nahid reduces the $1,800 payment by the following amounts:

$650, being the amount of the capital gain included in the net income assessed to her under section 97 of the ITAA 1936 (paragraph 104-70(1)(b));
$650, being the amount that represents the CGT discount allowed against the capital gain made by the trust (item 1 in the table in subsection 104-71(4)); and
$500, being the amount of the loss applied against the capital gain made by the trust and reflected in the payment to Nahid (item 7 in the table in subsection 104-71(4)).

The result for Nahid is the non-assessable part is nil [$1,800 - ($650 + $650 + $500)].

Payments associated with the building allowance

3.24 Currently, paragraph 104-70(7)(a) excludes from the non-assessable part a payment of an amount that is attributable to deductions allowed under Division 43 of the ITAA 1997. This Division deals with deductions for capital works which covers buildings, structural improvements and environment protection earthworks.

3.25 These amendments, in repealing paragraph 104-70(7)(a) for payments made on or after 1 July 2001, recognise that it is now appropriate that cost base adjustments be made for payments of these deduction amounts so as to:

treat investors in trusts on a broadly equivalent basis to direct investors; and
remove the ability to generate losses (or to reduce capital gains) on trust interests where recognition for the diminished value of the asset has already been provided.

[Schedule 3, item 1, subsection 104-71(3)]

Technical amendments

Table 3.1: Amendments to the ITAA 1997
What the provision does What the amendment will do
Subsection 104-70(2) - describes the situations where a payment is disregarded in the calculation of the non-assessable part. Correct the numbering of paragraphs that are now included in new subsection 104-71(1). [Schedule 3, item 1, paragraphs 104-71(1)(d) and (e)]
Subsection 104-70(2) - describes the situations where a payment is disregarded in the calculation of the non-assessable part. Ensure there are no tax consequences for a payment of the small business 15-year exemption amount. This supports the rules in section 152-125 of the ITAA 1997 that such a payment is not subject to tax. [Schedule 3, item 1, paragraph 104-71(1)(g)]
CGT event E4 - identifies different types of payments a trustee may make to a beneficiary. Adopt consistent terminology. [Schedule 3, item 1, subsection 104-70(1), notes 1 and 2]
Subsection 104-70(1) - provides that CGT event E4 applies to the non-assessable part of a payment. Clarify that beneficiaries do not inappropriately receive a double tax benefit in calculating the non-assessable part because of the application of Subdivision 115-C. [Schedule 3, item 1, subsection 104-70(1)]
Subsection 104-70(1) - provides that CGT event E4 applies to a payment received in respect of your unit or interest in a trust. Clarify the treatment of a payment to a beneficiary received after the beneficiary stops owning their interest in the trust. Such a payment forms part of the capital proceeds of the CGT event relating to the ending of ownership of the interest in the trust. [Schedule 3, item 1, subsection 104-70(1), note 3]

Application and transitional provisions

3.26 As a transitional measure, CGT event E4 does not apply to a payment of a CGT discount amount to the trustee of another trust, that is not a complying superannuation entity. [Schedule 3, item 4]

3.27 The transitional provision applies to payments made by a trustee on or after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and before 1 July 2001. The remaining amendments made by Schedule 3 apply to payments made by a trustee on or after 1 July 2001. [Schedule 3, item 5]

Consequential amendments

3.28 A minor change is made to the integrity rules for the CGT discount. Section 115-60 provided that to the extent a distribution is from a discount capital gain, section 115-45 will not prevent a CGT event E4 capital gain from being a discount capital gain. As the payment of a CGT discount amount no longer triggers a capital gain, section 115-60 is not necessary and is repealed [Schedule 3, item 2] . The definition of a chain of trusts is added [Schedule 3, item 3] .

Regulation impact statement

Policy objective

3.29 The policy objective is to ensure that persons making passive investments through managed funds receive a similar CGT outcome to persons investing directly. This will assist investors to access the benefits of portfolio diversification without adverse tax consequences.

3.30 This measure will provide broadly comparative tax treatment between direct and indirect investors by modifying the application of CGT event E4 for certain payments made by trustees to beneficiaries of trusts.

Implementation options

3.31 For beneficiaries owning interests in trusts to which CGT event E4 applies, where payments are made to those beneficiaries that can trigger this event, the only effective option was the one adopted in this bill. It reflects that the manner in which CGT event E4 currently operates is the source of impediment to the comparative tax treatment of persons investing indirectly through managed funds.

3.32 The amendments made to CGT event E4 ensure:

this event will not apply to payments of CGT discount amounts to beneficiaries;
inappropriate outcomes in the application of this event will not happen to CGT discount amounts passing through a chain of trusts to end beneficiaries; and
this event will apply to payments of non-assessable amounts associated with building allowances.

3.33 Minor amendments will enhance the understanding and operation of CGT event E4.

Assessment of impacts

Impact group identification

Investors

3.34 The proposed amendments will mainly affect persons investing in managed funds. Industry estimates that managed funds make investments on behalf of over 9 million Australians. By providing appropriate tax treatment for indirect investments, more taxpayers may invest in managed funds. Beneficiaries of other trusts owning interests of a type to which CGT event E4 applies may also be affected.

Managed funds

3.35 Currently, there are over 3,200 managed funds in Australia. The proposed amendments will also affect compliance costs incurred by the managed funds industry. The level of investments in managed funds is likely to increase.

ATO

3.36 The proposed amendments will also impact on the ATO who will administer the revised rules for CGT event E4.

Analysis of costs/benefits

Compliance costs

3.37 Investors in managed funds receiving payments of CGT discount amounts will benefit from the proposal as they will not be required to make cost base adjustments to their interests in the trusts. Investors in managed funds receiving payments associated with building allowances will now be required to make cost base adjustments to their interests in the trusts.

3.38 There will be a minimal increase in compliance costs for investors as they will receive all relevant information from the fund. The exact compliance cost for the investor cannot be reliably quantified because they will use a variety of means to familiarise themselves with the new law. Some investors will rely on the information sent to them by the fund, whilst others will obtain further information from either the ATO or their tax advisers.

3.39 The current substantiation rules will apply so there will be no increase in record keeping costs for investors.

3.40 As each managed fund may have different systems in place for account and record keeping purposes, a reliable quantification of the compliance costs cannot be obtained. Examples of the types of costs that will be incurred by the managed funds include:

changing their systems to identify the appropriate components of payments to members that will enable members to fulfil their tax obligations;
providing members with information on the new law; and
ensuring that their record keeping systems are updated to show the components paid to members.

Administration costs

3.41 The proposed amendments do not require a change to any of the existing ATO systems for administering the CGT regime. However, they will require changes to the material prepared for taxpayers and tax practitioners for education about the revised rules for CGT event E4. As the ATO booklets and information pamphlets are updated each year, these changes will be folded into that process. Therefore, there should be minimal costs to administration in this respect.

3.42 The ATO will also incur costs in relation to training staff members on the new rules. In the short term there is likely to be an increase in the requests for provision of advice on the revised rules. This training will be done internally as part of ongoing ATO training, and therefore costs in relation to this aspect of administration would also be minimal.

Government revenue

3.43 The financial impact in modifying the operation of CGT event E4 for payments of CGT discount is included in the estimates for providing Concessions for capital gains by individuals and some other entities in the general outline of the explanatory memorandum to the New Business Tax System (Integrity and Other Measures) Act 1999.

3.44 The proposed amendment to require cost base adjustments for payments associated with building allowances will result in a gain to revenue of $5 million in 2002-2003, rising to $40 million per annum after 10 years.

Economic benefits

3.45 There may be some expansion in the level of investment in the managed fund industry.

3.46 Taxation will not be an impediment to how an investor may choose to invest because one of the major differences in the taxation treatment between direct investment and indirect investment is now removed.

Other issues - consultation

3.47 The ATO and Treasury consulted with peak bodies representing the investment, finance and property industries. Draft legislation was also released to those representatives for their comment. The amendments have industry support.

Conclusion and recommended option

3.48 The proposed amendments will provide a comparative tax outcome for persons investing directly and indirectly through managed funds. The compliance costs associated with this change in the law will be minimal for the investor. Depending on the systems in place at the managed funds level, there may be some higher compliance costs associated with this change. However, the increased investment in managed funds will outweigh this short term increased cost.

3.49 Therefore, the net benefit of this change provides for increased levels of investment and diversification of investment for Australian investors.

Chapter 4 - Gifts or contributions

Outline of chapter

4.1 Schedule 4 to this bill amends Division 30 of the ITAA 1997. These amendments will allow an income tax deduction to the donor for certain gifts to the value of $2 or more to a number of funds and organisations listed in Table 4.1.

Summary of new law

4.2 The amendments will allow income tax deductions for certain gifts to the value of $2 or more made to the following funds and organisations from, and including, the day of announcement.

Table 4.1
Name of Fund Assistant Treasurer Press Release No. Date of Press Release
Southcare Helicopter Fund 46 of 2000 12 September 2000
Breast Cancer Network Australia 21 of 2001 23 May 2001
Australian Nuffield Farming Scholars Association 13 of 2001 17 April 2001
Dymocks Literacy Foundation Limited 1 of 2001 5 January 2001
The Sir Earl Page Memorial Trust 16 of 2001 7 May 2001
Research Australia Limited 26 of 2001 27 June 2001
The RSL Foundation 48 of 2000 21 September 2000
Australian Chinese Ex-Services National Reunion War Memorial Fund 54 of 2000 15 December 2000
Royal Australian Airforce (RAAF) Memorial Trust Fund 52 of 2000 17 November 2000
Voluntary Service to Indigenous Communities Foundation 14 of 2001 17 April 2001
Australia for UNHCR 27 of 2001 28 June 2001
The Bradman Memorial Fund 24 of 2001 20 June 2001
The Foundation for Young Australians 15 of 2001 7 May 2001
Visy Cares 23 of 2001 20 June 2001
Reconciliation Australia Limited See note A  

Note A: The Prime Minister announced in Parliament on 7 December 2000 during the presentation of the final report to Parliament by the Council for Aboriginal Reconciliation that gifts of $2 or more to Reconciliation Australia would attract an income tax deduction from that date.

4.3 In addition, the amendments listed in Table 4.2 change the name of a fund, authority or institution where that organisation has changed its name. This will ensure the organisation continues to qualify for gift deductibility status.

Table 4.2
Former name of organisation New name of organisation Date of effect of change of name
National Parks Foundation of South Australia Incorporated Nature Foundation SA Incorporated 10 March 2001
Work Skill Australia Foundation Incorporated WorldSkills Australia Inc 11 January 2001
Australia Foundation for Culture and the Humanities Ltd Australia Business Arts Foundation Ltd 24 July 2000

Detailed explanation of new law

4.4 The funds, authorities and institutions discussed in paragraphs 4.5 to 4.19 have been included in the tables in Subdivision 30-B of the ITAA 1997. Gifts of $2 or more to these organisations will qualify for deduction in accordance with section 30-15.

4.5 The Southcare Helicopter Fund has been established to raise funds for the Southcare Helicopter Service, which provides emergency medical rescue and retrieval services to the ACT and south-eastern NSW. [Schedule 4, item 1, subsection 30-20(2)]

4.6 The Breast Cancer Network Australia will raise funds to improve the treatment and care of those diagnosed with breast cancer and work towards preventing breast cancer for the benefit of the Australian community. [Schedule 4, item 1, subsection 30-20(2)]

4.7 The Australian Nuffield Farming Scholars Association offers a range of scholarships to young farmers. This funds support of Australian agriculturists will encourage excellence in all aspects of Australian agricultural production, distribution and management. [Schedule 4, item 2, subsection 30-25(2)]

4.8 The Dymocks Literacy Foundation Limited will raise funds to provide appropriate literacy programs for children and adults in Australia. [Schedule 4, item 2, subsection 30-25(2)]

4.9 The Sir Earl Page Memorial Trust will promote and encourage research into public policy issues with particular relevance to rural and regional Australia. [Schedule 4, item 3, subsection 30-40(2)]

4.10 Research Australia Limited advances health and medical research to inform the public about the nature of, and stimulate interest in, health and medical research. [Schedule 4, item 3, subsection 30-40(2)]

4.11 Reconciliation Australia Limited will raise funds to provide a national focus and national leadership in working towards reconciliation between all members of the Australian community. [Schedule 4, item 4, subsection 30-45(2)]

4.12 The RSL Foundation will raise monies for the benefit of returned services personnel. The Foundation will help the RSL in its enormous commitments in the next decade in caring for our fast-ageing World War II veterans. [Schedule 4, item 5, subsection 30-50(2)]

4.13 The Australian Chinese Ex-Services National Reunion War Memorial Fund will raise funds to erect a memorial dedicated to Australians of Chinese descent who have served in the Australian Defence Force since World War I. The proposed memorial will ensure that the wartime service to Australia by Chinese Australians is appropriately honoured and acknowledged. [Schedule 4, item 5, subsection 30-50(2)]

4.14 The Royal Australian Airforce (RAAF) Memorial Trust Fund will raise funds to redevelop the existing national memorial dedicated to members of the RAAF so that it more adequately reflects the sacrifice and service of members of the RAAF. [Schedule 4, item 5, subsection 30-50(2)]

4.15 The Voluntary Service to Indigenous Communities Foundation will assist indigenous Australian communities access volunteers with professional, business and technical skills. [Schedule 4, item 10, section 30-65]

4.16 The Australia for UNHCR will conduct educational, promotional and fundraising activities on behalf of the UNHCR in Australia to support the work of the United Nations High Commissioner for Refugees. [Schedule 4, item 11, subsection 30-80(2)]

4.17 The Bradman Memorial Fund will raise funds to promote the education and sporting development of young cricketers from disadvantaged communities. [Schedule 4, item 12, section 30-90]

4.18 The Foundation for Young Australians will support a range of projects aimed at assisting young Australians to reach their full potential. The Foundations work has a particular emphasis on assistance and education of disadvantaged young people. It is the successor to the Queen Elizabeth II Silver Jubilee Trust for Young Australians and the Australian Youth Foundation. [Schedule 4, item 14, section 30-95]

4.19 Visy Cares will raise funds primarily for the development of projects which enhance the quality of life and aid disadvantaged minority and special interest groups. [Schedule 4, item 14, section 30-95]

Change of names

4.20 This bill updates the tables in Subdivision 30-B to reflect the change of names of the following funds:

National Parks Foundation of South Australia Incorporated to Nature Foundation SA Incorporated from, and including, 10 March 2000 [Schedule 4, items 6 and 7, subsection 30-55(2)] ;
Work Skill Australia Foundation to WorldSkills Australia Inc from, and including, 11 January 2001 [Schedule 4, items 8 and 9, section 30-65] ; and
Australian Foundation for Culture and the Humanities Ltd to Australia Business Arts Foundation Ltd from, and including, 24 July 2000 [Schedule 4, items 15 and 16, subsection 30-100] .

4.21 The index to Division 30 is also updated to include the new funds, authorities and institutions. [Schedule 4, items 17 to 31, section 30-315]

Application provisions

4.22 The amendments will apply from the public announcement date for each fund, as itemised in Tables 4.1 and 4.2.

Chapter 5 - Information and communications technology, etc

Outline of chapter

5.1 Schedule 5 to this bill amends the ITAA 1997 to exempt from income tax the income of a society or association established for the purpose of promoting the development of Australian ICT resources.

5.2 Schedule 5 also amends the FBTAA 1986 to allow a rebate from FBT to an employer of a non-profit society or association established for the purpose of promoting the development of Australian ICT, aquaculture and fishing resources.

5.3 The amendments in relation to the exemption from income tax apply from 1 July 2000.

5.4 The amendments in relation to the FBT rebate for a non-profit society or association established for the purpose of promoting the development of ICT resources apply from 1 April 2000.

5.5 The amendments in relation to the FBT rebate for a non-profit society or association established for the purpose of promoting the development of aquaculture and fishing resources apply from 1 April 1999.

Summary of new law

5.6 The Government has announced that income derived by a non-profit society or association established to develop Australian ICT resources is to be exempt from income tax.

5.7 The Government also announced that an employer which is a non-profit society or association established to develop ICT resources would be eligible to claim a rebate from FBT.

5.8 The ITAA 1997 was amended in the year 2000 to exempt from income tax, for the 1999-2000 income year onwards, the income of non-profit societies and associations established to develop Australian aquaculture and fishing resources. There was no corresponding amendment under the provisions of the FBTAA 1986 in relation to granting a section 65J rebate from FBT. The FBTAA 1986 will now allow a rebate from FBT to these employers.

Detailed explanation of new law

Rebate of FBT

5.9 A section 65J rebate from FBT will be allowed to an employer which is a non-profit society or association established to develop Australian ICT resources. [Schedule 5, item 1, paragraph 65J(1)(ka)]

5.10 Employers which are non-profit societies or associations established to promote the development of Australian aquacultural and fishing resources are also to be allowed a section 65J rebate from FBT. [Schedule 5, item 2, paragraph 65J(1)(l)]

Exemption from income tax

5.11 An exemption from income tax will be allowed on the income derived by a non-profit society or association established to develop Australian ICT resources. [Schedule 5, item 4, section 50-40, item 8.3 in the table]

Application provisions

5.12 The amendments will apply as follows:

the rebate from FBT in relation to the development of Australian ICT resources applies from, and including, 1 April 2000;
the rebate from FBT in relation to the development of Australian aquacultural and fishing resources applies from, and including, 1 April 1999; and
the exemption from income tax on income derived in relation to the development of Australian ICT resources applies from, and including, 1 July 2000.


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