House of Representatives

Tax Laws Amendment (2008 Measures No. 3) Bill 2008

Explanatory Memorandum

Circulated by authority of the Treasurer, the Hon Wayne Swan MP

Glossary

The following abbreviations are used throughout this explanatory memorandum.

Abbreviation Definition
CGT capital gains tax
Commissioner Commissioner of Taxation
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
KAP Motors KAP Motors Pty Ltd v Commissioner of Taxation
[2008] FCA 159
McNeil's case Commissioner of Taxation v McNeil
[2007] HCA 5
TAA 1953 Taxation Administration Act 1953

General outline and financial impact

Shareholder and unitholder rights

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to:

·
ensure that no amount is included in the assessable income of a shareholder in a company or a unitholder in a unit trust as a result of acquiring certain rights issued by the company to acquire further shares or by the trustee of the unit trust to acquire further units; and
·
ensure that an amount that is included in the assessable income of a shareholder as a result of acquiring rights issued by the company to dispose of shares, is appropriately reflected in the cost base of the rights.

Date of effect : These amendments apply to rights issued on or after 1 July 2001. The retrospective application of these amendments will not disadvantage taxpayers.

Proposal announced : This measure was announced in the Treasurer's Press Release No. 019 of 8 April 2008.

Financial impact : Nil.

Compliance cost impact : Negligible.

Restriction on GST refunds and time limits for recovery and refund of indirect tax

Schedule 2 to this Bill amends the Taxation Administration Act 1953 to correct a deficiency in the goods and services tax (GST) refund restriction provisions. This measure also addresses deficiencies in the four-year time limit on indirect tax and fuel tax credit related liabilities and entitlements to refunds related to indirect tax and fuel tax credits and ensures that they apply as intended.

Date of effect : The amendment to the GST refund restriction provisions applies to overpayments that relate to tax periods commencing on or after 1 July 2008. The amendment to the four-year time limit applies on and after 1 July 2008.

Proposal announced : This measure was announced in the Treasurer's Press Release No. 030 of 6 May 2008.

Financial impact : This measure will have an unquantified but expected to be small impact on GST, wine equalisation tax and luxury car tax revenue and fuel tax credit entitlements.

Compliance cost impact : Low impact. These amendments ensure that the provisions apply more consistently and do not impose any significant compliance cost impacts on affected businesses.

Income tax treatment of rent assistance paid to Austudy recipients

Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 to exempt rent assistance paid to Austudy recipients from income tax.

Date of effect : This measure applies to rent assistance paid to Austudy recipients in the 2007-08 income year and later income years.

Proposal announced : This measure has not previously been announced.

Financial impact : Nil.

Compliance cost impact : Nil.

Income tax treatment of the Carer Adjustment Payment

Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to exempt the Carer Adjustment Payment from income tax.

Date of effect : This measure applies to Carer Adjustment Payments paid in the 2007-08 income year and later income years.

Proposal announced : This measure has not previously been announced.

Financial impact : Nil.

Compliance cost impact : Nil.

Chapter 1 - Shareholder and unitholder rights

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

Call options

·
ensure that no amount is included in the assessable income of a shareholder in a company as a result of acquiring certain rights issued by the company (issuing entity) to acquire further shares (relevant interests);
·
ensure that no amount is included in the assessable income for a unitholder in a unit trust as a result of acquiring certain rights issued by the trustee of the unit trust (issuing entity) to acquire further units (relevant interests); and

Put options

·
ensure that an amount that is included in the assessable income of a shareholder as a result of acquiring rights issued by the company to dispose of shares, is appropriately reflected in the cost base of the rights. As issue of rights to dispose of units is not possible for many trustees and is unlikely to arise in practice, rights to dispose of units are not dealt with by this Schedule.

Context of amendments

1.2 Companies and trustees of a unit trust may issue call options to their shareholders and unitholders. Companies may issue put options to their shareholders.

·
Under a call option, a company issues its shareholders with rights to buy additional shares in the company. A trustee of a unit trust can also issue to its unitholders with rights to buy additional units in the trust.
·
Under a put option, a company issues its shareholders with rights to sell their shares back to the company.

1.3 In Commissioner of Taxation v McNeil
[2007] HCA 5 (McNeil's case), the High Court of Australia found that the market value of tradeable put options issued by a company to its shareholders was assessable as ordinary income at the time of issue of the options.

1.4 While the decision in McNeil's case related to the acquisition of put options, the analysis in the decision is considered capable of applying to call options. This would require a shareholder or unitholder issued with call options in some circumstances to include the value of the option in their assessable income at the time of receiving the option. Such an outcome would seriously affect the capital markets and have significant implications for companies and trustees of unit trusts wanting to use call options to raise capital.

1.5 These amendments restore the original tax treatment of rights issued by issuing entities to existing shareholders or unitholders to acquire additional relevant interests in those entities. As a result, a taxing point will not arise for the shareholders or unitholders in relation to the rights until a subsequent capital gains tax (CGT) event happens to the rights or to relevant interests as a result of exercising the rights.

1.6 These amendments affect rights issued by companies and trustees to existing shareholders and unitholders to acquire shares and units if those shareholders and unitholders would ordinarily be taxed on capital account.

Summary of new law

1.7 These amendments ensure that an amount equal to the market value of rights issued by an issuing entity to existing shareholders or unitholders to acquire relevant interests in the issuing entity is non-assessable non-exempt income at the time the rights are issued, provided that those shareholders or unitholders holds their original interests in the issuing entity on capital account. As a consequence, a capital gain or loss will generally arise for an affected taxpayer when a CGT event subsequently happens to the rights or to the relevant interests acquired as a result of the exercise of the rights

1.8 These amendments also ensure that, for rights issued by a company to dispose of shares, any amount that is assessable at the time the rights are issued will be reflected in the cost base of the rights or of the shares disposed of as a result of the exercise of the rights.

Comparison of key features of new law and current law

New law Current law
Call options
In relation to the rights issued by an issuing entity to its shareholders or unitholders to acquire relevant interests in the issuing entity:

·
an amount equal to the market value of the rights is non-assessable non-exempt income at the time the rights are issued, provided that the original interests are held on capital account; and
·
a capital gain or loss will generally arise when a CGT event subsequently happens to the rights or to the relevant interests acquired as a result of the exercise of the rights.

Call options
In relation to rights issued by an issuing entity to its shareholders or unitholders to acquire relevant interests in the issuing entity:

·
an amount equal to the market value of the rights may be included in assessable income at the time the rights are issued; and
·
a capital gain or loss may also arise when a CGT event subsequently happens to the rights or to the relevant interests acquired as a result of the exercise of the rights.

Put options
In relation to rights issued by a company to its shareholders to dispose of shares to the company:

·
any amount that is assessable at the time the rights are issued will be included in the cost base of the rights or of the shares disposed of as a result of the exercise of the rights; and
·
the market value substitution rule will not apply in relation to the rights if they are exercised.

Put options
In relation to rights issued by a company to its shareholders to dispose of shares to the company:

·
the market value of the rights is included in assessable income at the time the rights are issued; and
·
the market value substitution rule generally applies to give the shareholder a market value cost base for the rights, for the purposes of calculating a capital gain or loss, when a CGT event subsequently happens to the rights or to the shares disposed of as a result of the exercise of the rights.

Detailed explanation of new law

Rights issued by an issuing entity to acquire relevant interests (call options )

No amount is included in assessable income at the time of issue

1.9 If an issuing entity issues rights to a taxpayer to acquire a relevant interest in the issuing entity, the market value of the rights, as at the time of issue, will be non-assessable non-exempt income at that time, provided certain conditions are satisfied. [Schedule 1, items 1 and 2, section 11-55 and subsection 59-40(1)]

1.10 The conditions are that:

·
at the time of issue, the taxpayer must already own an interest in the issuing entity (known as original interests);
·
the rights must be issued to the taxpayer because of their ownership of the original interests;
·
the original interests and the rights must not be revenue assets or trading stock at the time the rights are issued;
·
the rights must not have been acquired under an employee share scheme;
·
the original interests and rights must not be traditional securities; and
·
the original interests must not be convertible interests.

[Schedule 1, item 2, subsection 59-40(2)]

1.11 The conditions in paragraphs 59-40(2)(a) and (b) ensure that subsection 59-40(1) applies only if the rights are issued to a taxpayer who already owns original interests and they are issued because of their ownership of the original interests. Rights issued to an existing shareholder or unitholder because they choose to participate in a dividend or distribution reinvestment plan in relation to existing interests will generally be taken to be issued because of their ownership of the original interests. However, subsection 59-40(1) does not impact on the taxation of dividends or distributions reinvested under such plans.

1.12 The conditions in paragraphs 59-40(2)(c) to (e) ensure that subsection 59-40(1) only applies to shareholders or unitholders that would ordinarily be taxed on capital account in relation to the original interests and the rights. Consequently:

·
if the original interests and the rights are revenue assets, then the shareholder will generally be taxed on the profit that is made on the disposal of the rights at the time of disposal;
·
if the original interests and the rights are trading stock, then the trading stock provisions (Division 70) will apply to the rights;
·
if the rights are acquired under an employee share scheme, then the employee share scheme provisions (Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)) will apply to the rights; or
·
if the original interests and rights are traditional securities, then sections 26BB and 70B of the ITAA 1936 will apply to the rights.

1.13 The condition in paragraph 59-40(2)(f) ensures that subsection 59-40(1) does not apply if the original interests are convertible interests. In this regard, the principles enunciated in McNeil's case are not easily applied to convertible interests.

1.14 In the event that the principles enunciated in McNeil's case do apply to include the market value of rights in a taxpayer's ordinary income at the time of issue, then where that amount is otherwise included in assessable income again, section 6-25 will apply to ensure that the amount that was included in the taxpayer's assessable income at the time of issue will not be included in the taxpayer's assessable income again at any other time.

Capital gain or loss arises when a CGT event happens to the rights

1.15 If a company or trustee issues rights to a taxpayer to acquire shares in the company or units in the trust and the conditions in subsection 59-40(2) are satisfied, then a capital gain or capital loss will arise only when a CGT event happens to the rights or to the shares acquired as a result of the exercise of the rights. For example, if the taxpayer disposes of the rights, the taxpayer may make a capital gain or capital loss because CGT event A1 happens.

Example 1.1 Kylie is an existing shareholder of Co A. Co A issues existing shareholders with rights to acquire additional shares on 1 February 2009. The market value of the rights at that time is $130. Kylie disposes of the rights on 15 March 2009 and receives $150 and incurs transaction costs of $15.Section 59-40 operates to ensure that the market value of the rights at the time of issue ($130) is non-assessable non-exempt income at that time. However, Kylie will make a capital gain of $135 on the disposal of the rights. The capital gain is included in Kylie's assessable income for the 2008-09 income year.

Other CGT consequences

1.16 A capital gain that is made from a CGT event is currently reduced to the extent that, among other things, an amount of ordinary income that arises from the event is non-assessable non-exempt income. For the avoidance of doubt, a modification is made to ensure that the amount of a capital gain is not reduced by the amount that is non-assessable non-exempt income because of the operation of section 59-40. [Schedule 1, item 8, subsection 118-20(4)]

1.17 CGT event E4 happens if, broadly, a trustee makes a payment to the taxpayer in respect of a unit where some or all of the payment (the non-assessable part) is not included in assessable income. The non-assessable part is worked out disregarding various components, including any part that is 'non-assessable non-exempt income' (see paragraph 104-71(1)(a)), so that part does not include the value of a right to acquire units to which proposed section 59-40 applies.

1.18 CGT event G1 happens if, broadly, a company makes a payment to the taxpayer in respect of a share where some or all of the payment (the non-assessable part) is not a dividend or an amount taken to be a dividend. A capital gain arises if the non-assessable part is more than the share's cost base. To ensure that CGT event G1 does not happen at the time the rights to acquire shares are issued, CGT event G1 will be modified so that:

·
CGT event G1 does not apply to any amount that is included in the taxpayer's assessable income; and
·
in working out the non-assessable part, any amount that is non-assessable non-exempt income is disregarded.

[Schedule 1, items 3 and 4, paragraphs 104-135(1)(c) and 104-135(1A)(aa)]

Rights issued by a company to dispose of shares (put options )

CGT event H2 does not apply

1.19 CGT event H2 happens if, broadly, an act, transaction or event occurs in relation to a CGT asset owned by the taxpayer that does not result in an adjustment to the asset's cost base or reduced cost base. However, certain acts, transactions and events are specifically excluded from the scope of CGT event H2. A modification is made to ensure that CGT event H2 does not happen if a company grants an option to dispose of shares in the company, to the company. [Schedule 1, item 5, paragraph 104-155(5)(ea)]

The market value substitution rule does not apply

1.20 The market value substitution rule can currently apply to rights to dispose of shares regardless of whether or not the right is subsequently exercised. The rule is appropriate if the rights are not exercised as it ensures symmetry between the grantee's cost base for the rights and the capital proceeds that the company is taken to receive in relation to the grant of the rights for the purposes of calculating their capital gain or loss under CGT event D2 (which happens when an option is granted).

1.21 However, the market value substitution rule results in a lack of symmetry between the company that issues the rights and the shareholder who acquires the rights if the rights are exercised, as Division 134 only requires the company to reduce the cost base of the acquired shares by any actual payment they received for the grant of the option. However, Division 134 also allows the shareholder to include the market value of the option in the cost base of the shares sold because of the effect of section 112-20.

1.22 Therefore, the market value substitution rule will no longer apply in relation to a CGT asset that is a right to dispose of a share in a company if the right was issued by the company and the right was exercised either by the shareholder or by another entity who became the owner of the right. [Schedule 1, item 6, subsection 112-20(3)]

Cost base of put options

1.23 If a company issues tradeable put options to a shareholder, McNeil's case applies to ensure that the market value of the options at the time of issue is included in the shareholder's assessable income.

1.24 To ensure that this amount is not taxed again when the shareholder makes a capital gain or capital loss when a subsequent CGT event happens to the rights or to the shares disposed of as a result of the exercise of the rights, the first element of the cost base and reduced cost base of a right to dispose of a share in a company that a taxpayer acquires as a result of CGT event D2 happening is the sum of:

·
the amount included in the taxpayer's assessable income as ordinary income as a result of acquiring the right; and
·
the amount, if any, paid by the taxpayer to acquire the right.

[Schedule 1, item 7, section 112-37]

Application and transitional provisions

1.25 The amendments will apply to rights issued on or after 1 July 2001. [Schedule 1, item 9]

1.26 The amendments are beneficial to taxpayers because:

·
the taxing point in relation to rights issued by a company to acquire shares or by a trustee to acquire units will be deferred from the time that the rights are issued until the time that a subsequent CGT event happens to the rights or to the shares or units acquired as a result of the exercise of the rights; and
·
the cost base of shares disposed of on the exercise of a put option will more accurately reflect the effect of the assessment of the value of the put option on acquisition of the option.

1.27 Business and professional groups sought retrospective application of the amendments to prevent taxpayers from being disadvantaged by the reopening of past assessments.

Chapter 2 - Restriction on GST refunds and time limits for recovery and refund of indirect tax

Outline of chapter

2.1 Schedule 2 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) to correct a deficiency in the tax law to ensure that the restriction on refunds applies whether or not a transaction in respect of which goods and services tax (GST) has been paid is in fact a supply. It also ensures that the four-year time limit on recovery applies where a refund is overpaid to a taxpayer. In addition it ensures that the four-year time limit applies where a refund is payable by the Commissioner of Taxation (Commissioner) due to a reduction in the liability of a taxpayer.

Context of amendments

2.2 Under section 105-65 of Schedule 1 to the TAA 1953 (restriction on refund provisions), if a business overpays GST on a sale to a customer then the GST may be refunded to the business only if the business has first refunded the overpaid amount to the affected customer. This is because it is the customer who is intended to bear the cost of the GST. Without the restriction on refund requirement, there is a potential for a windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of the tax.

2.3 In the case of business-to-business transactions, the Commissioner is not required to refund overpaid GST because the purchasing business is potentially entitled to input tax credits to offset the GST included in the price of its acquisition.

2.4 A discretion exists so that, for example, in business-to-business transactions, the Commissioner may refund overpaid amounts if the supplier can demonstrate that they have first reimbursed the registered recipient of a supply for the amount of GST included in the price and the Commissioner considers it reasonable in the circumstances.

2.5 The Federal Court of Australia in KAP Motors Pty Ltd v Commissioner of Taxation
[2008] FCA 159 (KAP Motors) held that a taxpayer that had overpaid GST on a motor vehicle holdback payment need not first reimburse their customer for this amount before seeking a refund from the Commissioner because the transaction resulting in the overpayment was not a 'supply' for GST purposes. The Commissioner issued Goods and Services Tax Determination GSTD 2005/4 in June 2005 which provided that motor vehicle holdback amounts are not generally consideration for a supply and thus the transactions relating to holdback payments are 'out of scope' for GST.

2.6 The decision in KAP Motors has also highlighted a deficiency in the operation of the rule imposing a four-year time limit on indirect tax liabilities and entitlements to refunds. While generally refunds can only be claimed and tax recovered within four years, the relevant provisions may not apply in all circumstances as intended.

2.7 Under the current provisions, the four-year time limit on recovery of liabilities by the Commissioner may not apply in situations in which a taxpayer received a refund in relation to GST and it is later determined that the taxpayer was entitled to a lesser refund in relation to GST for the relevant tax period. Similarly, the four-year time limit on refunds, may not apply in situations where a taxpayer has overstated their tax liability for the relevant tax period to which the refund relates.

Summary of new law

2.8 These amendments ensure that the restriction on providing refunds of GST applies to situations in which transactions have been treated incorrectly as taxable supplies to any extent. This includes where a taxpayer has remitted GST on transactions for which there was no supply. This is achieved by amending the provisions in the TAA 1953 dealing with restrictions on refunds so they also apply to amounts that have been overpaid or not refunded because any supply or arrangement was treated as a taxable supply whether the transaction or arrangement was in fact a supply. This reinstates the approach taken by the Commissioner prior to the decision in KAP Motors and overcomes the identified deficiency in the law on or after 1 July 2008.

2.9 These amendments also ensure that the four-year time limit on recovery of liabilities applies in situations in which taxpayers were entitled to a refund in relation to GST, wine equalisation tax, luxury car tax or net fuel amounts for the relevant tax period to which the liability relates. In relation to the four-year time limit on refunds, these amendments ensure that the time limit applies in situations where taxpayers have overpaid an amount of GST, wine equalisation tax, luxury car tax or net fuel amounts for the relevant tax period to which the refund relates.

2.10 These amendments restore the intended operation of the four-year time limit and ensure that the law provides certainty for taxpayers, allowing them a reasonable period to finalise their affairs knowing that, other than in cases of fraud or evasion, their tax position will not change after that time.

Comparison of key features of new law and current law

New law Current law
Restriction on refunds - section 105-65 of Schedule 1 to the TAA 1953
The restriction on refunds of overpaid GST applies whether or not a transaction is subsequently held to be a supply.
The restriction also applies where:

·
input taxed or GST-free supplies are incorrectly treated as taxable supplies and GST has been remitted; or
·
an amount of GST on a taxable supply has been remitted that exceeds the amount of GST correctly payable on that taxable supply.

The restriction on refunds does not apply to the overpaid GST if the transaction is later held not to be a supply.
The restriction applies where:

·
input taxed or GST-free supplies are incorrectly treated as taxable supplies and GST has been remitted; or
·
an amount of GST on a taxable supply has been remitted that exceeds the amount of GST correctly payable on that taxable supply.

Time limit on recovery of liabilities - section 105-50 of Schedule 1 to the TAA 1953
A four-year time limit on recovery of indirect tax or fuel tax credit related liabilities applies irrespective of whether the liabilities result from a reduction in entitlement to a refund to a taxpayer or an increase in their obligation to pay. A four-year time limit applies on recovery of indirect tax and fuel tax credit related liabilities. However, it may not apply if the liabilities result from the reduction in a taxpayer's entitlement to a refund.
Time limit on refunds and credits - section 105-55 of Schedule 1 to the TAA 1953
A four-year time limit on refunds relating to indirect tax, input tax credits or fuel tax credits applies irrespective of whether the refund results from a reduction in the amount of a taxpayer's indirect tax liability, or fuel tax credit related liability or an increase in their refund entitlement. A four-year time limit applies on refunds relating to indirect tax, input tax credits or fuel tax credits. However, the limit may not apply if the refund results from a reduction in the amount of a taxpayer's indirect tax liability or fuel tax credit related liability.

Detailed explanation of new law

Restriction on refunds

2.11 This measure ensures that the restriction on refunds applies to all amounts of overpaid GST where transactions have been treated as taxable supplies, whether or not the transaction to which the overpayment relates, is in fact a supply. [Schedule 2, Part 2, item 17, section 105-65]

2.12 The overpayment of GST can occur if:

·
no tax was payable on the supply;
·
the amount of GST correctly payable was lower than the amount actually charged and remitted to the Commissioner; or
·
a business treats a transaction as a taxable supply to any extent, when in fact there was no supply.

2.13 The refund restrictions apply to all cases where GST has been overpaid to any extent because transactions have been treated as taxable supplies irrespective of whether the transaction on which overpaid tax was collected is determined to be a supply or not.

2.14 No tax may be payable on a supply if, for example, a GST-free supply or input taxed supply is treated as a taxable supply. Alternatively overpayment of GST may occur, for example, if a transaction is treated as a taxable supply when it is a mixed supply that is partly a taxable supply and partly a GST-free supply.

Example 2.1 Phil's Beverages is in the business of supplying apple juice concentrate which is used in making non-alcoholic beverages for sale to customers who are not registered for GST.Phil's Beverages treats this supply of concentrate as a taxable supply and remits the GST to the Commissioner in its business activity statement.However in the next tax period, Phil's Beverages realises that it has overpaid GST as no GST is payable on the transaction as the concentrate is a GST-free beverage in Schedule 2 to the A New Tax System (Goods and Services Tax) Act 1999.Phil's Beverages is not entitled to the refund of the overpaid GST from the Commissioner unless it reimburses the corresponding amount to its customers.

Example 2.2 Suzanne has a business of selling hampers to customers who are not registered for GST. Each hamper consists of a number of boxes of chocolates and jars of coffee and is sold for $32. The supply is a mixed supply, because the sale of chocolates is a taxable supply, and the sale of coffee is GST-free.Suzanne prepares her business activity statement and pays tax on the basis that the sale of each hamper attracts $2 GST. This is based on an apportionment of $20 (exclusive of GST) to chocolates and $10 to the coffee.Some months later, Suzanne rethinks her approach. She decides that she was apportioning too much of the consideration to the chocolates and not enough to the coffee and that she should only be charging $1 GST on the mixed supply.Suzanne seeks a refund for the GST that she considers has been overpaid ($1 for each hamper).Suzanne is not entitled to a refund in relation to any GST overpaid on the hampers until she has refunded the overpaid amount of $1 per hamper to her customers.

2.15 These amendments ensure the restriction on refund provisions applies where an arrangement has been treated as a taxable supply despite no supply having been made for GST purposes. An 'arrangement' is defined in the Income Tax Assessment Act 1997 and includes any agreement or understanding whether or not legally enforceable.

Example 2.3 Ami Motors operates a motor vehicle dealership. It has an arrangement with a car manufacturer under which it is credited an amount for each vehicle after Ami Motors has reported to the manufacturer that there has been a sale. The manufacturer is registered for GST.Ami Motors treats the amount received under the arrangement as consideration for a supply and remits in its business activity statement 1/11th of this amount as GST payable to the Commissioner.However in the next tax period, Ami Motors gets advice that the payment received is a retail holdback payment and is not consideration for any supply at all. Thus no GST is payable on the transaction as it is out of scope for GST.The restriction on refunds will apply in this case even though the transaction on which the overpaid amount was collected is later determined not to be a supply. Ami Motors is not entitled to get a refund of overpaid GST from the Commissioner as the manufacturer is registered for GST and has not borne the economic cost of GST, as it is entitled to claim input tax credits.

2.16 These amendments are intended to apply broadly and to ensure that it is the actions of an entity in treating an arrangement as a supply that result in the restriction on refund provisions applying rather than any requirement that it must correctly be a supply for GST purposes. Where an arrangement has been treated as a taxable supply but no supply has occurred, reimbursement must generally be made to the entity that has been treated as the recipient of the taxable supply for GST purposes. This provides a mechanism to enable entities that have borne the economic cost of GST to be reimbursed. [Schedule 2, Part 2, item 17, subsection 105-65(1) and paragraph 105-65(2)(b)]

Four-year time limit on recovery by the Commissioner

2.17 The tax law sets a four-year time limit on the recovery of net amounts, net fuel amounts and amounts of indirect tax. This includes GST, wine equalisation tax, luxury car tax and fuel tax credits. This provides certainty and finality by limiting to four years the time period in which the Commissioner can require payment of amounts relating to the indirect tax liabilities of taxpayers.

2.18 Examples where a liability may arise for a taxpayer include where:

·
the net amount relating to indirect taxes or the net fuel amount for a tax period is greater than zero (eg, where GST payable for a tax period exceeds input tax credits for that period);
·
the net amount relating to indirect taxes or the net fuel amount for a tax period as disclosed in a business activity statement is greater than zero and that net amount is increased by a subsequent amendment to the business activity statement;
·
the original net amount relating to indirect taxes or the fuel tax credits for a tax period was less than zero which resulted in the taxpayer being paid a refund and that refund is reduced by a subsequent amendment to a business activity statement; and
·
GST is payable on taxable importations.

2.19 A taxpayer's liability in respect of net amounts, net fuel amounts and amounts of indirect tax ceases being payable four years after it became payable unless the taxpayer avoided the payment by fraud or evasion or the Commissioner has required payment of the amount by giving a notice to the taxpayer within four years. [Schedule 2, Part 1, item 5, subsection 105-50(3)]

2.20 These amendments ensure that the four-year time limit on recovery of a taxpayer's liabilities applies irrespective of how the liabilities arise. Thus the four-year time limit on the recovery of liabilities also applies where liabilities arise from overpaid refunds or amounts incorrectly paid to taxpayers. These overpaid refunds and incorrectly paid amounts are referred to as the amount of excess in the amendments. [Schedule 2, Part 1, item 5, subsections 105-50(2) and (3)]

Example 2.4 Trusty Enterprises lodged its June 2008 quarterly business activity statement reporting GST of $50,000 on its sales and input tax credits on creditable acquisitions of $80,000. It was issued a refund of $30,000 on 20 July 2008.On 15 November 2012, the Commissioner found that that Trusty Enterprises' correct amount of GST payable on sales for the June 2008 business activity statement was $55,000 and it should only have received a refund of $25,000.Under the four-year time limit, Trusty Enterprises is not required to repay, and the Commissioner can not recover, the excess amount which was incorrectly refunded because it is more than four years since the amount of overpaid refund was due and payable.

Four-year time limit on refunds due to taxpayers

2.21 Under the indirect tax law there is also a four-year time limit, starting from the end of the relevant period, on the entitlement of taxpayers to refunds and credits, unless before the end of the four-year time limit the taxpayer notifies the Commissioner of their entitlement to a refund or credit or the Commissioner notifies taxpayers of their entitlement.

2.22 The time limit does not apply to claims for input tax credits or fuel tax credits if the credits are taken into account in working out the net amount or net fuel amount or overpaid refund, which the Commissioner can recover from the taxpayer because the payment of the liabilities was avoided by fraud or evasion. [Schedule 2, Part 1, item 9, paragraph 105-55(1)(c)]

2.23 Examples where a refund or credit may arise for a taxpayer include:

·
where the net amount relating to indirect taxes or net fuel amount for a tax period is less than zero;
·
additional claims for input tax credits;
·
where the original net amount relating to indirect taxes or net fuel amount for a tax period is more than zero which resulted in the taxpayer having a liability but the liability is reduced by one or more later amendments to their business activity statement;
·
where the net amount relating to indirect taxes or net fuel amount for a tax period is less than zero and the refund amount is increased;
·
overpaid GST on taxable importations.

2.24 The four-year time limit on the payment of refunds to taxpayers applies irrespective of how the entitlement to the refund arises. Therefore the four-year time limit on refunds applies, for example, where there is a reduction in a taxpayer's liability. These amendments achieve this by ensuring that the time limit applies to any refund of a net amount or net fuel amount or other amount or payment that was overpaid as indirect tax. [Schedule 2, Part 1, items 7 and 8, 10 to 12 and 15, paragraphs 105-55(2)(a), (2)(aa) and (3)(c)]

Example 2.5 Mark Enterprises lodged its June 2008 quarterly business activity statement reporting GST of $50,000 on sales and input tax credits of $30,000 on creditable acquisitions and remitted $20,000 to the Commissioner on 28 July 2008.On 15 November 2012, Mark Enterprises realised that it made an arithmetic error and the correct amount of GST payable on its sales was $45,000 and the net amount payable was $15,000. Mark Enterprises seeks to claim a refund of $5,000 for the amount of overpaid GST.Mark Enterprises is not entitled to a refund because four years have elapsed since the end of the June 2008 tax period.

Application and transitional provisions

2.25 The amendment made to the restriction on GST refunds applies for tax periods starting on or after 1 July 2008. Therefore to the extent that an overpayment of GST is related to a tax period commencing on or after 1 July 2008, these amendments apply. [Schedule 2, Part 2, item 18]

2.26 The amendment to the four-year time limits for liability and refunds applies on and after 1 July 2008. Accordingly, a four-year time limit applies in all cases (except fraud or evasion) where on and after 1 July 2008:

·
the Commissioner notifies a taxpayer of a liability; or
·
a taxpayer notifies the Commissioner or the Commissioner notifies the taxpayer, of an entitlement to a refund or credits.

[Schedule 2, Part 1, item 16]

2.27 These amendments apply from 1 July 2008 to ensure that the deficiencies in the law are addressed as soon as possible. Applying these amendments from the start of the monthly, quarterly and annual tax periods also minimises any taxpayer compliance impacts from these amendments.

Chapter 3

Income tax treatment of rent assistance paid to Austudy recipients

Outline of chapter

3.1 Schedule 3 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt rent assistance paid to Austudy recipients from income tax.

Context of amendments

3.2 The then Minister for Education, Science and Training announced the payment of rent assistance to Austudy recipients in Press Release No. BUDB 07/07 of 8 May 2007.

3.3 This measure is a consequential amendment that ensures the tax-free status for rent assistance paid to Newstart Allowance and Youth Allowance recipients is extended to rent assistance paid to Austudy recipients. Rent assistance has been payable to Austudy recipients from 1 January 2008.

Summary of new law

3.4 This measure provides that rent assistance paid to Austudy recipients will be exempt from income tax and applies to assessments for the 2007-08 income year and later income years.

Comparison of key features of new law and current law

New law Current law
Rent assistance paid to Austudy recipients is exempt from income tax. Rent assistance received by Austudy recipients is considered to be 'ordinary income' and therefore taxed at the recipient's marginal tax rate.

Detailed explanation of new law

3.5 Section 52-10 of the ITAA 1997 sets out the taxation treatment for social security payments. The table at section 52-10 lists payments under the Social Security Act 1991 that are wholly or partly exempt from income tax.

3.6 Item 2A.1 of the table sets out the taxation treatment of Austudy payments. Item 2A.1 provides that the 'supplementary amount' of Austudy payment is exempt from income tax.

3.7 Section 52-15 of the ITAA 1997 provides a table for working out the supplementary amount of a social security payment for the purposes of section 52-10.

3.8 Under item 4 in the table, the definition of 'supplementary amount' of Austudy payment is amended to include so much of the payment as is included by way of rental assistance. This ensures that Austudy recipients who receive rent assistance pay no tax on that assistance. [Schedule 3, item 4, section 52-15]

Application and transitional provisions

3.9 This measure applies to assessments for the 2007-08 income year and later income years.

Chapter 4 - Income tax treatment of the Carer Adjustment Payment

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to exempt the Carer Adjustment Payment from income tax.

Context of amendments

4.2 The Carer Adjustment Payment was announced as part of the 2007-08 Budget.

4.3 These amendments are consequential amendments that ensure the Carer Adjustment Payment is treated as tax-free for all recipients.

4.4 The Carer Adjustment Payment has been payable to eligible carers from 1 July 2007.

Summary of new law

4.5 This measure provides that the Carer Adjustment Payment will be exempt from income tax and applies to assessments for the 2007-08 income year and later income years.

Comparison of key features of new law and current law

New law Current law
The Carer Adjustment Payment is exempt from income tax.
The Carer Adjustment Payment may, in the hands of some recipients, be considered assessable income and therefore taxed at the recipient's marginal tax rate.

Detailed explanation of new law

4.6 These amendments include the Carer Adjustment Payment into the table at section 53-10 of the ITAA 1997.

4.7 This table sets out the taxation treatment of various types of payments. The table lists payments that are wholly or partly exempt from income tax, the authority under which the payments are made, and any exceptions or special conditions that apply to the payments in order for them to be tax exempt.

4.8 The amendment to section 53-10 includes the Carer Adjustment Payment as a separate item in the table made under the Commonwealth power to make ex-gratia payments. There are no exceptions or special conditions under which the tax exemption has been extended to the Carer Adjustment Payment. This amendment ensures that recipients of the Carer Adjustment Payment pay no tax on the payment. [Schedule 4, item 1, section 53-10]

4.9 These amendments also include the Carer Adjustment Payment into the list of ordinary or statutory income at section 11-15 of the ITAA 1997. This section lists types of ordinary or statutory income which are exempt from income tax. The amendment to section 11-15 includes the Carer Adjustment Payment in this list. [Schedule 4, item 1, section 11-15]

Application and transitional provisions

4.10 This measure applies to assessments for the 2007-08 income year and later income years.

Index

Schedule 1 : Shareholder rights

Bill reference Paragraph number
Items 1 and 2, section 11-55, subsection 59-40(1) 1.9
Item 2, subsection 59-40(2) 1.10
Items 3 and 4, paragraphs 104-135(1)(c) and 104-135(1A)(aa) 1.18
Item 5, paragraph 104-155(5)(ea) 1.19
Item 6, subsection 112-20(3) 1.22
Item 7, section 112-37 1.24
Item 8, subsection 118-20(4) 1.16
Item 9 1.25

Schedule 2 : Collection and administration of indirect taxes

Bill reference Paragraph number
Part 1, item 5, subsections 105-50(2) and (3) 2.20
Part 1, item 5, subsection 105-50(3) 2.19
Part 1, items 7 and 8, 10 to 12 and 15, paragraphs 105-55(2)(a) and (2)(aa) and (3)(c) 2.24
Part 1, item 9, paragraph 105-55(1)(c) 2.22
Part 1, item 16 2.26
Part 2, item 17, subsection 105-65(1) and paragraph 105-65(2)(b) 2.16
Part 2, item 17, section 105-65 2.11
Part 2, item 18 2.25

Schedule 3 : Austudy rent assistance

Bill reference Paragraph number
Item 4, section 52-15 3.8

Schedule 4 : Carer adjustment payments

Bill reference Paragraph number
Item 1, section 11-15 4.9
Item 1, section 53-10 4.8


View full documentView full documentBack to top