House of Representatives

Tax Laws Amendment (2005 Measures No. 2) Bill 2005

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)
This memorandum takes account of amendments made by the House of Representatives to the Bill as introduced.

Glossary

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

Abbreviation Definition
ATO Australian Taxation Office
BAS Business Activity Statement
CGT capital gains tax
Commissioner Commissioner of Taxation
DGR deductible gift recipients
domestic IRUs indefeasible rights to use domestic telecommunications cables
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
international IRU indefeasible rights to use international telecommunications cables
IRU indefeasible rights to use domestic and international telecommunications cables
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
member spouse is defined in section 90MD of the Family Law Act 1975 to mean, in relation to a superannuation interest, the spouse who has the superannuation interest
non-member spouse is defined in section 90MD of the Family Law Act 1975 to mean, in relation to a superannuation interest, the spouse who is not the member spouse in relation to the superannuation interest
PAYG pay as you go
payment split is defined in section 90MD of the Family Law Act 1975 to mean the application of section 90MJ of that Act, or a splitting order, in relation to a splittable payment
SIS Act Superannuation Industry Supervision Act 1993
TAA 1953 Taxation Administration Act 1953

General outline and financial impact

Simplified imputation system

Schedule 1 to this Bill amends the simplified imputation system to ensure that, in certain situations, private companies that pay franked distributions will not have their franking deficit tax offset reduced in respect of the income year in which they first incur an income tax liability.

Date of effect: These amendments apply in relation to the income year in which this Bill receives Royal Assent and to later income years.

Proposal announced: This measure was announced in the 2004-05 Budget and in the Treasurer's Press Release No. 36 of 11 May 2004.

Financial impact: Nil.

Compliance cost impact: These amendments will provide taxpayers with additional flexibility and are not expected to impact on compliance costs.

CGT roll-over for superannuation entities that merge under new superannuation safety arrangements

Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to provide an automatic capital gains tax (CGT) roll-over for the transfer of assets of registrable superannuation entities that merge during the transitional period to comply with licensing requirements under superannuation safety reforms.

The CGT roll-over ensures that the capital gain or capital loss that would otherwise be recognised when the transfer of assets occurs is disregarded and that the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entity trustees.

Date of effect: The roll-over applies to CGT events that happen to CGT assets from 1 July 2004 to 30 June 2006 (inclusive).

Proposal announced: The proposal was announced in the 2004-05 Budget and in the former Minister for Revenue and Assistant Treasurer's Press Release No. C029/04 of 11 May 2004.

Financial impact: Nil.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Providing capital allowance deductions for certain telecommunications rights

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to provide appropriate taxation treatment of expenditure incurred on acquiring certain telecommunications rights.

Date of effect: These amendments apply to eligible expenditure incurred on or after 12 May 2004.

Proposal announced: This proposal was announced in the 2004-05 Budget and in the former Minister for Revenue and Assistant Treasurer's Press Release No. C039/04 of 11 May 2004.

Financial impact: These amendments are estimated to pose a cost to revenue of:

2004-05 2005-06 2006-07 2007-08
-$1.1 million -$3.2 million -$4.5 million -$5.5 million

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Changing from annual to quarterly payment of PAYG instalments

Schedule 4 to this Bill amends the Taxation Administration Act 1953 to simplify the movement of taxpayers from paying annual pay as you go (PAYG) instalments to paying quarterly PAYG instalments where they become ineligible to pay annual instalments in certain cases. The amendments apply in cases where ineligibility is the result of registering or becoming required to register under the goods and services tax law or becoming a member of an instalment group. Taxpayers who become ineligible to pay annual instalments during an income year in these circumstances will commence paying quarterly instalments from the first instalment quarter of the following income year for which they are required to pay an instalment under the quarterly payment rules.

Date of effect: These amendments apply for the income year following the income year in which this Bill receives Royal Assent and subsequent years.

Proposal announced: This measure was announced in the 2004-05 Budget.

Financial impact: Nil.

Compliance cost impact: These amendments reduce the compliance costs of taxpayers who become ineligible to pay annual PAYG instalments by removing the requirement for those taxpayers to pay both annual PAYG instalments and quarterly PAYG instalments for the same income year.

Deductible gift recipients

Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to update the lists of deductible gift recipients (DGRs).

Date of effect: Deductions for gifts to the following organisations, listed as DGRs under Schedule 5, apply from 8 November 2004 to 7 November 2006:

·
Freedom Across Australia.
·
Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited.
·
National Police Memorial.

Deductions for gifts to the following organisations listed as DGRs under Schedule 5, apply as follows:

·
Page Research Centre Limited from 13 January 2005.
·
Russian Welfare Aid to Russia Fund from 23 December 2004 to 22 December 2006.

Proposal announced: The deductibility of gifts to the Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited was announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 15 of 23 November 2004.

Financial impact: The DGR listings have the following cost to revenue:

·
Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited: $100,000 per year.
·
National Police Memorial: $100,000 for the life of the project.

The cost to revenue of the remaining DGR listings is unquantifiable but is likely to be insignificant.

Compliance cost impact: Nil.

Goods and services tax and real property

Schedule 6 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 to prevent entities from reducing or eliminating their goods and services tax (GST) liability on supplies of real property through unintended outcomes arising from the interaction of a number of special rules in the Act. It also clarifies the operation of the margin scheme and ensures entities joining a GST group have appropriate adjustments to input tax credits.

A consequential amendment is also made to the Taxation Administration Act 1953.

Date of effect: The amendment which requires written agreement to use the margin scheme will apply from the date this Bill receives Royal Assent. All other amendments apply from the date this Bill was introduced into Parliament.

Proposal announced: This measure was not announced before the Bill was introduced into the House of Representatives on 17 March 2005. Parliamentary amendments to this measure were announced in the Minister for Revenue and Assistant Treasurer's Press Release No. 052 of 7 June 2005.

Financial impact: These amendments are expected to result in an unquantifiable gain to GST revenue.

Compliance cost impact: These amendments are not expected to impact significantly on compliance costs.

Superannuation and family law

Schedule 7 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to provide appropriate tax treatment for superannuation annuities that have been split upon marriage breakdown. The broad aim of these amendments is to ensure that where a superannuation annuity is split upon marriage breakdown then the taxation consequences will be the same as those that currently apply where an equivalent benefit in a superannuation fund is split.

Schedule 7 also amends the ITAA 1936 to correct minor anomalies in relation to how the taxation law applies when superannuation benefits are split on marriage breakdown.

Date of effect: Royal Assent.

Proposal announced: These measures have not previously been announced.

Financial impact: The cost to revenue over the forward estimates period is expected to be very small.

Compliance cost impact: Minimal.

Fringe benefits tax - worker entitlement funds

Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 to remove the condition that contributions to approved worker entitlement funds must be required under an industrial instrument in order to be eligible for an exemption from fringe benefits tax (FBT).

Date of effect: These amendments will apply in respect of the FBT year beginning 1 April 2005 and in respect of all later FBT years.

Proposal announced: These amendments have not been announced. Consultation with industry on the current exemption provisions for contributions to worker entitlement funds was, however, foreshadowed by the former Minister for Revenue and Assistant Treasurer in Press Release No. C019/04 of 1 April 2004.

Financial impact: The financial impact is unquantifiable but expected to be insignificant.

Compliance cost impact: This measure is expected to have a minimal impact on compliance costs.

Chapter 1 - Simplified imputation system

Outline of chapter

1.1 Schedule 1 to this Bill amends the simplified imputation system to ensure that, in certain situations, private companies that pay franked distributions will not have their franking deficit tax offset reduced in respect of the income year in which they first incur an income tax liability.

Context of amendments

1.2 Generally, a company does not pay income tax until after the end of the first income year during which it derives taxable income. Consequently, the company does not generate franking credits during that income year to attach to distributions made in that year. The company will first generate franking credits after the end of the relevant income year when the company pays its income tax liability for that year.

1.3 The inability of a company to generate franking credits does not restrict it from paying franked distributions during that year. However, a company that makes franked distributions in these circumstances is required to pay franking deficit tax at the end of the income year because the balance in its franking account will be in deficit at that time.

1.4 The payment of franking deficit tax allows a company to claim an offset equal to the amount of franking deficit tax paid when calculating its income tax liability for that income year. The franking deficit tax offset can also be carried forward to later income years to reduce the company's future income tax liability.

1.5 A company is deterred from paying franked distributions in excess of the franking credits generated in an income year as its franking deficit tax offset is reduced by 30 per cent. This reduction occurs where the company's franking deficit at the end of the income year exceeds the franking credits in its franking account at that time by more than 10 per cent.

1.6 This deterrent causes a problem for private companies as they are unable to pay franked distributions in their first profitable income year without incurring a franking deficit tax penalty.

Summary of new law

1.7 The amendments will provide greater flexibility to private companies by allowing them, in certain situations, to pay franked distributions during the income year in which they first incur an income tax liability without incurring the penalty that reduces their franking deficit tax offset by 30 per cent for that year.

Comparison of key features of new law and current law

New law Current law
Private companies, subject to certain conditions being met, will not have their franking deficit tax offset reduced by 30 per cent in the year of income in which they first incur income tax liability. Private companies that have a franking deficit tax liability at the end of the year have their franking deficit tax offset reduced by 30 per cent where their franking deficit exceeds the franking credits by more than 10 per cent.

Detailed explanation of new law

1.8 A company is entitled to a franking deficit tax offset in an income year if, broadly, it has incurred a liability to pay franking deficit tax in that income year (subsection 205-70(1) of the Income Tax Assessment Act 1997).

1.9 The amount of the tax offset is worked out by applying the method statement in subsection 205-70(2). If the company's franking deficit at the end of the income year exceeds the franking credits in its franking account by more than 10 per cent, the amount of the tax offset is reduced by 30 per cent (steps 1 and 2 of the method statement). This 30 per cent reduction will not apply to a private company that meets certain conditions. [Schedule 1, item 1, steps 1 and 2 in the method statement in subsection 207-70(2)]

1.10 The conditions are that:

·
the private company must (assuming that it did not have the franking deficits tax offset) be liable to pay income tax for the income year that is sufficient to generate franking credits equal to at least 90 per cent of the deficit in the company's franking account at the end of that income year - this 90 per cent rule ensures that there is a close alignment between the amount of franking credits the company has paid out during the income year and the company's income tax liability for that income year, and
·
the private company must not have had an income tax liability for any earlier income year - that is, it must be the private company's first income year.

[Schedule 1, item 2, subsection 207-70(5)]

Example 1.1 Andrew is the sole member of Top Speed Pty Ltd, a private company that specialises in installing turbo chargers. The company was established on 1 July 2002 but did not generate taxable income (or become liable for income tax) for the 2002-03 income year. Top Speed's franking account balance as at 1 July 2003 is zero.Top Speed makes a pre-tax profit of $10,000 for the 2003-04 income year and expects to pay income tax for that income year of $3,000 ($10,000 * 30%). Top Speed makes a franked distribution to Andrew of $7,000.Top Speed attaches $3,000 in franking credits to the distribution. The deficit in its franking account at the end of the income year is $3,000. Top Speed is liable to pay $3,000 in franking deficit tax. Top Speed pays the franking deficit tax and therefore is entitled to a franking deficit tax offset.As the 2003-04 income year is the first income year in which Top Speed derives taxable income and it satisfies the other conditions in subsection 205-70(5), Top Speed's franking deficit tax offset will not be reduced by 30 per cent. Therefore, Top Speed will be entitled to a franking deficit tax offset of $3,000.

Application and transitional provisions

1.11 These amendments apply in relation to the income year in which this Bill receives Royal Assent and to later income years. [Schedule 1, item 3]

Chapter 2 - CGT roll-over for superannuation entities that merge under new superannuation safety arrangements

Outline of chapter

2.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide an automatic capital gains tax (CGT) roll-over for the transfer of assets of registrable superannuation entities that merge during the transitional period to comply with licensing requirements under superannuation safety reforms.

2.2 The CGT roll-over ensures that the capital gain or capital loss that would otherwise be recognised when the transfer of assets occurs is disregarded and that the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entity trustees.

Context of amendments

2.3 The new superannuation safety arrangements, which modernise and strengthen the prudential regulation of superannuation funds, commenced on 1 July 2004 and have a two year transitional period.

2.4 The arrangements, among other things, require trustees of registrable superannuation entities to meet the new licensing requirements to ensure better management and protection of member benefits.

2.5 If the trustee of a registrable superannuation entity is unable to meet the new licensing requirements, the superannuation safety arrangements allow that entity to merge with one or more registrable superannuation entities with a licensed trustee.

2.6 Superannuation industry representatives have raised concerns that the potential CGT consequences for registrable superannuation entities will discourage compliance with the new superannuation safety arrangements. The amendments are directed at addressing these concerns.

Summary of new law

2.7 An automatic CGT roll-over applies during the period from 1 July 2004 to 30 June 2006 inclusive (transitional period) for the transfer of assets by a registrable superannuation entity whose trustee is not licensed to one or more registrable superannuation entities whose trustees are licensed.

2.8 It also applies for registrable superannuation entities whose trustees did not seek a licence but during the transitional period merged with other registrable superannuation entities whose trustees intended to be licensed by the end of the transitional period.

2.9 The effect of the CGT roll-over is that the capital gain or capital loss that would otherwise be recognised when the transfer occurs is disregarded - the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entities.

Comparison of key features of new law and current law

New law Current law
An automatic CGT roll-over applies when during the transitional period assets of a registrable superannuation entity whose trustee is not licensed are transferred to one or more registrable superannuation entities whose trustees are licensed, or whose trustees are not licensed at the time of the transfer but where it is reasonable to assume that they will be licensed by 1 July 2006.
The CGT roll-over ensures that the capital gain or capital loss that would otherwise be recognised when the transfer of assets occurs is disregarded and that the recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entities.
Assets transferred from a registrable superannuation entity whose trustee is not licensed to one or more registrable superannuation entities whose trustee is licensed cause CGT events to happen.
Any capital gain or capital loss arising because of the transfer of assets is taken into account in determining the registrable superannuation entity's net capital gain or net capital loss for that income year.

Detailed explanation of new law

2.10 Schedule 2 to this Bill inserts new Subdivision 126-F into the ITAA 1997. The new Subdivision provides for an automatic roll-over if all of the following conditions apply:

·
During the transitional period, one or more CGT events happen because the trustee (the first registrable superannuation entity trustee) of a registrable superannuation entity ceases to hold all CGT assets.
·
Because of the cessation, CGT assets (the identical assets) that, together, are identical to all the first registrable superannuation entity trustee's CGT assets just before the CGT events start to be held during the transitional period by a trustee or trustees (successor registrable superannuation entity trustee) of one or more registrable superannuation entities.
·
The cessation and starting occur because it is expected that the first registrable superannuation entity will not have a licence under Part 2A of the Superannuation Industry Supervision Act 1993 (SIS Act) by 1 July 2006 while each successor registrable superannuation entity trustee has a licence or will have such a licence by 1 July 2006.

[Schedule 2, item 2, subsection 126-210(1)]

2.11 A registrable superannuation entity is defined in subsection 10(1) of the SIS Act (as amended by the Superannuation Safety Amendment Act 2004) to mean a regulated superannuation fund, an approved deposit fund or a pooled superannuation trust, but does not include a self managed superannuation fund. The definition does not include exempt public sector superannuation schemes because they are not regulated under the SIS Act.

2.12 A licence under Part 2A of the SIS Act means a 'registrable superannuation entity licence' granted under section 29D of that Act. All existing trustees of registrable superannuation entities need to obtain a registrable superannuation entity licence by the end of the transitional period.

2.13 The amendments do not provide a roll-over for exchange of members' interests in registrable superannuation entities because it is already provided for in existing CGT provisions. Section 118-305 of the ITAA 1997 provides an exemption for certain capital gains or capital losses from transfers of rights in superannuation funds and approved superannuation funds. Section 118-350 provides an exemption for certain capital gains or capital losses in relation to a unit in a pooled superannuation trust.

Effects of the roll-over

2.14 Subsections 126-210(2) to (4) provide for the following effects of the roll-over:

·
The capital gain or loss made by the first registrable superannuation entity trustee from each of the CGT events is disregarded - recognition of the accrued capital gain or loss is deferred until later disposal of the assets by one or more successor registrable superannuation entity trustees.
·
For a successor registrable superannuation entity trustee, the first element of the cost base of each of the identical assets the successor registrable superannuation entity trustee holds is the cost base of the corresponding asset for the first registrable superannuation entity trustee at the time of the relevant CGT event.
·
For a successor registrable superannuation entity trustee, the first element of the reduced cost base of each of the identical assets the successor registrable superannuation entity trustee holds is the reduced cost base of the corresponding asset for the first registrable superannuation entity trustee at the time of the relevant CGT event.

[Schedule 2, item 2, subsections 126-210(2) to (4)]

2.15 An example is given after subsection 126-210(4) to illustrate that identical assets include the cancelling of units in a unit trust on the request of the first registrable superannuation entity trustee and the issuing of the same number of units in the unit trust to the successor registrable superannuation entity trustee.

Pre-CGT assets

2.16 One of the consequences of the CGT roll-over is that if the first registrable superannuation entity trustee acquired the asset before 20 September 1985, the successor trustee is taken to have acquired the asset before that day - that is, the pre-CGT status of the asset is preserved. [Schedule 2, item 2, subsection 126-210(5)]

2.17 However, pre-1985 CGT asset status is in practice only relevant where the superannuation fund or approved deposit fund is non-complying. This is because all CGT assets owned by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust on 30 June 1998 are treated as if they were acquired on that date (section 306 of the Income Tax Assessment Act 1936).

Where there is no roll-over

2.18 If the trustees of the registrable superannuation entities do not acquire the required licence by 1 July 2006 the roll-over will be treated as if it had never happened. [Schedule 2, item 2, subsection 126-210(6)]

Application and transitional provisions

2.19 The CGT roll-over applies to CGT events that happen to a CGT asset during the superannuation safety reform transitional period - that is, from 1 July 2004 to 30 June 2006 (inclusive).

Consequential amendments

2.20 The superannuation safety CGT roll-over involves the transfer of an asset from one registrable superannuation entity to one or more successor registrable superannuation entities - that is, the roll-over is a same asset roll-over. Therefore, the table in section 112-150 which contains a list of the same asset roll-overs is amended to make reference to the CGT roll-over for superannuation entities that merge under new superannuation safety arrangements. [Schedule 2, item 1, section 112-150]

Chapter 3 - Providing capital allowance deductions for certain telecommunications rights

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide appropriate taxation treatment of expenditure incurred on acquiring certain telecommunications rights.

3.2 These amendments will provide capital allowance deductions for expenditure incurred on acquiring indefeasible rights to use domestic telecommunications cables (domestic IRUs). Additionally, the changes will provide capital allowance deductions for expenditure incurred, by telecommunications carriers licensed under the Telecommunications Act 1997, on acquiring telecommunications site access rights.

Context of amendments

3.3 The Government has given a commitment to provide appropriate tax recognition for blackhole expenditure and has also noted that it would review certain inappropriate taxation treatment of business expenditures on a case-by-case basis.

3.4 Under the uniform capital allowances regime, depreciation deductions are available for physical assets and a number of defined intangible assets. Indefeasible rights to use international telecommunications cables (international IRUs) are already defined within the uniform capital allowances as depreciating assets, and this measure extends capital allowance treatment to domestic IRUs. The measure therefore removes an anomaly in the taxation treatment of domestic IRUs and international IRUs.

3.5 The new law is intended to better match the taxation treatment of expenditure incurred on acquiring domestic IRUs and telecommunications site access rights with the economic characteristics of the underlying assets. It is also intended to better facilitate sharing of telecommunications equipment within the telecommunications industry, thereby encouraging more efficient use of that infrastructure.

Summary of new law

3.6 These amendments will allow capital allowance deductions for expenditure incurred on acquiring domestic IRUs and for expenditure incurred by licensed telecommunications carriers on acquiring telecommunications site access rights. Domestic IRUs will be written-off over the effective life of the underlying telecommunications cable. Telecommunications site access rights will be written-off over the term of the right.

3.7 The new treatment will only apply to expenditure incurred on or after 12 May 2004 and the law contains integrity measures to stop access to the new taxation treatment where existing arrangements are 'refreshed'. Refreshing describes the situation where an existing arrangement entered into prior to a date of effect is essentially terminated and an arrangement on similar terms is entered into to qualify the expenditure for more favourable taxation treatment.

Comparison of key features of new law and current law

New law Current law
Capital allowance deductions will be available for the cost of purchasing telecommunications site access rights and domestic IRUs. No deduction. The cost of purchasing a domestic IRU or telecommunications site access right may be allowable as a capital loss upon expiry of the right.

Detailed explanation of new law

IRUs

3.8 Indefeasible rights to use domestic and international telecommunications cables (IRUs) is a legal interest created by contractual agreement that confers a permanent indefeasible and exclusive right of access to some or all of the capacity in a telecommunications cable system to another party. The term IRU is widely used and accepted in the telecommunications industry. However described, an IRU must provide indefeasible permanent access to raw capacity in a cable system.

3.9 An IRU is broadly equivalent to ownership of the cable system in terms of cable operation. An IRU contract generally contains the following elements:

·
The IRU holder is generally required to contribute an upfront capital payment and to pay ongoing amounts for the operation and maintenance of the cable.
·
The IRU holder is not entitled to any compensation for the failure in or breakdown of the cable system or for any interruption of the use of the cable system.
·
The IRU holder is usually required to contribute to its proportional share of any costs which arise from the liquidation of the cable system or from claims by third parties. In addition, the IRU holder may also be entitled to any proportional share of proceeds which arise from the liquidation of the cable system or from claims against third parties in respect of it.

3.10 An IRU is specifically called 'indefeasible' as it cannot be defeated or terminated by the unilateral action of one party to the IRU agreement.

3.11 A telecommunications cable system comprises not only the cable itself but may also include the land-based portions of the cable system including plant, testing equipment, land and buildings.

3.12 Rights of use over cables that are not specifically IRUs may still fall for consideration under the provision for telecommunications site access rights.

Application provisions

3.13 The current provision applying to international IRUs will be amended to cover IRUs generally. This means that the reference to IRUs in subsection 40-30(2) will effectively be extended to cover both international IRUs and domestic IRUs. A minor amendment to the definition of IRU will achieve this. [Schedule 3, item 3, definition of an 'IRU']

3.14 To be eligible for capital allowance deductions, the expenditure on a domestic IRU must be incurred on or after 12 May 2004. [Schedule 3, subitem 5(1)]

3.15 The effective life for calculating capital allowance deductions will be the effective life of the underlying telecommunications cable. [Schedule 3, item 2]

3.16 It is now appropriate that transitional provisions currently in the ITAA 1997, that apply only to international IRUs, be moved to the Income Tax (Transitional Provisions) Act 1997. [Schedule 3, items 1 and 4]

3.17 Refreshing is the notion that an existing (pre-12 May 2004) IRU over a particular cable system is terminated and a new IRU acquired over the same cable system. Due to the permanent and indefeasible nature of IRU arrangements, where the IRU is simply the refreshing of an existing IRU no deduction will be allowed for expenditure on that part that is essentially the same IRU. [Schedule 3, subitem 5(3)]

Example 3.1 Before 12 May 2004, User Co. was granted an IRU under a contract to use 50 Mb/s of the capacity of a telecommunications cable in Australia. After 12 May 2004, the contract is terminated and a new contract is made granting User Co. an IRU over 60 Mb/s of the capacity of that cable for a payment of $6 million.The amendments do not apply to $5 million of the expenditure by User Co. under the new contract assuming that, of the $6 million payment for the right to use 60 Mb/s of the capacity of the cable, it is reasonable to attribute $5 million to User Co. being allowed to use 50 Mb/s of that capacity.

3.18 Where an IRU is deemed to be acquired on or after 12 May 2004 merely due to a taxpayer taking advantage of the consolidations provisions, then the IRU is taken to have been acquired before 12 May 2004 for the purposes of this measure. [Schedule 3, subitem 5(2)]

Commencement of deductions

3.19 A purchaser of an IRU will be able to commence claiming deductions for the year that the IRU commences to be used to produce assessable income. The deduction will be apportioned if the use commences other than on the first day of the year.

3.20 An IRU owner will not necessarily know what the cable owner has calculated as the effective life of the cable. Therefore the IRU holder must place itself in the position of the cable owner and calculate the cable's effective life.

Detailed explanation of new law

Site access rights

3.21 An existing list of intangible assets that are treated as depreciable assets will be amended to include a reference to telecommunications site access rights. [Schedule 3, items 6 to 8]

3.22 To be eligible for capital allowance deductions, the expenditure on a telecommunications site access right must be incurred on or after 12 May 2004. [Schedule 3, subitem 12(1)]

3.23 A telecommunications site access right will be written-off over the term of the right. [Schedule 3, item 10]

3.24 The prime cost (straight line) method is to be used to calculate the capital allowance deductions, and use of the diminishing value method will not be allowable. [Schedule 3, item 9]

3.25 A telecommunications site access right will be defined in the legislation as a right (except an IRU) of a carrier:

·
to share a facility (as defined in section 7 of the Telecommunications Act 1997)
·
to install such a facility at a particular location or on a particular structure, or
·
to enter or cross premises for the purposes of installing or maintaining such a facility that is on the premises, or is at a location, or on a structure, that is accessible by way of the premises.

[Schedule 3, item 11]

Example 3.2 In July 2004 Telco Co. buys a right from a retail shopping company to install a telecommunications antenna on a retail shopping centre. The term of the right is five years. Capital allowance deductions are available over a five year period.

3.26 Facility, as defined under the Telecommunications Act 1997, means:

·
any part of the infrastructure of a telecommunication network, or
·
any line, equipment, apparatus, tower, mast, antenna, tunnel, duct, hole, pit, pole or other structure or thing used, or for use, in or in connection with a telecommunications network.

3.27 Carrier means a holder of a carrier licence granted under section 56 of the Telecommunications Act 1997.

3.28 A telecommunications site access right does not include an IRU but may include other types of rights over a telecommunications cable.

3.29 Similar to IRUs, a taxpayer will not be able to refresh telecommunications site access rights.

3.30 Where a party holds a telecommunications site access right prior to the application date, and that right ends at a time other than when it would ordinarily have ended, and a right of the same kind is entered into after that date, then no deduction is allowable in respect of the new right. [Schedule 3, subitem 12(3)]

Example 3.3 In July 1998 Tele Co. acquired a 10 year telecommunications site access right that is due to expire in July 2008. Tele Co. then buys a new right of the same kind over the same facility in July 2005 and terminates or sells the old right back to the site owner. In this case Tele Co. will not be able to access capital allowance deductions for the new access right.

Example 3.4 In January 2002 Smartuser Co. acquired a five year telecommunications site access right that is due to expire in January 2007. In January 2007 Smartuser Co. acquires a new access right which is essentially a renewal of the expired right over the same facility. Capital allowance deductions are available for expenditure on the new access right from January 2007.

3.31 Where a party is deemed to have acquired a site access right on or after 12 May 2004, merely because of the operation of the consolidations provisions, that right will be taken to have been acquired before 12 May 2004 for the purposes of this measure. [Schedule 3, subitem 12(2)]

Commencement of deductions

3.32 A purchaser of a site access right will be able to commence claiming deductions for the year that the site access right commences to be used to produce assessable income. The deduction will be apportioned if the use commences other than on the first day of the year.

Chapter 4 - Changing from annual to quarterly payment of PAYG instalments

Outline of chapter

4.1 Schedule 4 to this Bill amends Division 45 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to simplify the movement of taxpayers from paying annual pay as you go (PAYG) instalments to paying quarterly PAYG instalments where they become ineligible to pay annual instalments in certain cases. These amendments apply in cases where ineligibility is the result of registering or becoming required to register under the goods and services tax (GST) law or, in the case of a company, becoming a member of an instalment group.

Context of amendments

4.2 Taxpayers who choose to pay PAYG instalments on an annual basis become ineligible to pay annually when they register or become required to register under the GST law or, in the case of a company, become a member of an instalment group. These rules are in section 45-150 of Schedule 1 to the TAA 1953. Currently, where taxpayers become ineligible to pay annually during an instalment quarter in an income year they must generally commence paying quarterly instalments from the current quarter. Taxpayers who are eligible to pay two quarterly instalments annually commence paying quarterly instalments from the latter of the current or third quarter in an income year.

4.3 Where taxpayers become ineligible to be annual PAYG instalment payers after the first quarter in an income year, they must still pay an annual PAYG instalment. The annual instalment is reduced by the total of the quarterly instalments for that income year.

4.4 The rules for changing from paying annual PAYG instalments to paying quarterly PAYG instalments due to GST registration or becoming a member of an instalment group and the requirement to pay both annual and quarterly instalments for the same income year has caused confusion for taxpayers and practical problems for the Australian Taxation Office. The amendments will simplify these rules and reduce compliance costs for taxpayers.

4.5 The rules in section 45-160 of Schedule 1 to the TAA 1953 that provide that taxpayers cease to be annual payers where they become the head company of a consolidated group are not amended and continue to apply in their current form.

Summary of new law

4.6 These amendments allow taxpayers to continue to pay only an annual PAYG instalment in the income year in which they become ineligible to be annual PAYG instalment payers. Generally, these taxpayers will begin paying quarterly PAYG instalments from the first instalment quarter of the following income year. Those taxpayers who are eligible to pay two quarterly instalments annually will commence paying quarterly PAYG instalments from the third quarter of the following income year.

Comparison of key features of new law and current law

New law Current law
Taxpayers who become ineligible to pay annual PAYG instalments in an income year due to registering or becoming required to register under the GST law or becoming a member of an instalment group will pay only an annual instalment for that income year.
Taxpayers will generally commence paying quarterly PAYG instalments from the first instalment quarter of the following income year.
Taxpayers who are eligible to pay two quarterly instalments annually will commence paying quarterly PAYG instalments from the third quarter of the following income year.
Taxpayers who become ineligible to pay annual PAYG instalments in an income year due to registering or becoming required to register under the GST law or becoming a member of an instalment group must generally begin paying quarterly PAYG instalments from the current quarter.
Those taxpayers who are eligible to pay two quarterly instalments annually, pay quarterly PAYG instalments from the latter of the current or third quarter of that income year.
All taxpayers who become ineligible to pay annual PAYG instalments in an income year must still pay an annual PAYG instalment. The annual instalment is reduced by the total of the quarterly instalments paid in that income year.

Detailed explanation of new law

4.7 These amendments to the PAYG instalments rules in Division 45 of Schedule 1 to the TAA 1953 provide a similar outcome for affected taxpayers as that provided under section 45-180 of Schedule 1 to the TAA 1953 in respect of the first two years of The New Tax System, the 2000-01 and 2001-02 income years. Affected taxpayers will generally be those who become ineligible to pay annual PAYG instalments in an income year due to registering or becoming required to register under the GST law or becoming a member of an instalment group, for income years following the year of Royal Assent.

4.8 The note at the end of subsection 45-50(3) is repealed because under the amended provisions taxpayers who become ineligible to pay annual PAYG instalments will not be required to make both quarterly PAYG instalments and an annual PAYG instalment for the same income year. [Schedule 4, item 1]

4.9 Paragraph 45-125(2)(c) is repealed as it is only required for specifying the starting instalment quarter under the current law. Under the amended law the starting instalment quarter will be the first instalment quarter of the following year as specified by paragraph 45-125(2)(b). This may be either the first instalment quarter of the next income year, or, for those taxpayers who pay two quarterly instalments annually, the third instalment quarter of the next income year. [Schedule 4, items 2 and 3]

4.10 The current section 45-150 is repealed and a new section 45-150 is substituted. The first sentence of current subsection 45-150(1) refers to the 2002-03 income year as the year from which the rules commenced to apply. The reference to the 2002-03 income year is omitted from the substituted provision to avoid confusion over the commencement of the amendments. The substituted paragraphs 45-150(1)(a) to (e) which specify when an annual payer becomes ineligible to pay annually due to GST registration or, in the case of a company, becoming a member of an instalment group apply in an identical way to the current paragraphs 45-150(1)(a) to (e). [Schedule 4, item 4]

4.11 The substituted subsection 45-150(2) replaces the repealed subsections 45-150(2) and (3) to provide that where a taxpayer stops being an annual payer due to the operation of subsection 45-150(1) they will still be required to pay an annual instalment for the current year and they will commence paying quarterly instalments from the instalment quarter in the next income year as specified by the current PAYG instalments rules. Specifically:

·
Taxpayers who are required to pay four instalments annually will commence paying quarterly PAYG instalments from the first instalment quarter of the following income year.
·
Taxpayers who are eligible to pay two quarterly instalments annually as provided in section 45-134 will commence paying quarterly PAYG instalments from the third instalment quarter of the following income year.

Taxpayers will pay quarterly instalments in subsequent years where required to do so under the current provisions of the PAYG instalments system. [Schedule 4, item 4]

4.12 Substituted paragraph 45-150(2)(a) provides that taxpayers must still pay an annual instalment for the income year in which they become ineligible to be annual PAYG instalment payers. [Schedule 4, item 4]

4.13 Substituted subsection 45-150(3) replaces and is identical to the repealed subsection 45-150(4). The effect of this rule is not changed. Taxpayers may again choose to become an annual payer if they again satisfy the conditions to pay instalments annually.

Application and transitional provisions

4.14 The amendments apply to the income year following the income year in which this Bill receives Royal Assent and subsequent income years.

4.15 Item 5 of Schedule 4 is a saving provision to ensure that despite the repeal of paragraph 45-125(2)(c) and the repeal and substitution of section 45-150, those provisions continue to apply in relation to income years starting before the day on which the amendments receive Royal Assent. [Schedule 4, item 5]

Chapter 5 - Deductible gift recipients

Outline of chapter

5.1 Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the lists of deductible gift recipients (DGRs).

Context of amendments

5.2 The income tax law allows taxpayers to claim income tax deductions for gifts of $2 or more to DGRs. To be a DGR, an organisation must fall within a category of organisations set out in Division 30 of the ITAA 1997, or be listed under that Division.

5.3 These amendments will assist relevant funds and organisations to attract public support for their activities.

Summary of new law

5.4 These amendments add certain organisations to the lists of DGRs.

Detailed explanation of new law

Listed deductible gift recipients

5.5 Schedule 5 lists the organisations in Table 5.1 as DGRs. [Schedule 5, items 1 to 9]

Table 5.1
Name of fund Date of effect Special conditions
Freedom Across Australia 8 November 2004 The gift must be made before 8 November 2006
Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund Limited 8 November 2004 The gift must be made before 8 November 2006
National Police Memorial 8 November 2004 The gift must be made before 8 November 2006
Page Research Centre Limited 13 January 2005 None
Russian Welfare Aid to Russia Fund 23 December 2004 The gift must be made before 23 December 2006

5.6 Freedom Across Australia is a medically supervised holiday travel organisation that provides low cost holidays within Australia for disabled Australians, including sufferers of cerebral palsy, brain damage, spinal injury, or severe mental disability. [Schedule 5, items 2 and 5]

5.7 The Rotary Leadership Victoria Australian Embassy for Timor-Leste Fund is established by Rotary in Australia and the Williamson Community Leadership Foundation, to construct an embassy for East Timor in Canberra on land provided by the Government. On completion, the embassy will be donated to the Government of East Timor. [Schedule 5, items 3 and 8]

5.8 The National Police Memorial (Company) is established for the construction of a national police memorial in Kings Park in Canberra, dedicated to Australian police officers killed in the line of duty. The memorial, the first of its kind in Australia, will serve as an appropriate memorial to focus community understanding of the important work of Australian Police in the community. [Schedule 5, items 4 and 6]

5.9 The Page Research Centre Limited was established to undertake research and develop policy aimed at enhancing the prosperity of regional Australia. The centre's research focuses on issues that improve the wellbeing of regional and rural Australia. [Schedule 5, items 1 and 7]

5.10 The Russian Welfare Aid to Russia Fund was established to provide support for children, and their families, who are victims of the terrorist atrocities in Beslan, Russia. [Schedule 5, items 3 and 9]

Application and transitional provisions

5.11 The amendments to list the organisations in Table 5.1 apply from the dates of effect shown in that table. [Schedule 5, items 1 to 9]

Chapter 6 - Goods and services tax and real property

Outline of chapter

6.1 Schedule 6 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to:

·
remove unintended outcomes that arise from the interaction of various provisions of the Act, allowing property owners to reduce their goods and services tax (GST) liability on supplies of real property
·
ensure entities joining a GST group have appropriate adjustments to input tax credits, and
·
address certain aspects regarding the application of the margin scheme.

Context of amendments

6.2 The Australian Taxation Office (ATO) has identified a number of arrangements used by entities to reduce or eliminate their GST liabilities on the supply of real property. Some arrangements involve manipulating the interaction of provisions of the GST Act - such as associates, GST groups and GST joint ventures - with the margin scheme to avoid paying GST on the full value added to the real property. Other arrangements include using the grouping or joint venture provisions in an attempt to avoid paying GST on the sale of new residential property by transforming taxable sales of '... new residential premises...' into input taxed sales.

6.3 Under the GST Act, registered businesses can calculate GST payable on supplies of new residential or commercial property under the basic rules (GST is 1/11th of the GST-inclusive price) or, subject to certain conditions, under the margin scheme (GST is 1/11th of the margin). Use of the margin scheme generally ensures that GST only applies to the value added to real property held by registered owners on or after 1 July 2000.

6.4 Purchasers of real property under the margin scheme are not entitled to claim input tax credits for GST remitted by the supplier. Consistent with this, the margin scheme does not apply where the property has been acquired under the basic calculation of tax payable, as an input tax credit would generally have been claimed on the purchase of the property (and GST would effectively not have been collected).

6.5 The effect of many of the arrangements is that the value added to the real property before the arrangement is imposed is excluded for GST purposes. This is contrary to the policy intent that GST be collected on the value added to real property held by registered owners on or after 1 July 2000.

6.6 In addition to these arrangements, some entities are incorrectly including the value of acquisitions for developing or improving the real property in the '... consideration for your acquisition ...' of the property. By including these acquisitions, the margin on which GST is collected is reduced.

6.7 Entities are also uncertain about whether they are able to claim input tax credits on the acquisition of real property and in some cases are unaware of whether the margin scheme has been applied.

6.8 Further, contrary to the general policy regarding entitlements to input tax credits, input tax credits are effectively able to be claimed for acquisitions that will be used by a GST group to make input taxed supplies or be applied to private use.

6.9 Other amendments aim to provide more flexibility and certainty in the application of the margin scheme and ensure property that has been inherited is not overtaxed.

6.10 These amendments aim to ensure the appropriate amount of GST is collected on supplies of real property and they are consistent with the policy intent of the GST system.

Summary of new law

6.11 These amendments:

·
ensure that the grouping and joint venture provisions cannot be used to re-open eligibility to the margin scheme
·
ensure the grouping and joint venture provisions cannot be used to avoid paying GST on 'new residential premises' by converting otherwise taxable sales of 'new residential premises' into input taxed sales
·
introduce increasing and decreasing adjustments for a change to the extent of creditable purpose caused by an entity entering or exiting a GST group
·
calculate the margin under the margin scheme with the GST-inclusive market value as the consideration for a supply to an associate and the GST-inclusive market value as the consideration for an acquisition from an associate
·
ensure that property that has been inherited is not subject to unintended tax consequences under the margin scheme
·
allow entities to use the margin scheme even though they are selling amalgamated real property, providing those entities have an adjustment for input tax credits entitlements in respect of that part of the property that was purchased under the basic rules
·
clarify that for the purposes of the margin scheme, consideration for the acquisition of the property does not include any consideration for costs incurred in developing or improving the real property, including legal costs, renovation costs and statutory fees
·
require that the use of the margin scheme be agreed in writing by the supplier and recipient, and
·
ensure that when an entity sells a property on which they have not paid full consideration, the margin should be calculated with reference to the amount of consideration actually paid, rather than the sale price.

Comparison of key features of new law and current law

New law Current law
The margin scheme will only be available if a GST group member would have been eligible to use the margin scheme before the first intra-group sale of the real property.
The margin scheme will only be available to a GST joint venture participant if the GST joint venture operator would have been eligible to use the margin scheme before the supply to the participant.
(These amendments clarify, rather than change, the existing law.)
Some people have raised doubts that the margin scheme will only be available if a GST group member would have been eligible to use the margin scheme before the first intra-group sale of the real property.
Supplies of real property by a GST joint venture operator to a joint venture participant may be subject to the basic rules. If eligible, the joint venture operator may apply the margin scheme on taxable supplies of the property.
Intra-GST group sales of residential premises are not the first sale of new residential premises. They are subject to GST when they are supplied outside the group.
A supply of premises by a joint venture operator to a joint venture participant in the course of the joint venture operation is not treated as the first sale of new residential premises. Consequently, when the joint venture participant supplies the premises they will be taxable as new residential premises.
(These amendments clarify, rather than change, the existing law.)
Some people have raised doubts that intra-GST group sales of residential premises are not the first sale of new residential premises.
Supplies by a GST joint venture participant of new residential premises are taxable and subject to GST.
An increasing adjustment will arise if entities entering into a GST group have already claimed input tax credits on acquisitions that will be used by the group to make input taxed supplies or be applied to private use.
A decreasing adjustment will be available if entities were denied input tax credits before entering a GST group which makes taxable supplies.
An entity that has claimed input tax credits on its acquisitions is not required to make an increasing adjustment when it joins a GST group that makes input taxed supplies or applies it to private use.
An entity that was ineligible to claim input tax credits on its acquisitions is not entitled to a decreasing adjustment when it joins a GST group that makes taxable supplies.
For the purposes of the margin scheme, the margin on a supply to an associate will be calculated with reference to the GST-inclusive market value of the supply at the time the real property was supplied. The margin on a supply that was acquired from an associate will be calculated with reference to the GST-inclusive market value of the acquisition at the time it was acquired. Under the margin scheme, the margin is calculated with reference to the consideration actually paid even though they are associates.
The beneficiary's margin will be calculated with reference to either an approved valuation at the time the real property (held by the beneficiary or the deceased) enters the GST system or the consideration paid for the property by the deceased. The sale of real property that was inherited is subject to GST on the full price, even if the margin scheme is used. This reflects that when calculating the margin the provisions could have the effect that the beneficiary's consideration is zero.
The margin scheme will be able to be applied in respect of amalgamated property even if some of the property were not purchased under the margin scheme or as a GST-free, input taxed or non-taxable acquisition. However, an increasing adjustment will arise to recover input tax credits claimed on the real property. Suppliers are only able to use the margin scheme if all of the real property which is the subject of the sale were purchased under the margin scheme or were a GST-free, input taxed or non-taxable acquisition.
Consideration paid under the margin scheme only includes the price paid for the real property and not the price paid for improvements, construction work or other expenses such as stamp duties and solicitors' fees.
(This amendment clarifies, rather than changes, the existing law.)
Consideration paid under the margin scheme only includes the price paid for the real property and not the price paid for improvements, construction work or other expenses such as stamp duties and solicitors' fees.
The supplier and the recipient of a taxable supply of real property will need to agree in writing to apply the margin scheme. This agreement must be made at or before the day of supply (usually settlement) or within such further time as the Commissioner of Taxation (Commissioner) allows. This measure only applies to those supplies made under contracts entered into on or after Royal Assent, other than those contracts entered into pursuant to an agreement under which rights or options were granted before Royal Assent. The supplier can choose whether to apply the margin scheme. Currently, this choice can be made without informing the recipient (even though the recipient will be denied input tax credits if the margin scheme is used).
When suppliers sell real property on which the previous supplier did not receive the full sale price, the margin will be calculated with reference to the amount of consideration actually received by the previous supplier. When suppliers sell real property on which the previous supplier did not receive the full sale price, the margin is calculated with reference to the sale price.

Detailed explanation of new law

GST groups cannot be used to re-open eligibility to the margin scheme

6.12 Property owners may be able to use the margin scheme to calculate tax payable on the sale of real property under a number of circumstances, including when it is purchased within a GST group as supplies within a GST group are treated as if they were not taxable supplies (see Division 48 of the GST Act).

6.13 However, the grouping provisions cannot be used to re-open eligibility to the margin scheme. The GST group is treated as a single entity for the purposes of the margin scheme. This means that when applying the margin scheme all transactions between members of a GST group are ignored. The margin scheme is only available to a member of a GST group if the 'original acquiring member' of the group could have used the margin scheme if they had supplied the property to an entity outside the GST group [Schedule 6, item 11, subsections 75-5(2) and (4), paragraph 75-5(3)(c)]. The margin on a supply of property to an entity outside the group is the difference between the consideration for the supply and the consideration paid by the 'original acquiring member' of the GST group [Schedule 6, item 16, paragraph 75-11(1)(c)]. (The original acquiring member is the member of the GST group who last acquired the property from an entity who was not a member of the same GST group at that time.)

6.14 If the original acquiring member had acquired the property from an associate on or after 1 July 2000, the margin is instead the difference between the consideration for the supply (assuming it is not being supplied to an associate) and the GST-inclusive market value at the time it was acquired by the original acquiring member [Schedule 6, item 16, paragraph 75-11(1)(d)]. If the original acquiring member purchased the property before 1 July 2000, the margin is calculated with reference to an approved valuation as at 1 July 2000 [Schedule 6, item 16, subsection 75-11(2)].

Example 6.1 Liv (who is registered for GST) purchased real property in October 2000 under the margin scheme for $660,000. She sells this property (which was not new residential premises) to Paul in August 2001 for $770,000 using the basic rules. Liv remits 1/11th of $770,000 ($70,000) to the ATO and Paul claims an input tax credit of $70,000 on his next BAS.In early 2002 Paul sells this property to Graeme for $800,000. Paul and Graeme are members of the same GST group. As this is a supply within a GST group it is treated as if it were not a taxable supply.After further developing the property, Graeme sells the property in late 2002 to Matt (who is not a member of the GST group) for $990,000. Graeme is unable to use the margin scheme on this supply because the supply of property from Liv to Paul was taxable under the basic rules and Paul therefore would not have been eligible to use the margin scheme. This is despite the previous supply of this property, which was within the GST group (from Paul to Graeme), being treated as if it were not a taxable supply.If, however, the supply from Liv to Paul had been made using the margin scheme (or it were a non-taxable supply or from an unregistered seller), Graeme would be eligible to use the margin scheme on the supply to Matt. The margin on such a supply would be the difference between the price for which he supplies the property to Matt ($990,000) and the price paid when the property last entered the GST group ($770,000), which is $220,000.

GST joint ventures cannot be used to re-open eligibility to the margin scheme

6.15 Property owners may be able to use the margin scheme to calculate tax payable on the subsequent sale of real property when it is acquired by a joint venture participant from the joint venture operator. However, the joint venture provisions cannot be used to re-open eligibility to the margin scheme. The margin scheme is only available to a joint venture participant if the joint venture operator from whom it acquired the property could have used the margin scheme. [Schedule 6, item 11, subsections 75-5(2) and (4), paragraph 75-5(3)(d)]

6.16 Generally, the margin on a supply of real property by a joint venture participant (where they acquired the property from a joint venture operator in the course of the joint venture operation) will be the difference between the consideration for the supply and either the consideration paid by the joint venture operator when it acquired the property or, if acquired from an associate, the GST-inclusive market value of the interest at that time [Schedule 6, item 16, subsection 75-11(2A)]. However, if the property were acquired by the joint venture operator before 1 July 2000, the margin for the supply will be the difference between the consideration for the supply and an approved valuation of the interest as at 1 July 2000 [Schedule 6, item 16, subsection 75-11(2B)].

Example 6.2 In Example 6.1, if Paul and Graeme had instead been members of a GST joint venture (and Paul was the joint venture operator) the sale from Paul to Graeme may be treated as if it is not a taxable supply - assuming all the requirements of subsection 51-30(2) are satisfied - (see Division 51 of the GST Act).Sales from Graeme to Matt (regardless of whether he is another participant of this GST joint venture or outside this GST joint venture) cannot be made under the margin scheme because the supply from Liv to Paul was taxable under the basic rules and Paul therefore would not have been eligible to use the margin scheme. This is despite the fact that the previous supply of this property, which was from the joint venture operator to a joint venture participant (from Paul to Graeme), is treated as if it were not a taxable supply.If, however, the supply from Liv to Paul had been made using the margin scheme (or it were a non-taxable supply or from an unregistered seller), Graeme would be eligible to use the margin scheme on the supply to Matt. Similar to the treatment of GST groups, the margin on such a supply would be $220,000, being the difference between the price for which Graeme supplies the property to Matt ($990,000) and the price paid when the property was acquired by the joint venture operator ($770,000).

When are sales of real property within a GST group or GST joint venture taxed as 'new residential premises'?

6.17 Entities will be unable to use the grouping and joint venture provisions to turn taxable sales of new residential premises into input taxed supplies.

6.18 New residential premises do not lose their new status when they are supplied within a GST group. When the premises are supplied to an entity who is not a member of the GST group, the supply is treated as a supply of new residential premises and is subject to GST at this time (calculated either under the margin scheme or under the basic rules). [Schedule 6, item 2, paragraph 40-75(2A)(a)]

6.19 Similarly, new residential premises do not lose their new status after being supplied by a joint venture operator to a joint venture participant in the course of the joint venture operation. When the premises are supplied by the joint venture participant to another entity, the supply is treated as a supply of new residential premises and is subject to GST at this time (calculated either under the margin scheme or under the basic rules). [Schedule 6, item 2, paragraph 40-75(2A)(b)]

Adjustments will arise for input tax credits claimed by, or denied to, entities entering and exiting GST groups

6.20 An entity that makes input taxed supplies is generally not entitled to input tax credits for GST paid on their acquisitions. This ensures that these supplies are not completely free from GST. Consistent with this policy, subsection 48-55(1A) enables an increasing adjustment to be calculated to recover input tax credits if entities entering into a GST group have already claimed input tax credits on acquisitions that will be used by the group to make input taxed supplies or that will be applied to private use. [Schedule 6, item 3, subsection 48-55(1A)]

6.21 Similarly, subsection 48-55(1A) provides that if entities were denied input tax credits (before entering a GST group which makes taxable supplies) because they made input taxed supplies or applied the supplies to private use, the representative member of the GST group will be entitled to a decreasing adjustment under section 129-40 to account for the change in the extent of creditable purpose. [Schedule 6, item 3, subsection 48-55(1A)]

6.22 Consistent with this policy, entities must compare the extent of creditable purpose after they leave the GST group with the extent of creditable purpose which was used to calculate either:

·
the amount of input tax credit to which either they or the representative member of the GST group was entitled, or
·
the amount of any adjustment they or the representative member had under Division 129

whichever occurred most recently. [Schedule 6, item 4, paragraph 48-115(1)(a); item 5, subsection 48-115(1); item 6, paragraph 48-115(1)(c); item 7, paragraph 48-115(1)(d)]

6.23 If an entity purchased a thing before entering a GST group and ceases to be a member of the GST group before the representative member has had an adjustment under Division 129, when the entity calculates the amount of adjustment under Division 129 the entity must account for the extent of creditable purpose to which the thing was applied while they were a member of the GST group. [Schedule 6, item 4, paragraph 48-115(1)(a); item 5, subsection 48-115(1); item 6, paragraph 48-115(1)(c); item 7, paragraph 48-115(1)(d)]

6.24 These amendments apply not only to acquisitions of real property but also to other acquisitions an entity may make before entering a GST group.

Example 6.3 Heather is registered for GST. She purchases a van that is used for private purposes. Consequently, she is denied input tax credits for GST on the purchase of the vehicle. Shortly afterwards, Heather joins a GST group which makes (taxable) supplies of catering services. She uses the van in making these supplies. Subsection 48-55(1A) allows the representative member of Heather's GST group to have a decreasing adjustment under section 129-40. The amount of the decreasing adjustment is worked out with reference to the difference between the extent Heather used the van for a creditable purpose prior to joining the GST group and the extent to which the van is now used for a creditable purpose for the GST group.

Example 6.4 Rod is registered for GST. He purchases a van which is used entirely to make deliveries of flowers in the course of his business. He claims input tax credits for the GST paid on the purchase of this vehicle. He later joins a GST group which specialises in sales of (input taxed) residential properties. The van is used in the course of the activities of the group. Under subsection 48-55(1A), the representative member of Rod's GST group will have an increasing adjustment under section 129-40. The amount of the increasing adjustment is worked out with reference to the difference between the extent Rod used the van for a creditable purpose prior to joining the GST group and the extent to which the van is now used for a creditable purpose for the GST group.

Calculation of the margin on supplies of real property acquired from an associate or supplied to an associate

6.25 Division 72 of the GST Act includes special rules for supplies to associates for below market value where the recipient would not have been entitled to a full input tax credit. These rules are intended to ensure the supply is treated as if it had been made at market value, however, the terminology used in Division 72 differs from that used in Division 75 and therefore Division 72 is not effective in respect of the calculation of the margin under the margin scheme.

6.26 Subsection 75-11(7) provides that for a supply of real property that was acquired from an associate - unless the property was acquired from a fellow member of a GST group, a participant of a GST joint venture or from a deceased estate - the margin is calculated with reference to the GST-inclusive market value of the acquisition at the time it was acquired (if it were acquired on or after 1 July 2000) or with reference to the approved valuation as at 1 July 2000 (if it were acquired prior to 1 July 2000). Subsection 75-11(8) clarifies that 'associates' in the subsection 75-11(7) covers the associate rules for GST branches, non-profit sub-entities or government entities as in Subdivision 72-D of the GST Act. [Schedule 6, item 16, subsections 75-11(7) and (8)]

6.27 Similar to subsection 75-11(7), section 75-13 requires the margin on a supply to an associate to be calculated by referring to the GST-inclusive market value of the supply at the time it was supplied rather than the consideration for the supply. This ensures that where the property is sold for inadequate consideration under the margin scheme, the appropriate amount of GST is paid. It also ensures an entity cannot reduce the GST payable on a supply of property under the margin scheme by acquiring the property from an unregistered associate for consideration which is more than the GST-inclusive market value. [Schedule 6, item 16, section 75-13]

Example 6.5 Kivacia Ltd purchases land after 1 July 2000 which is valued at $200,000. Kivacia Ltd is registered for GST. It then sells it to an associate, Vivacia Ltd, for $100,000. The GST-inclusive market value at the time of the sale is $250,000. Kivacia Ltd and Vivacia Ltd agree to apply the margin scheme and the margin is

$250,000 - $200,000 = $50,000.

GST is 1/11th of $50,000 (or $4,545.45).When Vivacia Ltd subsequently sells the property, Vivacia and the recipient agree to apply the margin scheme. Because the property had been purchased by Vivacia Ltd from an associate, the margin on this sale is calculated with reference to the GST-inclusive market value of the property at the time it was acquired rather than the consideration for the acquisition. Vivacia Ltd sells the property for $300,000. The margin is therefore

$300,000 - $250,000 = $50,000

and Vivacia Ltd remits GST of 1/11th of $50,000 (or $4,545.45) to the ATO on this supply.

Example 6.6 Alan is not registered for GST. He sells property to an associate, Lynn, for $500,000. The GST-inclusive market value of the property at the time of the sale is $300,000. Lynn is registered for GST and is eligible to apply the margin scheme on a subsequent sale of this property because no GST was payable on the purchase of this property. She sells the property a year later for $550,000 and she and the recipient of the property agree to apply the margin scheme. Because Lynn purchased the property from an associate she must use the GST-inclusive market value of the property at the time it was acquired rather than the consideration for the acquisition. The margin is therefore calculated as

$550,000 - $300,000 = $250,000

and Lynn remits GST of 1/11th of $250,000 (or $22,727.27) to the ATO on this supply.

Calculation of the margin on supplies of real property that have been inherited

6.28 When the margin scheme is applied to the supply of property that has been inherited, the beneficiary's margin is calculated with reference to the consideration paid by the deceased or an approved valuation at a particular time, rather than zero.

6.29 The amendments provide a meaning for 'inheriting' to ensure property acquired from a deceased estate includes situations where the property is transferred by way of court order or deed of arrangement. However in most cases the day on which you inherit property is the date of death of the deceased.

6.30 If the property were held by the deceased on or after 1 July 2000 the relevant date is the date the deceased acquired the property. The valuations of the property in these circumstances broadly align with the valuations used in subsections 75-10(2) and (3). Otherwise, the relevant date is the date the property is first held by either the registered deceased or registered beneficiary after 1 July 2000. However, if the beneficiary knows what the consideration paid by the deceased was, it may choose to use that consideration for calculating the margin. [Schedule 6, item 16, subsections 75-11(3) and (4)]

6.31 These rules effectively treat the beneficiary and deceased as one entity and ensure that the beneficiary is not denied benefits of the margin scheme in terms of a generally lower GST liability than the GST liability due under the basic rules.

6.32 However, if you are a member of a GST group or a participant in a GST joint venture and the property were inherited from a member of the same GST group or a GST joint venture operator, instead of looking at the circumstances of the deceased, the margin is determined by looking at the approved valuation at the time the property last entered the GST group or was acquired by the joint venture operator. [Schedule 6, item 16, paragraphs 75-11(3)(b) and 75-11(4)(b)]

6.33 The margin scheme is only available if the deceased would have been eligible to apply the margin scheme on a subsequent supply of the real property. [Schedule 6, item 11, paragraph 75-5(3)(b)]

Example 6.7 If the deceased were registered for GST on 1 July 2000 and held the property before 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at 1 July 2000.

Example 6.8 If the deceased held the property prior to 1 July 2000 but registered for GST after 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property as at the day the deceased registered for GST.

Example 6.9 However, if the deceased held the property before 1 July 2000, was not registered for GST and the beneficiary was registered for GST, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at the time the beneficiary inherited it.

Example 6.10 In the case that the deceased held the property before 1 July 2000, was not registered for GST and the beneficiary was not registered for GST at the time they inherited the property, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property at the time the beneficiary registered or was required to be registered for GST.

Example 6.11 If the beneficiary acquired the property before 1 July 2000, the beneficiary's margin is the difference between the consideration for the supply and the appropriate valuation at the later of 1 July 2000 or the date the beneficiary registered or became required to be registered for GST. This is consistent with the treatment under subsection 75-10(3).

Example 6.12 If the deceased acquired the property on or after 1 July 2000, the beneficiary's margin on the subsequent supply is the difference between the consideration for the supply and the approved valuation of the property as at the day the deceased acquired it (regardless of when they or the deceased registered for GST). As the beneficiary is effectively adopting the consideration and eligibility of the deceased, this treatment is consistent with subsection 75-10(2).

6.34 Note: In Examples 6.7 to 6.12 the beneficiary may instead choose to use the consideration paid by the deceased for the property. In these cases, the margin is the difference between the consideration for the supply and the consideration paid by the deceased.

Example 6.13 If, however, the deceased were a member of the same GST group as the beneficiary, the beneficiary's margin on the subsequent supply of the property is the difference between the consideration for the supply and an approved valuation of the property at the time it was last supplied (on or after 1 July 2000) by an entity who was not a member of the GST group to an entity who was a member of the GST group. If the property were owned by a member of the GST group before 1 July 2000, the relevant valuation date is 1 July 2000.

Expansion of the margin scheme to supplies of amalgamated land

6.35 Entities can use the margin scheme on the supply of amalgamated real property where some (but not all) of this property had been purchased as a taxable supply calculated under the basic rules (ie not under the margin scheme) [Schedule 6, item 11, subsection 75-5(2)]. However, if an entity chooses to use the margin scheme on such sales it will have an increasing adjustment under section 75-22 to recover any input tax credits that have been claimed. This adjustment is equal to the previously attributed input tax credit amount. (This is an amount of input tax credits that takes into account any adjustments under Subdivision 19-C, Division 21 or 129.) [Schedule 6, item 18, section 75-22]

6.36 Entities are also able to use the margin scheme on the supply of amalgamated land that they inherited where some of the property had been purchased by the deceased as a taxable supply calculated under the basic rules. If the beneficiary chooses to use the margin scheme on such supplies, it will have an increasing adjustment under subsection 75-22(2) equal to the deceased's previously attributed input tax credit amount. [Schedule 6, item 18, subsection 75-22(2)]

Consideration under the margin scheme does not include related acquisitions

6.37 For the purposes of the margin scheme, consideration for the acquisition of property does not include any consideration for improvements, construction or development costs of building work or additional costs such as solicitors' fees and stamp duty (as these would reduce the margin on which GST is calculated and input tax credits would generally have been claimed on these acquisitions). Any expenses or activities in bringing the interest, unit or lease into physical or legal existence are also ignored. [Schedule 6, item 16, section 75-14]

Agreement by parties to use the margin scheme must be in writing

6.38 The use of the margin scheme needs to be agreed in writing by the two parties. This requirement addresses uncertainty that had led some entities to claim input tax credits for GST paid even though they were not eligible because the property was purchased under the margin scheme. The agreement must be obtained by the day of supply (usually settlement). The Commissioner has discretion to extend the date by which the agreement in writing should be made, however, it is expected that most entities should have agreed whether to use the margin scheme by the date of settlement. Such a decision by the Commissioner is a reviewable decision under subsection 62(2) of the Taxation Administration Act 1953 (TAA 1953). This measure only applies to those supplies made under contracts entered into on or after Royal Assent, other than those contracts entered into pursuant to an agreement under which rights or options were granted before Royal Assent. It is not expected this will lead to significant additional compliance costs for entities that sell real property. [Schedule 6, item 10, subsections 75-5(1) and (1A); subitem 28(3)]

Margin on subsequent supply takes into account failure to pay full consideration

6.39 Sometimes an entity may sell property on which they have paid an amount which is less than the contract price for the acquisition of that property. Section 75-12 ensures that if the purchaser of the property sells the property under the margin scheme, they must calculate the margin with reference to the amount of consideration they actually paid rather than the sale price. Similarly, if the entity purchased it from a member of the same GST group, the consideration for the acquisition by the original acquiring member (see paragraph 6.13) is reduced by the amount of consideration that has not yet been paid. This ensures GST is collected on the full value added because, in most cases, the original supplier will have only effectively remitted GST on the amount of consideration they actually received. [Schedule 6, item 16, section 75-12]

6.40 If, after the subsequent supply of the property under the margin scheme, the supplier (or original acquiring member) makes an additional payment to the original supplier for the acquisition of the property, the supplier will be entitled to a decreasing adjustment under section 75-27. The amount of the decreasing adjustment is 1/11th of the extra payment. [Schedule 6, item 19, section 75-27]

Example 6.14 Gilmore Ltd and Newport Ltd are related parties. Gilmore Ltd sells land to Newport Ltd on a terms contract for $1.10 million. The margin on this supply is $550,000 and GST payable on the supply is 1/11th of the margin or $50,000. Newport Ltd pays only $460,000 of the sale price of $1.10 million. Newport Ltd then sells the land under the margin scheme for $1.12 million. Section 75-12 provides that the margin is calculated with reference to the amount actually paid ($460,000) rather than the sale price ($1.10 million). This results in GST being payable on a margin of

$1,120,000 - $460,000 = $660,000

therefore GST of $60,000 is payable.If Newport Ltd subsequently pays Gilmore Ltd an additional amount of $220,000, Newport Ltd will need to amend the calculation of GST payable under the margin scheme and will be entitled to a decreasing adjustment. The amount which Newport Ltd has now paid to Gilmore Ltd is

$460,000 + $220,000 = $680,000.

GST payable under the margin scheme should now have been

1/11th of $1,120,000 - $680,000 = 1/11th of $440,000 = $40,000.

The decreasing adjustment to which Newport Ltd is entitled is 1/11th of the additional consideration which is

1/11th of $220,000 = $20,000.

This results in Newport Ltd having effectively remitted $40,000 to the ATO in respect of the sale of this property.

Approved valuations

6.41 Under section 75-35, the Commissioner has the power to issue a written determination which specifies the requirements for a valuation to be an '... approved valuation ...' for the purposes of calculating the margin on real property supplied using the margin scheme. [Schedule 6, item 20, section 75-35]

Application and transitional provisions

6.42 The amendments made by Schedule 6, except items 9 and 10, apply from the date of introduction of this Bill into Parliament. This date was chosen rather than the date of Royal Assent because the majority of the measures are tax integrity measures which are consistent with the original policy intent. Any delay in their operation may allow some entities to bring forward sales of their properties in order to take advantage of the property arrangements prior to this Bill receiving Royal Assent. [Schedule 6, subitems 28(1) and (2)]

6.43 It is not expected that a start date of the date of introduction will cause significant compliance costs for property owners and recipients. Some measures, namely those relating to amalgamated land and inherited property and margin scheme, are beneficial to taxpayers.

6.44 The amendment that requires the supplier and recipient to agree in writing to apply the margin scheme (items 9 and 10) applies from the date this Bill receives Royal Assent. This date has been chosen to allow time for entities purchasing property to ensure they have written agreement where they wish to apply the margin scheme. [Schedule 6, subitem 28(3)]

Consequential amendments

6.45 As a consequence of the change to subsection 75-5(1), the heading of section 75-5 is amended so that it no longer refers to choosing to apply the margin scheme. [Schedule 6, item 9, section 75-5]

6.46 Schedule 6 also makes a consequential amendment to subsections 75-10(2) and (3) to include a reference to margins calculated under section 75-11 and thereby ensure that the calculations of the margin under section 75-11 are not overridden by subsection 75-10(2). References to sections 75-11 to 75-14 are also added to section 75-15. Also the definitions of 'margin' and 'margin scheme' under section 195-1 are amended to refer to the margins calculated under section 75-11 and new subsection 75-5(1) respectively. [Schedule 6, item 12, subsection 75-10(2); item 13, subsection 75-10(3); item 17, section 75-15; item 27, section 195-1; item 27A, section 195-1]

6.47 Amendments are also required to reflect the introduction of a defined term, 'approved valuation', in section 75-35. These amendments are to substitute this defined term in paragraph 75-10(3)(b) for the more expansive description. A savings provision is also inserted to ensure that any determinations previously issued by the Commissioner under paragraph 75-10(3)(b) are not affected by the determination-making power being moved to section 75-35. [Schedule 6, item 14, paragraph 75-10(3)(b); item 15, paragraph 75-10(3)(b); item 21]

6.48 The table in the definition of 'decreasing adjustment' is expanded to include a reference to an additional type of decreasing adjustment, which is available under section 75-27 for additional consideration paid on real property acquired on an earlier supply. [Schedule 6, item 24, section 195-1]

6.49 Similarly, the table in the definition of 'increasing adjustment' is expanded to include a reference to an additional type of increasing adjustment, which arises under section 75-22 in respect of entitlements for input tax credits on real property which has since been supplied under the margin scheme. [Schedule 6, item 25, section 195-1]

6.50 Additionally, the table in section 17-99, which lists special rules relating to net amounts or adjustments, is expanded to include a reference to the adjustments contained in Division 75. [Schedule 6, item 1, section 17-99]

6.51 The note at the end of the definition of 'consideration' is changed to include references to sections 75-12 to 75-14, which clarify the definition of consideration for your acquisition for the purposes of the margin scheme. [Schedule 6, item 23, section 195-1]

6.52 Definitions of the terms 'approved valuation', 'ineligible for the margin scheme' and 'inherit' are inserted in the Dictionary in section 195-1. [Schedule 6, item 22, section 195-1; item 26, section 195-1; item 26A, section 195-1]

6.53 Finally, a consequential change is made to subsection 62(2) of the TAA 1953 to take into account that a decision by the Commissioner - to extend the time to obtain written agreement for use of the margin scheme - is a reviewable decision. [Schedule 6, item 27B, subsection 62(2) of the TAA 1953]

Chapter 7 - Superannuation and family law

Outline of chapter

7.1 Schedule 7 to this bill amends the Income Tax Assessment Act 1936 (ITAA 1936) to provide appropriate taxation treatment for superannuation annuities that have been split on marriage breakdown. The broad aim of these amendments is to ensure that where a superannuation annuity is split upon marriage breakdown then the taxation consequences will be the same as those that currently apply where an equivalent benefit in a superannuation fund is split.

7.2 Schedule 7 also amends the ITAA 1936 to correct minor anomalies in relation to how the taxation law applies when superannuation benefits are split on marriage breakdown. Context of amendments

7.3 Legislation under Part VIIIB of the Family Law Act 1975 which allows separating couples to split their superannuation on marriage breakdown commenced on 28 December 2002.

7.4 This legislation, and related legislation, provided for the splitting of superannuation on marriage breakdown but it did not apply to superannuation-like annuity products, such as annuities purchased from life offices (and other organisations) with rolled-over superannuation money.

7.5 The Government has recently amended the Family Law Act 1975 to allow these superannuation annuities to be split between separating couples on marriage breakdown in the same way as other equivalent superannuation benefits.

7.6 As a result of the amendments to the Family Law Act 1975, amendments are required to the income taxation law so that superannuation annuities split on marriage breakdown are taxed in the same way that equivalent superannuation benefits are taxed on marriage breakdown.

7.7 In addition to the amendments dealing with superannuation annuities, Schedule 7 also includes amendments to correct minor anomalies in relation to how the taxation law applies when superannuation benefits are split on marriage breakdown. These amendments clarify the law in several areas and give effect to the original policy intent of the superannuation and family law arrangements. Summary of new law

7.8 These amendments to the income taxation law extend the same taxation treatment currently provided to superannuation split on marriage breakdown to superannuation annuities split upon marriage breakdown.

7.9 If the superannuation annuity is an immediate annuity (ie an annuity that is presently payable) that has been split on marriage breakdown, then the amendments will ensure it is subject to the same taxation arrangements as apply to a pension in a superannuation fund that has been split in similar circumstances.

7.10 If the superannuation annuity is a deferred annuity (ie an annuity not payable on purchase) that has been split on marriage breakdown, then the amendments will ensure it is subject to the same taxation arrangements as apply to a superannuation interest in the accumulation phase that has been split in similar circumstances.

7.11 These amendments to the income taxation law also correct minor anomalies and are intended to:

·
ensure appropriate taxation treatment where a non-member spouse receives a share of superannuation as a result of a payment split after the death of his or her former member spouse
·
ensure the appropriate taxation treatment of payments made to a non-member spouse, or retained for a non-member spouse in the superannuation system, when superannuation is split
·
clarify the taxation treatment of a contribution to superannuation made for the benefit of a non-member spouse to satisfy family law obligations
·
allow a trustee or retirement savings account provider to reject a member spouse's request to treat contributions as deductible if, because of a family law related split, there are not sufficient monies in the member spouse's account to meet any income taxation liability that would arise for the fund or provider on treating those contributions as deductible, and
·
ensure a member spouse's pension is appropriately reassessed against the reasonable benefit limits whenever the pension is reduced to satisfy a family law obligation.

Comparison of key features of new law and current law

New law Current law
Superannuation annuities will be able to be split under Part VIIIB of the Family Law Act 1975 from the commencement of the Family Law Amendment (Annuities) Act 2004, and the amendments in this Schedule ensure that the taxation consequences of the split are the same as those that currently apply when other equivalent superannuation benefits are split. Prior to the commencement of Schedule 2 to the Family Law Amendment (Annuities) Act 2004, superannuation annuities cannot be split under Part VIIIB of the Family Law Act 1975 and accordingly the taxation law does not specify the taxation consequences of such splitting. Schedule 2 to that Act is to commence on the earlier of proclamation or 15 June 2005.
The amendments correct minor anomalies and clarify certain aspects of the taxation treatment of superannuation benefits split on marriage breakdown. Anomalies in the current law result in inconsistent, inappropriate or unclear taxation treatment of certain superannuation benefits split on marriage breakdown.

Detailed explanation of new law

Death benefit eligible termination payments

7.12 Amendments made to sections 27ACA and 27AAA of the ITAA 1936 are designed to correct unintended outcomes that may arise from the current law.

Clarifying which eligible termination payment paragraph applies when a payment is made to the non-member spouse on the death of the member spouse

7.13 An amendment to section 27ACA ensures that if a payment is made to the non-member spouse because a splittable payment has become payable to another person on the death of the member spouse then that payment will always be taken to be an eligible termination payment under paragraph (ba) of the definition of 'eligible termination payment' in section 27A. This provides more certainty over how that payment will be treated for taxation purposes.

7.14 The amendment ensures it does not matter to whom the splittable payment is initially payable, as the payment to the non-member spouse in this situation is considered an eligible termination payment under paragraph (ba) of the definition of eligible termination payment. [Schedule 7, item 8, subsection 27ACA(1)]

Ensuring that payments to a non-member spouse are only death benefits if the non-member spouse is a dependant (within the ordinary meaning of that expression)

7.15 An amendment to section 27AAA ensures that where the non-member spouse receives a payment as a result of a payment split on marriage breakdown after the death of the member spouse, the payment will only be considered a death benefit eligible termination payment (and thus eligible for special taxation treatment) if the non-member spouse was a dependant (in the ordinary sense of the word) of the member spouse immediately before the member spouse's death. [Schedule 7, items 5 and 6, subsection 27AAA(7A)]

7.16 This amendment corrects an anomaly in the current law under which a payment to a non-member spouse may be considered a death benefit eligible termination payment simply because the non-member spouse is a former spouse, rather than because they would otherwise be considered a dependant.

Classification of amounts retained in superannuation for the non-member spouse

7.17 Section 27ACA of the ITAA 1936 currently contemplates the situation where a payment is made directly to the non-member spouse (or their legal personal representative). It is possible, however, that the amount for the non-member spouse may be retained in the superannuation system (eg paid into another fund for the non-member spouse).

7.18 This amendment ensures that this possibility is covered by clarifying that if this occurs then there will be an eligible termination payment roll-over for the non-member spouse. This allows the appropriate eligible termination payment components to be calculated under subsection 27ACA(2). [Schedule 7, item 7, paragraphs 27ACA(1)(b) and (c)]

Splitting of eligible annuities

7.19 New subsection 27ACB(1A) of the ITAA 1936 deals with the situation where an eligible annuity (within the meaning of Part VIIIB of the Family Law Act 1975) is split on marriage breakdown and, in circumstances to be prescribed in regulations, an annuity is created for the non-member spouse or an amount is transferred to a superannuation fund for the non-member spouse. It is intended that the circumstances prescribed in the regulations will include where a deferred annuity is split and amounts remain in the superannuation system for both the member spouse and non-member spouse.

7.20 In such circumstances, subsection 27ACB(1A) provides that there is an eligible termination payment for the non-member spouse equal to the value of the amount split for the non-member spouse and this eligible termination payment is considered to have been rolled-over. Similarly, the remaining value of the annuity is considered to be an eligible termination payment for the member spouse and rolled-over. These provisions effectively mirror subsection 27ACB(1), which provides for an equivalent outcome if superannuation interests are split in accordance with relevant regulations under the Superannuation Industry (Supervision) Regulations 1994. The relevant taxation components of the eligible termination payments under subsection 27ACB(1A) are then calculated under subsections 27ACB(2) to (4). [Schedule 7, items 13 and 14, subsection 27ACB(1A)]

7.21 An eligible annuity is defined in the Family Law Act 1975 and means an annuity purchased wholly out of rolled-over amounts. Only eligible annuities can be split under Part VIIIB of the Family Law Act 1975.

7.22 Where a new annuity is created for the non-member spouse, the new annuity may be provided by either the same annuity provider as the original eligible annuity, or by another annuity provider.

Untaxed element of post-June 1983 component of an eligible termination payment

7.23 The untaxed element of the post-June 1983 component of an eligible termination payment is now included in the identified components of an eligible termination payment which are subject to an interest split. [Schedule 7, item 16, paragraph 27ACB(5)(e)]

7.24 This amendment corrects an anomaly in the current law and ensures that the untaxed element of the post-June 1983 component of an eligible termination payment is split on marriage breakdown in the same way as the other identified components of an eligible termination payment.

Contributions to superannuation for a non-member spouse

7.25 Under the Family Law (Superannuation) Regulations 2001 (eg Regulation 14H) it is possible for a member spouse to satisfy a payment split obligation on marriage breakdown by making a contribution to superannuation for the non-member spouse. If the contribution is sufficient to meet the non-member spouse's entitlement, the non-member spouse is not entitled to any further amounts under the payment split. The nature of such a contribution is that it should most appropriately be considered an undeducted contribution to the fund and should also not qualify as an eligible spouse contribution under section 159T of the ITAA 1936.

7.26 These amendments ensure that a contribution to a regulated superannuation fund or to a retirement savings account made by a member spouse on behalf of a non-member spouse to satisfy a payment split:

·
is not an allowable deduction [Schedule 7, item 18, subsection 82AAC(1A)]
·
is not an eligible spouse contribution [Schedule 7, item 53, subsection 159T(1A)] , and
·
is not a taxable contribution [Schedule 7, items 55 and 56, subsection 274(4)].

Impact of a split on the ability to claim a deduction for earlier superannuation contributions

7.27 A self-employed person may claim a taxation deduction under section 82AAT of the ITAA 1936 for his or her own contributions to superannuation, including a retirement savings account. To do so the person must give a relevant notice to the trustee or retirement savings account provider and the fund or provider must acknowledge that notice. The fund or provider then becomes liable to pay income taxation on those contributions.

7.28 Section 82AAT is amended to provide that the trustee or retirement savings account provider may reject the person's notice (and hence not treat the contributions as deductible) if, after the contribution was made and before the notice is given, the person's benefit has been split under family law (the exact circumstances will be prescribed in regulations) and as a result the remaining benefit is insufficient to meet the income taxation that would be payable by the fund or retirement savings account provider if the contributions in question were treated as deductible. [Schedule 7, items 24 to 27, subsections 82AAT(1A), (1AA), (1CB) and (1CBA)]

Reasonable benefit limits

7.29 These amendments to the reasonable benefit limits provisions of the ITAA 1936 deal with the implications for reasonable benefit limits assessing and reporting when an eligible annuity (within the meaning of Part VIIIB of the Family Law Act 1975) is split on marriage breakdown. The general aim of these amendments is to ensure that the split of an eligible annuity will have the same taxation consequences (both for reasonable benefit limits purposes and other relevant provisions such as section 27H of the ITAA 1936) as a split of a superannuation pension. These amendments also address some existing anomalies in the law to ensure the correct treatment of superannuation split on marriage breakdown.

Ensuring that eligible annuity splits are treated the same as superannuation pension splits

7.30 Amendments to subsections 140M(1A) and (1C) ensure that where an eligible annuity is split, the same consequences will arise under these provisions as currently arise when a superannuation pension is split. Generally, this will mean that a new annuity is considered to have commenced for the non-member spouse and is assessed appropriately against his or her reasonable benefit limits and the reduced annuity paid to the member spouse is remeasured and assessed against his or her reasonable benefit limits. [Schedule 7, items 29 to 38, subsections 140M(1A) and (1C)]

Ensuring appropriate reasonable benefit limits treatment when amounts split in favour of the non-member spouse are retained in the superannuation system

7.31 Paragraph 140M(1C)(d) is amended to confirm that subsection 140M(1C) can be applied in the situation where a payment is not made directly to the non-member spouse but is retained in the superannuation system (eg paid into another fund for the non-member spouse). This ensures that the resulting reduced pension/annuity payments made to the member spouse can be remeasured and assessed against their reasonable benefit limits in this case. [Schedule 7, item 39, paragraph 140M(1C)(d)]

Removing unnecessary restriction on application of subsection 140M(1C)

7.32 Paragraph 140M(1C)(g) is amended to ensure that in any case where a pension continues for a member spouse after a split has been applied then that will be considered a new pension for the member spouse (and hence re-assessed against their reasonable benefit limits). The words 'as a result of the splittable payment becoming payable' have been removed as in some circumstances a benefit may be split in such a way that a 'splittable payment' never becomes payable. For example, the pension may have been partly commuted and the non-member spouse's share paid out - if this occurs no future 'splittable payments' can arise under relevant family law provisions. [Schedule 7, item 40, paragraph 140M(1C)(g)]

Commutation of an annuity under a payment split

7.33 Section 140UA currently deals with the impact of a commutation of a superannuation pension as a result of a split relating to family law. In particular, it specifies how any resultant eligible termination payments or pensions are to be assessed for reasonable benefit limits purposes. The amendments to section 140UA ensure that where an eligible annuity is commuted the same treatment applies as currently applies when a superannuation pension is commuted. [Schedule 7, items 41 to 47, subsections 140UA(1) and (2)]

Assessment against pension reasonable benefit limits

7.34 If the member spouse's annuity qualified for the pension reasonable benefit limits before a payment split on marriage breakdown, then it will continue to qualify for the pension reasonable benefit limits. Again, this ensures equivalent treatment to a superannuation pension split on marriage breakdown. [Schedule 7, items 48 to 50, section 140ZFA)]

Reduction in the reasonable benefit limits value of a pension or annuity as a result of a split

7.35 Subsection 140ZP(3) is amended so that it also applies in the situation where a payment is not made directly to the non-member spouse but is retained in the superannuation system (eg paid into another fund for the non-member spouse). [Schedule 7, item 52, subsection 140ZP(3)]

7.36 Subsection 140ZP(3) (as amended) provides that if a member's pension entitlement is reduced because of a split relating to family law then the capital value of that original pension is taken to be reduced in accordance with a method determined by the Commissioner of Taxation (Commissioner). This is to ensure that the member will no longer be assessed for reasonable benefit limits purposes on that part of their benefit that has been split in favour of the non-member spouse.

7.37 New subsection 140ZN(3) introduces an equivalent provision for eligible annuities that have been split relating to family law. In effect, the relevant reasonable benefit limits amount of the annuity that has been split will be reduced in accordance with a method determined by the Commissioner. [Schedule 7, item 51, subsection 140ZP(3)]

7.38 New subsection 140ZN(4) states that the determination made under subsection 140ZN(3) is a legislative instrument, but neither section 42 nor Part 6 of the Legislative Instruments Act 2003 applies to the determination. This subsection has no substantive effect but is merely to clarify the position for users. [Schedule 7, item 51, subsection 140ZN(4)]

Definitions

7.39 The terms 'eligible annuity', 'member spouse', 'non-member spouse', 'payment split', 'regulated superannuation fund', 'retirement savings account', 'splittable payment' and 'superannuation interest' are defined to have the same meaning as in Part VIIIB of the Family Law Act 1975. [Schedule 7, items 1 to 4, subsection 27A(1); items 10 and 12, subsection 27ACA(5); items 15 and 17, subsection 27ACB(5); items 19 to 23, subsection 82AAC(3); item 28, subsection 82AAT(4); item 54, subsection 159T(3); item 56, subsection 274(5)]

Chapter 8 - Fringe benefits tax - worker entitlement funds

Outline of chapter

8.1 Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to remove the condition that contributions to approved worker entitlement funds must be required under an industrial instrument in order to be eligible for an exemption from fringe benefits tax (FBT).

Context of amendments

8.2 Worker entitlement funds are funds which provide for employee entitlements such as leave or redundancy payments. Currently certain contributions to approved worker entitlement funds are exempt from FBT. The exemption was designed to ensure that these contributions are not taxed twice, once as a fringe benefit when paid into the fund and again as income when paid out of the fund.

8.3 A 'fund' is an approved worker entitlement fund if it is prescribed by regulation and a declaration is not in force in relation to the fund. From 1 April 2003, funds have been able to obtain prescription as an approved worker entitlement fund if it meets certain criteria. Long service leave funds established and operated by or under commonwealth, state or territory legislation are also approved worker entitlement funds.

8.4 As a transitional arrangement, the FBT exemption also applied to certain contributions made to existing worker entitlement funds during the FBT years beginning on 1 April 2003 and 1 April 2004.

8.5 Under the transitional arrangements, contributions to existing worker entitlement funds are exempt when they are in accordance with existing industrial practice and are made for either:

·
the purposes of ensuring that an obligation to make leave payments (including payments in lieu of leave) or payments when an employee ceases employment is met, or
·
for the reasonable administrative costs of the fund.

8.6 A fund is an existing worker entitlement fund if it accepted contributions during the FBT year beginning 1 April 2002 for the purposes of meeting obligations in relation to leave payments or payments when an employee ceases employment.

Summary of new law

8.7 These amendments will replace the current condition that contributions to approved worker entitlement funds must be required under an industrial instrument in order to be eligible for an exemption from FBT. Following the amendment, contributions to an approved worker entitlement fund must be made under an industrial instrument.

Comparison of key features of new law and current law

New law Current law
Contributions to approved worker entitlement funds are made under an industrial instrument to qualify for an FBT exemption.
Contributions are made for the purposes of ensuring an obligation under the industrial instrument to meet leave or redundancy payments for an employee.
Contributions to approved worker entitlement funds must be required under an industrial instrument to qualify for an FBT exemption.
Contributions are required for the purposes of ensuring an obligation under the industrial instrument to meet leave or redundancy payments for an employee.

Detailed explanation of new law

8.8 The proposed amendments to the FBTAA 1986 will replace the current condition that contributions for leave or redundancy payments must be required under the industrial instrument in order to be eligible for an exemption from FBT. [Schedule 8, item 1, paragraph 58PA(b)]

8.9 The criterion for an exemption from FBT will be satisfied where the contribution is made under an industrial instrument to an approved worker entitlement fund, for the purposes of meeting obligations to make leave or redundancy payments for employees.

8.10 Industrial instruments, such as awards, may include an obligation for employers to provide leave or redundancy payments for employees, based on the length of an employee's service. Employers may have the option of providing for the payments themselves, or by way of making contributions to a worker entitlement fund. Thus the wording of these industrial instruments may make contributions to a worker entitlement fund optional. The industrial instruments may not require employers to meet their obligation to provide those payments by way of a contribution to a worker entitlement fund.

8.11 Prior to these amendments, contributions needed to be 'required under an industrial instrument' in order for the contribution to be eligible for an exemption from FBT. As a result, employers may be liable to pay FBT on their contributions to approved worker entitlement funds in cases where the contributions are optional, but not required, under the relevant industrial instrument.

8.12 Whilst an obligation to make contributions for the purposes of meeting employee leave or redundancy payments is made under the industrial instrument, the amendments allow related legal instruments to be used to determine the quantum and other relevant matters regarding the contributions. An obligation to make a contribution will arise when the employer elects to make the payment to an approved worker entitlement fund. [Schedule 8, item 2, subparagraph 58PA(c)(i)]

8.13 In certain cases it is only through the interaction of the industrial instrument and related legal instruments that an obligation to provide leave or redundancy payments to an employee and the actual amount payable can be enunciated. For example, an employer may be required to provide leave or redundancy payments, calculated on the length of service, by way of contributions to a worker entitlement fund under an industrial instrument (such as a federal or state award). The amount of the payment and other relevant matters may be specified in the trust deed of the fund. While the trust deed of the fund is a related legal instrument, it is not the industrial instrument.

Application and transitional provisions

8.14 These amendments will apply in respect of the FBT year beginning on 1 April 2005 and all later FBT years. [Schedule 8, item 3]

Index

Schedule 1: Simplified imputation system

Bill reference Paragraph number
Item 1, steps 1 and 2 in the method statement in subsection 207-70(2) 1.9
Item 2, subsection 207-70(5) 1.10
Item 3 1.11

Schedule 2: CGT roll-over for transfer of assets to superannuation funds with licensed trustees

Bill reference Paragraph number
Item 1, section 112-150 2.20
Item 2, subsection 126-210(1) 2.10
Item 2, subsections 126-210(2) to (4) 2.14
Item 2, subsection 126-210(5) 2.16
Item 2, subsection 126-210(6) 2.18

Schedule 3: Deducting expenditure on telecommunications rights

Bill reference Paragraph number
Items 1 and 4 3.16
Item 2 3.15 Item 3, definition of an 'IRU' 3.13 Items 6 to 8 3.21 Item 9 3.24 Item 10 3.23 Item 11 3.25 Subitem 5(1) 3.14 Subitem 5(2) 3.18 Subitem 5(3) 3.17 Subitem 12(1) 3.22 Subitem 12(2) 3.31 Subitem 12(3) 3.30

Schedule 4: Changing from annual to quarterly payment of PAYG instalments

Bill reference Paragraph number
Item 1 4.8
Items 2 and 3 4.9
Item 4 4.10, 4.11
Item 5 4.15

Schedule 5: Deductible gift recipients

Bill reference Paragraph number
Items 1 and 7 5.9
Items 1 to 9 5.5, 5.11
Items 2 and 5 5.6
Items 3 and 8 5.7
Items 3 and 9 5.10
Items 4 and 6 5.8

Schedule 6: Goods and services tax and real property

Bill reference Paragraph number
Item 1, section 17-99 6.50
Item 2, paragraph 40-75(2A)(a) 6.18
Item 2, paragraph 40-75(2A)(b) 6.19
Item 3, subsection 48-55(1A) 6.20, 6.21
Item 4, paragraph 48-115(1)(a); item 5, subsection 48-115(1); item 6, paragraph 48-115(1)(c); item 7, paragraph 48-115(1)(d) 6.22, 6.23
Item 9, section 75-5 6.45
Item 10, subsections 75-5(1) and (1A); subitem 28(3) 6.38
Item 11, subsection 75-5(2) 6.35
Item 11, subsections 75-5(2) and (4), paragraph 75-5(3)(c) 6.13
Item 11, subsections 75-5(2) and (4), paragraph 75-5(3)(d) 6.15
Item 11, paragraph 75-5(3)(b) 6.33
Item 12, subsection 75-10(2); item 13, subsection 75-10(3); item 17, section 75-15; item 27, section 195-1; item 27A, section 195-1 6.46
Item 14, paragraph 75-10(3)(b); item 15, paragraph 75-10(3)(b); item 21 6.47
Item 16, paragraph 75-11(1)(c) 6.13
Item 16, paragraph 75-11(1)(d) 6.14
Item 16, subsection 75-11(2) 6.14
Item 16, subsection 75-11(2A) 6.16
Item 16, subsection 75-11(2B) 6.16
Item 16, subsections 75-11(3) and (4) 6.30
Item 16, paragraphs 75-11(3)(b) and 75-11(4)(b) 6.32
Item 16, subsections 75-11(7) and (8) 6.26
Item 16, section 75-12 6.39
Item 16, section 75-13 6.27
Item 16, section 75-14 6.37
Item 18, section 75-22 6.35
Item 18, subsection 75-22(2) 6.36
Item 19, section 75-27 6.40
Item 20, section 75-35 6.41
Item 22, section 195-1; item 26, section 195-1; item 26A, section 195-1 6.52
Item 23, section 195-1 6.51
Item 24, section 195-1 6.48
Item 25, section 195-1 6.49
Item 27B, subsection 62(2) of the TAA 1953 6.53
Subitems 28(1) and (2) 6.42
Subitem 28(3) 6.44

Schedule 7: Superannuation and family law

Bill reference Paragraph number
Items 1 to 4, subsection 27A(1); items 10 and 12, subsection 27ACA(5); items 15 and 17, subsection 27ACB(5); items 19 to 23, subsection 82AAC(3); item 28, subsection 82AAT(4); item 54, subsection 159T(3); item 56, subsection 274(5) 7.39
Items 5 and 6, subsection 27AAA(7A) 7.15
Item 7, paragraphs 27ACA(1)(b) and (c) 7.18
Item 8, subsection 27ACA(1) 7.14
Items 13 and 14, subsection 27ACB(1A) 7.20
Item 16, paragraph 27ACB(5)(e) 7.23
Item 18, subsection 82AAC(1A) 7.26
Items 24 to 27, subsections 82AAT(1A), (1AA), (1CB) and (1CBA) 7.28
Items 29 to 38, subsections 140M(1A) and (1C) 7.30
Item 39, paragraph 140M(1C)(d) 7.31
Item 40, paragraph 140M(1C)(g) 7.32
Items 41 to 47, subsections 140UA(1) and (2) 7.33
Items 48 to 50, section 140ZFA) 7.34
Item 51, subsection 140ZP(3) 7.37
Item 51, subsection 140ZN(4) 7.38
Item 52, subsection 140ZP(3) 7.35
Item 53, subsection 159T(1A) 7.26
Items 55 and 56, subsection 274(4) 7.26

Schedule 8: Amendment of the Fringe Benefits Tax Assessment Act 1986

Bill reference Paragraph number
Item 1, paragraph 58PA(b) 8.8
Item 2, subparagraph 58PA(c)(i) 8.12
Item 3 8.14


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