House of Representatives

Taxation Laws Amendment Bill (No. 5) 1992

Taxation Laws Amendment Act (No. 5) 1992

Income Tax (Dividends and Interest Withholding Tax) Bill 1992

Income Tax (Dividends and Interest Withholding Tax) Amendment Act 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

General Outline and Financial Impact

The Taxation Laws Amendment Bill (No. 5) will amend various taxing Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936- the Act) by making the following changes:

Capital Gains Tax

. Improves the readability of the Capital Gains Tax provisions of Part IIIA, and to provide an index of the key concepts relevant to the operation of those provisions.

Date of effect: The amendments will not affect the operation of the law.

Proposal announced: Not previously announced.

Financial impact: None

Gifts

Australia-United States Coral Sea Commemorative Council Incorporated

. Allows, for a limited period, income tax deductions for gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated.

Date of effect: On or after 26 November 1991 and on or before 30 June 1992.

Proposal announced: Treasurer's Press Release No.97 of 1992.

Financial impact: Insignificant.

Gifts to gift funds of environmental organisations

·
Introduces new arrangements for gifts to gift funds of environmental organisations.
·
Requires five environmental organisations, presently listed in the income tax gift provisions, to satisfy two new requirements as from the year commencing 1 July 1993.

Date of effect: The amendments to include the Register of Environmental Organisations apply to gifts made from the date the Bill receives Royal Assent.

The amendments to compel five organisations presently listed in paragraph 78(1)(a) to satisfy two new requirements apply from the year commencing 1 July 1993.

Proposal announced: 1992/93 Budget.

Financial impact: The nature of the measure is such that a reliable estimate can not be provided. However, it is unlikely to have a substantial impact on revenue.

Provisional Tax

·
Ensures that the provisional tax uplift factor is reduced from 10% to 8% in ascertaining provisional tax for the 1992-93 year of income and 10% for later years of income
·
Increases the margin for error allowed, when varying down provisional tax, in estimating taxable income or PAYE tax instalment deductions without incurring additional tax from 10% to 15%
·
Ensures that, in ascertaining the amount of provisional tax payable, credit is given for tax deducted from investment income

Date of effect: Applies to the ascertainment of provisional tax for the 1992-93 year of income and later years of income.

Proposal announced: Treasurer's Press Release No.110 of 1992

Financial impact: The estimated cost to revenue is expected to be $250 million in the 1992-93 financial year.

Zone and related rebates

·
Increases the current fixed dollar amounts in these rebates by 12.5% for assessments in respect of the 1992-93 year of income and by 25% for assessments in respect of the 1993-94 and subsequent years of income.

Date of effect: The amendments will apply to assessments for the 1992-93 and subsequent years of income.

Proposal announced: 1992/93 Budget.

Financial impact: The estimated cost of increasing the zone and related rebates is $5 million in 1992-93, $19 million in 1993-94 and gradually increasing in subsequent years.

Deductibility of losses on disposal of traditional securities

·
Denies deductions for capital losses on the disposal or redemption of traditional securities in circumstances where the disposal is made in anticipation of the issuer not being able to meet all its obligations to pay out the security.
·
Ensures that deductions are not allowable for losses on the forgiveness of a loan that would qualify as a traditional security.

Date of effect: To disposals or redemptions of traditional securities on or after 1 July 1992.

Proposal announced: Treasurer's Press Release, No. 108, 30 June 1992.

Financial impact: These amendments will have a positive but unquantifiable revenue effect.

Reduced accelerated write-down for horse breeding stock

·
Reduces the special valuation option available to horse breeders for valuing horse breeding stock on hand at the end of a year of income. The amount of write-down will be:

-
male horse breeding stock - up to a maximum of 25% of cost; and
-
female horse breeding stock - on prime cost so that the value is not less than $1 by the end of the year in which the horse is aged 12. The amount written-down in any year is not to exceed 33 1/3% of cost.

Date of effect: The amendments will apply to horse breeding stock acquired under a contract entered into on or after 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: The savings from this measure are expected to be $7 million in 1993-94, $8 million in 1994-95 and $5 million in 1995-96.

Environment protection expenditure

·
Allows a deduction for certain environment protection expenditure and allows depreciation of plant and equipment and amortisation of the capital cost of structures, structural improvements and buildings used for environment protection purposes.

Date of effect: 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: a reliable costing of this measure cannot be made.

Research and Development expenditure

·
Continues the research and development (R&D) concession at the rate of 150 per cent indefinitely.

Date of effect: 1993-94 year of income

Financial impact: The estimated cost to revenue is $110 million in 1994-95 and $125 million in 1995-96.

·
Removes the $10 million limit applying to pilot plant.

Date of effect: Plant acquired or commenced to be constructed on or after 19 August 1992:

Financial impact: The cost to revenue is unlikely to be significant.

·
Denies the (R&D) concession to companies where they are involved in syndicates, or other financing schemes, which include government bodies or their associates, and there are guaranteed returns in place.

Date of effect: 19 August 1992 - for companies which are registered or seeking registration under sections 39J or 39P of the Industry Research and Development Act 1986 on or after that day.

Financial impact: The savings to the revenue are expected to be $115 million in 1993-94, $140 million in 1994-95 and $167 million in 1995-96.

(Industry Research and Development Act 1986 )

·
Denies registration, or authorises the issue of a certificate that will have the effect of denying the tax concession, to companies undertaking or proposing to undertake research and development activities where there is (or was) an ineligible finance scheme in relation to those activities; and
·
Authorises the Industry Research and Development Board to develop and publish guidelines that will specify the criteria for assessing whether any finance schemes that companies enter into to fund research and development are ineligible.

Date of effect: For the year of income ended 30 June 1993.

Financial impact: There will be no measurable financial impact.

Proposals announced: 1992/93 Budget.

Deductibility of interest on borrowings to finance superannuation contributions and life insurance premiums

·
Denies an income tax deduction for interest and other borrowing expenses on moneys borrowed to finance personal superannuation contributions and certain life insurance premiums.

Date of effect: On or after 19 August 1992.

Proposal announced: 1992/93 Budget.

Financial impact: The proposals will reduce the potential for future losses to the revenue.

Amendments to extend the concept of Crown leases for the purposes of the depreciation provisions

·
Extends the meaning of Crown lease under the plant depreciation provisions to include commercial leases, easements and other interests in land that are granted by governments or tax-exempt government authorities.

Date of effect: The amendments apply from the same time as the existing measures. That is, they apply to expenditure incurred after 26 February 1992 in installing plant on Crown leases. They also apply to expenditure incurred on or before that date, based on notional written down values on 27 February 1992.

Proposal announced: Press Release of 25 September 1992.

Financial impact: The amendments give effect to Government policy announced in the One Nation statement and involve no further cost to the revenue.

Amendments to extend the concept of eligible lessees entitled to deductions for capital expenditure on buildings and structural improvements

·
Extends deductions to taxpayers for capital expenditure they incur on the construction of buildings and other structural improvements on land over which they hold a "Crown lease" within the meaning of the plant depreciation provisions.

Date of effect: Applies where construction commences after 26 February 1992.

Proposal announced: Press Release of 25 September 1992.

Financial impact: The amendments give effect to Government policy announced in the One Nation statement and involve no additional cost to the revenue.

Development allowance on property installed on leased Crown land

·
Gives the development allowance for expenditure which would be denied the allowance only because the plant in respect of which the expenditure is incurred is installed on leased Crown land.

Date of effect: 26 February 1992.

Proposal announced: One Nation Statement of 26 February 1992 and Press statement of 5 April 1992.

Financial impact: The amendment is expected to have some impact on revenue. The original estimates of the cost of the development allowance to revenue included the cost of this amendment.

Research and Development rollover relief

·
Provides rollover relief for intra company group transfers of property to which the research and development provisions have applied.

Date of effect: The measure will apply in respect of disposals occurring after 6 December 1990.

Proposal announced: Not previously announced.

Financial impact: The amendments are likely to have some revenue cost; however, their nature is such that a reliable estimate of their revenue impact cannot be made.

Amendments to capital allowance rollover relief

·
Amends the various capital allowance rollover relief provisions so that rollover relief is available where:

-
assets are disposed of more than once in a single year; or
-
assets that were fully written-off at the time they were acquired are disposed of again.

Date of effect: The amendments apply from the same time as the existing provisions; that is:

-
to transfers of assets within wholly-owned company groups occurring after 6 December 1990 and before 20 December 1991 where an election is made for the rollover relief to apply;
-
to transfers of assets within wholly-owned company groups, to wholly owned companies or between spouses occurring after 19 December 1991 where capital gains tax rollover relief is obtained;
-
to disposals that are taken to occur, after 19 December 1991, on the partial change in ownership of property and an election is made by all the persons owning the property both before and after that change.

Proposal announced: Not previously announced.

Financial impact: The amendments give effect to the Government's original policy and there is no further cost to the revenue.

Royalty withholding tax

(Income Tax Assessment Act 1936 , the Income Tax (Dividends and Interest Withholding Tax) Amendment Act 1974 and the Income Tax (International Agreements) Act 1953)

·
Introduces a final withholding tax on royalties paid or credited to non-residents instead of the current assessment basis of taxation.

Date of effect: Commencement of the recipient's 1993/94 income year

Proposal announced: 1992/93 Budget.

Financial impact: There will be an estimated gain to revenue of $50M in 1993-94, $55M in 1994-95 and $60M in 1995-96.

Foreign Source Income amendments

Amendment to limit the clawback provision in subsection 47A(13)

·
Provides, in certain cases, a sunset clause for subsection 47A(13) so that a group of companies is not locked into a given company structure indefinitely for fear of triggering the provision in that subsection that creates a tax liability.

Date of effect: 3 June 1990

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Amendment to limit the clawback provision in subsection 47A(14)

·
Limits the clawback provision in subsection 47A(14) so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax.

Date of effect: 3 June 1990

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Offset of Carry Forward Primary Production Losses Against Foreign Income

·
Enables taxpayers who have carry forward domestic primary production losses to choose whether to offset those losses against their assessable foreign income.

Date of effect: The election will be available to taxpayers in respect of assessments for the 1991-92 and subsequent years of income.

Proposal announced: Not previously announced

Financial impact: This amendment will have a small but unquantifiable cost to the revenue.

Amendments to the Taxation Administration Act 1953

Method of payment of taxation and child support liabilities

·
Permits the making of Regulations that will enable taxpayers to pay their taxation and child support liabilities through the recently introduced BILLPAY or Electronic Funds Transfer systems.

Date of effect: Date of Royal Assent of the amending Act.

Proposal announced: Not previously announced.

Financial impact: Insignificant.

Amendments relating to taxation offences

·
Makes technical amendments and to correct an inconsistency in the Taxation Administration Act 1953 in relation to penalties for taxation offences.

Date of effect: Date of Royal Assent of the amending Act

Proposal announced: Not previously announced.

Financial impact: Insignificant

Petroleum Resource Rent Tax technical amendments

(Petroleum Resource Rent Tax Assessment Act 1987)

·
Amends the Petroleum Resource Rent Tax Assessment Act 1987, in relation to the transfer of expenditure between persons where there is a sale of interest in a project and between projects held by the one person or company group, to ensure that:

-
exploration expenditure incurred on or after 1 July 1990 is taken to be incurred by the purchaser of a vendor's whole entitlement to assessable receipts from a petroleum project; and
-
exploration expenditure is still transferable between projects if an interest in the transferring project has been lost only because a project licence or exploration right has ceased to be in force.

Date of effect: 1 July 1991.

Proposal announced: Not previously announced.

Financial impact: None.

Clauses involved in the proposed amendments

General

Clause 1: stipulates the short title of the Act as being the Taxation Laws Amendment Act (No. 5) 1992.

Clause 2: stipulates the commencement day of the provisions of the Bill:

·
subclauses 14(2), 15(2), 16(2), and 17(2) which deal with amending the zone rebate are to commence on 1 July 1993;
·
Part 5 which deals with amending the Petroleum Resource Rent Tax Assessment Act 1987 is to commence retrospectively on 1 July 1991; and
·
every other provision of the Bill is to commence on the day the Act receives royal assent.

Clause 3: defines "Principle Act" as meaning the Income Tax Assessment Act 1936.

Capital Gains Tax
[See page 35 for further detail]

Clause 4: substitutes the heading to Division 1 of Part IIIA of the Act as a result of the insertion of proposed Subdivision A (Clause 5).

Clause 5: proposes to insert new Subdivision A into Division 1 of Part IIIA of the Act, to provide for the object, simplified outline and example of the basic operation of the capital gains tax provisions. An index will also be inserted, showing the major concepts relevant to the operation of the capital gains tax provisions.

Gifts
[See page 39 for further detail]

Contributions to registered political parties

Clause 6: relocates and renumbers subsection 51(7A) of the Act so that it now appears and operates as subsection 78(1B).

Australia-United States Coral Sea Commemorative Council Incorporated

Clause 7(b): proposes to insert new subparagraph 78(1)(a)(cviii) into the Act, to ensure that gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated are tax deductible.

Clause 7(d): proposes to insert new subsection 78(6AL) into the Act, to limit the deductibility of gifts made under subparagraph 78(1)(a)(cviii) to those gifts that are made on or after 26 November 1991 and on or before 30 June 1992.

Gifts to gift funds of environmental organisations

Subclause 7(a): subparagraph 78(1)(a)(cvii) amended so "register" is omitted and substituted by "Register of Cultural Organisations".

Subclause 7(b): inserts new subparagraph 78(1)(a)(cviv) which will allow deductions for gifts made to gift funds which are listed on the Register of Environmental Organisations.

Subclause 7(c): a deduction will only be allowed as from the year commencing 1 July 1993 for gifts to organisations listed under subparagraphs 78(1)(a)(xliv), (xlvii), (lxxiii), (lxxiv) and (civ) where two new requirements are met.

Clause 8: section 78AA amended by omitting "Tourism" from the definitions of "Arts Department" and "Arts Minister".

Clause 9: inserts section 78AB which sets out the eligibility criteria for the admission of environmental organisations and their gift funds to the Register; and also the Register's administrative arrangements.

Provisional Tax
[See page 49 for further detail]

Clause 10: proposes to amend subsection 221YA(1) of the Act to ensure that the provisional tax uplift factor is 8% in relation to the 1992-93 year of income and 10% in relation to later years of income.

Clause 11: proposes to amend paragraphs 221YCAA(2)(m) and (q) of the Act to ensure that credits for TFN tax deducted from investment income are taken into account in ascertaining provisional tax on the same basis as foreign tax credits.

Paragraph (a) of Clause 12: proposes to amend subsections 221YDB(1), (1AAA), (1AA) and (1ABA) of the Act to ensure that taxpayers varying their provisional tax liability are not subject to additional tax unless they underestimate their taxable income by more than 15%.

Paragraph (b) of Clause 12: proposes to amend subsections 221YDB(1AAA) and (1ABA) of the Act to ensure that taxpayers varying their provisional tax liability are not subject to additional tax unless they overestimate their PAYE tax instalment deductions by more than 15%.

Clause 13: proposes that the above clauses apply when ascertaining provisional tax for the 1992-93 and all later years of income.

Zone and related rebates
[See page 53 for further detail]

Clause 14: proposes to amend subsection 23AB(7); firstly by replacing the current dollar amount of $270 with $304 (an increase of 12.5% for the 1992-93 year), and secondly by replacing the dollar amount of $304 with $338 (an increase of 25% in the current amount for subsequent years).

Clause 15: proposes to amend section 79A; firstly by replacing the current dollar amounts of $938, $270 and $45 in paragraphs 2(a), (d) and (e) with $1056, $304 and $51 respectively (an increase of 12.5% for the 1992-93 year), and secondly by replacing the dollar amounts of $1056, $304 and $51 with the amounts of $1173, $338 and $57 (an increase of 25% in the current amounts for subsequent years).

Clause 16: proposes to amend section 79B; firstly by replacing the current dollar amount of $270 with $304 (an increase of 12.5% for the 1992-93 year), and secondly by replacing the dollar amount of $304 with $338 (an increase of 25% in the current amount for subsequent years).

Clause 17: proposes that:

·
subclauses 14(1), 15(1) and 16(1), which will implement the 12.5% increase in the current dollar amounts, will apply to assessments in respect of the 1992-93 year of income; and
·
subclauses 14(2), 15(2) and 16(2), which will implement the 25% increase in the current dollar amounts, will apply to assessments in respect of the 1993-94 and subsequent years of income.

Deductible losses on disposal of traditional securities
[See page 55 for further detail]

Clause 18: proposes to amend section 23E of the Act by omitting the reference to subsection 160ZB(6) which is being deleted by the Bill.

Clause 19: proposes to amend section 70B by inserting:

·
subsection 70B(4), to deny a deduction under the section for losses of capital in circumstances where a reason for the disposal of a traditional security was a belief or apprehension that the issuer would be unable or unwilling to meet its payment obligations under the security.
·
subsection 70B(5), to make clear that the forgiveness or waiver of a debt is not a disposal of a traditional security.
·
subsection 70B(6), so that subsection 70B(5) applies only for the purpose of section 70B.
·
subsection 70B(7), which defines 'issuer', 'marketable security' and 'securities market'.

Clause 20: to omit subsection 160ZB(6).

Clause 21: specifies that the limitation on deductions under section 70B being made by the Bill apply only to disposals or redemptions of traditional securities on or after 1 July 1992.

Clause 22: specifies that subsection 70B(5) cannot be called in aid to determine what "disposal" or "redemption" mean in relation to transactions before 1 July 1992.

Reduced accelerated write-down for horse breeding stock
[See page 61 for further detail]

Clause 23:

·
repeals existing section 32 which provides for the valuation of live stock on hand at the end of a year of income; and
·
inserts new sections 32 and 32A to provide the valuation options for:

-
livestock other than horse breeding stock; and
-
horse breeding stock;
acquired on or after 19 August 1992 that are on hand at the end of the year of income.

Clause 24: provides that new sections 32 and 32A will apply to live stock acquired on or after 19 August 1992 and that the previous section 32 will apply to live stock acquired before 19 August 1992 as if the section had not been repealed.

Environment protection expenditure
[See page 73 for further detail]

Clause 25: inserts new Subdivision CA (which contains new sections 82BH to 82BR) into Division 3 to provide deductions for environment protection expenditure.

Clause 26: amends the definition of "building" in subsection 124ZF(1) in Division 10D to include an earthwork for environment purposes.

Clause 27: inserts new section 124ZFC in Division 10D to allow amortisation of environment earthworks.

Research and Development expenditure
[See page 91 for further detail]

Clause 28: amends section 73B of the Act to:

·
remove the reference to the factor of 1.25 in the definition of "deduction acceleration factor";
·
delete the transitional arrangements for qualifying plant first used prior to 1 July 1993;
·
remove the $10 million limit applying to pilot plant;
·
clarify that a deduction is not allowable to a registered eligible company for its R&D activities that are not approved under section 39P of the Industry Research and Development Act 1986 (the IR&D Act); and
·
provide that deductions for expenditure on R&D activities will not be allowable under section 73B of the ACT where the Industry Research and Development Board issues a certificate under section 39MA of the IR&D Act.

Clause 29: removes the reference to 1.25 from the calculation of clawback on expenditure incurred on or after 21 November 1987.

Clause 30: inserts section 73BC so that where expenditure is incurred to a government body or its associates and a guaranteed return is involved in the finance arrangement then a deduction is not allowable under section 73B of the Act.

Clause 31: amends section 170 of the Act to allow assessment to be amended at any time to give effect to new section 73CB.

Clause 32: is the application provision for the amendments to:

·
subsection 73B(10) (to deny a deduction for R&D expenditure on basis of a certificate issued the Industry Research and Development Board) which will apply from the date of introduction of the Bill;
·
section 73CB which will apply on or after 19 August 1992 to companies making an application, being registered or entering or varying a finance scheme on or after 19 August 1992.

(Industry Research and Development Act 1986)

Clause 90: specifies the legislation being amended to be the Industry Research and Development Act 1986(the IR&D Act).

Clause 91: defines " finance scheme guidelines" to be those made under section 39EA of the IR&D Act.

Clause 92 : extends the functions of the Industry Research and Development Board (the Board) to include those conferred on it by the finance scheme guidelines.

Clause 93 : extends the duties of the chairman under the IR&D Act to include duties that may be conferred by the finance schemes guidelines.

Clause 94 : any directions given by the Minister to the Board relating to the policies and practices of the Board under the IR&D Act are to include the finance scheme guidelines.

Clause 95 : extends the Board's power to delegate its powers and functions under the Act to powers and functions conferred on it by the finance scheme guidelines.

Clause 96 : is an interpretative provision to extend a reference to the IR&D Act in respect of the formation of, and delegation by the Board to Committees to include a reference to the finance scheme guidelines.

Clause 97 : is an interpretative provision to extend a reference to the IR&D Act in respect of delegation by a Committee to include a reference to the finance scheme guidelines.

Clause 98 : amends section 39A of the IR&D Act by including definitions of "finance", "finance scheme" " ineligible finance scheme" and "scheme".

Clause 99 : inserts section 39EA requiring the Board to formulate written guidelines on whether or not finance schemes in relation to research and development activities will be ineligible finance schemes and specifies some of the matters to be considered by the Board in making the finance scheme guidelines.

Clause 100 : inserts section 39MA which enables the Board to issue a certificate in relation to particular research and development activities where it is of the opinion that an ineligible finance scheme exists in relation to those research and development activities.

Clause 101: inserts section 39P(3)(d) to refer to the absence of an ineligible finance scheme as one of the grounds on which the Board is able to jointly register companies for the tax concession.

Clause 102 : inserts section 39S(1A) to allow for internal review of a Board decision under the finance scheme guidelines

Clause 103 : enables companies to seek a review of a decision by the Board in relation to ineligible finance schemes by the Administrative Appeals Tribunal

Clause 104 : where the Board makes a decision in relation to ineligible finance schemes it is required to give notice in writing to the company or companies and that notice must include a statement to the effect that the company may seek a reconsideration by the Board or appeal to the Administrative Appeals Tribunal.

Clause 105 : defines the circumstances in which the new provisions will apply to companies in the "interim period"; such that, where a company was either registered under either section 39J or section 39P or had sought or been given an "advance eligibility ruling" from the Board during the interim period then the new provisions do not apply.

Clause 106 : amends section 39P to clarify that joint registration is in relation to particular project or projects carried on in a particular year or years.

Clause 107 : provides that the amendments apply to applications made under section 39P of the IR&D Act after the date the Bill is introduced.

Deductibility of interest on borrowings to finance superannuation contributions and life insurance premiums
[See page 103 for further detail]

Clause 33: proposes to insert new section 67AAA into the Act to deny an income tax deduction for interest and other borrowing expenses incurred on moneys borrowed to finance personal superannuation contributions and certain life insurance premiums

Clause 34: sets out the application date for the amendments made in clause 33.

Amendments to extend the meaning of Crown leases for the purposes of the depreciation provisions
[See page 109 for further detail]

Clause 35: extends the meaning of "Crown lease" for depreciation purposes [amendments to section 54AA]. The amendments ensure that taxpayers can obtain depreciation deductions for plant they install on land over which they hold a lease, easement or other right, power or privilege that was granted by a Government or a tax-exempt authority of a government.

Clause 36: specifies that the depreciation Crown lease amendments in clause 35 are to apply from the same as the existing Crown lease provisions.

Crown lessees to be eligible lessees entitled to deductions for capital expenditure on buildings and structural improvements
[See page 115 for further detail]

Clause 37: extends the meaning of eligible lessee within Division 10D to include persons who hold a Crown lease; the meaning of "Crown lease" is the same as for the plant depreciation provisions.

Clause 38: has the effect that the amendments made by clause 37 apply to buildings (including structural improvements) commenced to be constructed after 26 February 1992.

Development allowance on property installed on leased Crown land
[See page 117 for further detail]

Clause 39: inserts two new subsections in the interpretation provisions of the development allowance legislation.

New subsection 82AQ(3A): provides that, where a taxpayer is a lessee of land under a Crown lease and, for depreciation purposes, is treated by virtue of section 54AA as the owner of a unit of property affixed to that land, that taxpayer will be treated as the owner of such property for the purpose of the development allowance.

Terms used in the new subsection 82AQ(3A) are defined in new subsection 82AQ(3B) as having the same meaning as in section 54AA. The extended term "Crown lease" ( as proposed in Clause 35) and the term "lessee" (proposed to be inserted by Clause 35), in section 54AA, will apply to the extended development allowance provision.

Clause 40: ensures the amendment proposed in Clause 39 applies to expenditure incurred by a taxpayer under contracts entered into, or in respect of construction which commenced, after 26 February 1992, in accordance with the original development allowance provisions.

Research and development rollover relief
[See page 121 for further detail]

Clause 41: inserts new subsection 59(2AB) which deals with instances where both the research and development (R&D) and the plant depreciation provisions have applied to property in the hands of two or more taxpayers and either R&D or depreciation rollover relief has applied on the transfer of that property between those taxpayers.

It treats so much of the cost of such property as has been deductible under the R&D rules as deductions allowed under the plant depreciation rules for the purposes of calculating balancing adjustments on a non rollover disposal of the property.

Clause 42: inserts the following new sections:

·
new section 73E setting out the rules for R&D rollover relief for disposals of plant.
·
new section 73F which sets out the rules for R&D rollover relief for disposals of buildings.
·
new section 73G setting out the rules for R&D rollover relief for disposals of industrial property.

Clause 43: amends subsection 262A(4AC) [which deals with record keeping under the various capital allowance provisions] to include a reference to the new R&D rollover relief provisions.

Clause 44: specifies, in effect, that new subsection 59(2AB) applies to disposals occurring after 6 December 1990. It also specifies that CGT derived R&D rollover relief applies to disposals occurring after [date of introduction].

Clause 45: provides optional R&D rollover relief for disposals that occurred after 6 December 1990 and on or before [date of introduction] .

Amendments to capital allowance rollover relief
[See page 149 for further detail]

Clause 46: inserts new subsection 58(7A) to ensure that rollover relief is available for successive disposals of depreciable plant occurring in a single year.

Clause 47: inserts new subsection 73AA(7) to ensure that rollover relief is available for successive disposals of buildings used in scientific research occurring in a single year.

Clause 48: inserts new subsection 122JAA(22A) to ensure that rollover relief is available for successive disposals of mining property occur in a single year.

Clause 49: inserts new subsection 122JG(12A) to ensure that rollover relief is available for successive disposals of quarrying property occurring in a single year.

Clause 50: inserts new subsection 123BBA(16) to ensure that rollover relief is available for successive disposals of property used in the transport of minerals occurring in a single year.

Clause 51: inserts new subsection 123BF(9) to ensure that rollover relief is available for successive disposals of property used in the transport of quarrying materials occurring in a single year.

Clause 52: inserts new subsection 124AMAA(18A) to ensure that rollover relief is available for successive disposals of petroleum mining property occurring in a single year.

Clause 53: inserts new subsection 124GA(5) to ensure that rollover relief is available for successive disposals of property used as access roads in timber operation occurring in a single year.

Clause 54: inserts new subsection 124JD(5) to ensure that rollover relief is available for successive disposals of timber mill buildings occurring in a single year.

Clause 55: inserts new subsection 124PA(6) to ensure that rollover relief is available for successive disposals of industrial property occurring in a single year.

Clause 56: specifies that the above amendments to the various capital allowance rollover relief provisions applies to disposals occurring after 19 December 1991.

Clause 57: specifies that the above amendments also apply to transitional measures for intra company group disposals occurring after 6 December 1990 and before 20 December 1991 where an election is made for capital allowance rollover relief to apply.

Clause 58: relocates subsection 262A(4A) of the Act so that it appears after subsection 262A(4).

Royalty Withholding Tax
[See page 153 for further detail]

Clause 59: amends section 6 of the Act to extend the definition of 'royalties' to include television and radio broadcasting by means of satellite and cable.

Clause 60: deletes certain references in section 6C of the Act which are no longer necessary.

Clause 61: amends section 103 of the Act to reflect the fact that section 136A (which dealt with film and video royalties) is being repealed.

Clause 62: amends the heading to Division 11A of Part III of the Act to make it clear that it applies to royalties.

Clause 63: expands the scope of the term 'income' in section 128A of the Act to include royalties.

Clause 64: inserts new subsections in section 128B of the Act to include royalties as income to which the section applies and to make royalties liable to withholding tax.

Clause 65: repeals Division 13A of Part III of the Act which deals with film and video royalties. Film and video royalties are to be subject to the same provisions as other types of royalties.

Clause 66, 67, and 68: removes references to royalties from sections 221YHZA, 221YHZB and 221YHZC of the Act as they will no longer provide the collection mechanism for royalty payments.

Clause 69: amends section 221YK of the Act to treat royalties as having been paid where amounts are accumulated, reinvested etc but not actually paid over to the taxpayer.

Clause 70: inserts new subsections in section 221YL of the Act to ensure that the payers of royalties have similar responsibilities to borrowers making interest withholding tax deductions.

Clause 71: extends section 221YM of the Act to royalties. The section allows the Tax Office, in special circumstances, to provide an exemption from deducting withholding tax or a variation in the amount to be deducted.

Clause 72: amends section 221YN of the Act to submit payers of royalties to the same compliance requirements as payers of dividends and interest in relation to payment remittances to the Tax Office.

Clause 73 : amends section 221YQ of the Act regarding liabilities of persons failing to make deduction of withholding tax from royalties.

Clause 74: amends section 221YRA of the Act to prevent a deduction being allowed to the payer of the royalty until the withholding tax has been deducted and remitted to the Tax Office.

Clause 75: amends section 221YS of the Act to allow a credit to the person receiving the royalty equal to the amount of the withholding tax.

Clause 76: amends section 221YU of the Act to make a trustee in control of the property of the payer of the royalty to be liable to deduct and remit any withholding tax to the Tax Office.

Clause 77: extends the scope of section 221YV of the Act to royalties. The section is designed to protect a person who has made a deduction from legal action by a non-resident for payment in full of the royalty.

Clause 78 : removes a reference to a royalty payment from section 255 of the Act. The reference is no longer required.

Clause 79: amends section 389 of the Act to remove the reference to section 136A of the Act. That section is being repealed.

Clause 80: repeals the Income Tax (Film Royalties) Act 1977 as that Act will no longer be relevant.

Clause 81: specifies that the changes made in the method of taxing royalties will first apply to the 1993-94 year of income.

Foreign Source Income Amendments
[See page 165 for further detail]

Amendment to limit the clawback provision in subsection 47A(13) and subsection 47A(14)

Clause 82: proposes to insert new paragraph (ba) into subsection 47A(13). This will ensure that the provision in subsection 47A(13) which creates a tax liability will not apply where shares or units, the acquisition of which was treated as the transfer of a benefit for the purposes of section 47A, are redeemed or bought back by the recipient of that benefit for full consideration.

The clause will also insert paragraph (ca) into subsection 47A(14). The amendment will limit the clawback provision in subsection 47A(14) so that it will not apply to an acquisition of shares on the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax.

Further, the clause will insert a definition of "arm's length value" into subsection 47A(21).

Subclause 85(1): provides that the amendment proposed by clause 82 will apply in relation to dividends deemed to have been paid after 3 June 1990 (i.e., the commencement of section 47A). The retrospective operation of the amendment will be to the benefit of the taxpayer.

Offset of Carry Forward Primary Production Losses Against Foreign Income

Clause 83: proposes to insert new subsections (5A), (5B), (5C), and (5D) into section 80AA of the Act to enable taxpayers who have carry forward domestic primary production losses to choose whether to offset those losses against their assessable foreign income.

Clause 84: amends the definition of "net foreign income" in subsection 160AF(8) so that a taxpayer's assessable foreign income is to be reduced by, amongst other things, any amount which is the subject of an election by the taxpayer under proposed subsection 80AA(5B) when calculating the taxpayer's "net foreign income".

Subclause 85(2): provides that the amendments proposed by clauses 83 and 84 will apply to assessments for the 1991-92 and subsequent years of income. The retrospective operation of the amendment will be to the benefit of the taxpayer.

Amendments to the Taxation Administration Act 1953
[See page 175 for further detail]

Method of payment of taxation and child support liabilities

Clause 117: proposes to insert new section 16A into the Taxation Administration Act 1953 (the Act). The new section will enable Regulations to be made under the Act in relation to the payment of taxation and child support liabilities.

Amendments relating to taxation offences

Clause 118: proposes to insert new section 8HA into the Taxation Administration Act 1953 (the Act) to provide penalties for persons convicted of an offence under sections 8C (failure to comply with taxation law requirements), 8D (failure to answer questions when attending before the Commissioner) and 8H (failure to comply with an order to comply). The new penalties parallel those currently imposed under section 8W for persons convicted of an offence for the making of a false or misleading statement.

Clause 119: proposes to ensure that a matter dealt with under section 19B of the Crimes Act 1914 will be treated as a conviction for penalty purposes under section 8W of the Act.

Clause 120: proposes to amend section 8ZA of the Act to prevent a second summary offence becoming an indictable offence where a person is convicted of the first summary offence before the same court in the same sitting.

Clause 121: proposes to formalise an amendment to subsection 8ZB(2) of the Act which was indirectly made when the Crimes Act 1914 was amended by Act No.4 of 1990 but has not been formally made to the Act.

Petroleum Resource Rent Tax Technical Amendments
[See page 181 for further detail]

(Petroleum Resource Rent Tax Assessment Act 1987)

Clause 2(3): commencement of amendments on 1 July 1991

Clause 108: identifies the Principal Act being amended, the Petroleum Resource Rent Tax Assessment Act 1987.

Clause 109: amends section 48 of Principal Act to enable transfer of all expenditure with transfer of entire interest in project.

Clause 110: amends clause 1 of Schedule to Principal Act to ensure that defined term "incurred exploration expenditure amount" includes all expenditure transferred under the amendment in Clause 109, and to insert term "finishing day", the day on which the production licence of a petroleum project, or an exploration permit or retention lease ceases to be in force.

Clause 111: consequential amendment to clause 6 of Schedule to the Principal Act, reflecting the possible transfer of expenditure from a project after the finishing day.

Clause 112: consequential amendment to clause 10 of Schedule to the Principal Act, reflecting the possible transfer of expenditure from a project after the finishing day.

Clause 113: consequential amendment to clause 13 of Schedule to the Principal Act, reflecting the possible transfer of expenditure from an exploration permit or retention lease after the finishing day.

Clause 114: amends clause 22 of Schedule to Principal Act to enable transfer of expenditure of a person, although the transfer is after the finishing day.

Clause 115: amends clause 31 of Schedule to Principal Act to enable transfer of expenditure of a group company, although the transfer is after the finishing day.

Capital Gains Tax

Summary of proposed amendments

Purpose of amendment: To improve the readability of the Capital Gains Tax provisions of Part IIIA of the Act, and to provide an index of the key concepts relevant to the operation of those provisions.

Date of Effect: The amendments will not affect the operation of the law.

Background to the legislation

The CGT provisions apply generally where there is a disposal of an asset which was acquired after 19 September 1985. The general scheme of Part IIIA is twofold: it sets out the situations in which the CGT provisions apply and, if they do apply, it provides rules for calculating the amount of the capital gain or capital loss in respect of the disposal of the asset.

Because of the variety of situations to which CGT does apply, it is not always appropriate that the general scheme of the CGT provisions apply in their usual manner. For this reason, a number of provisions modify the way in which the general scheme of Part IIIA operates in particular circumstances. The number and scope of these modifications add to the complexity of Part IIIA and make it difficult to read.

The proposed amendments will provide:

·
a simplified outline of the scheme of Part IIIA,
·
an example of how the Part applies in a typical case, and
·
an index of the main circumstances (the key concepts) in which the scheme is modified.

Explanation of proposed amendments

Object

[Clause 5, new section 160AX,]

Section 160ZO provides for a net capital gain which accrues to a taxpayer to be included in the assessable income of the taxpayer. This is the object of Part IIIA.

Simplified outline of scheme of Part

[Clause 5, new section 160AY]

Section 160L sets out the general circumstances in which Part IIIA applies. These are:

·
a taxpayer disposes of an asset (the basic definition of "disposal" is in section 160M; the basic definition of "asset" is in section 160A);
·
the asset was acquired by the taxpayer on or after 20 September 1985 (the basic definition of "acquisition" is in section 160M; the time of acquisition is primarily dealt with in section 160U); and
·
the disposal occurs on or after 20 September 1985 (the time of disposal is primarily dealt with in section 160U).

Section 160Z is the basic provision for determining the amount of a capital gain or capital loss on the disposal of an asset. A comparison is made between:

·
the consideration in respect of the disposal of the asset (the basic definition is in section 160ZD)
and
·
the indexed cost base of the asset, if the asset is owned for 12 months or more (see sections 160ZH and 160ZJ),
·
the cost base of the asset, if the asset is owned for less than 12 months (see section 160ZH), or
·
the reduced cost base of the asset (see sections 160ZH and 160ZK).

Where the consideration in respect of the disposal exceeds the cost base or indexed cost base of the asset, the amount of the excess is the amount of the capital gain.

Where the consideration in respect of the disposal is less than the reduced cost base of the asset, the amount of the difference is the amount of the capital loss.

Where the consideration in respect of the disposal does not exceed the cost base or indexed cost base of the asset and is not less than the reduced cost base of the asset, there is no capital gain and no capital loss.

Where the taxpayer disposes of more than one asset in any year, or has a net capital loss in an earlier year, the capital gains and/or capital losses are netted to determine the net capital gain or net capital loss of the taxpayer - section 160ZC. If there is a net capital gain, the amount of that net capital gain is included in the taxpayer's assessable income - section 160ZO.

Index of key concepts

[Clause 5, new section 160AZA]

There are a number of modifications to this general scheme of the CGT provisions in situations where it is not appropriate for that scheme to operate in its normal manner. The Bill proposes to include an index of the main areas in which that scheme is modified. By indicating these key concepts which are relevant to the operation of Part IIIA, it will be easier to see how the CGT provisions apply in any specific situation.

The index is in three parts. There are a number of provisions, those dealing with exemptions and roll-overs, which have the same general effect:

·
An Exemptions Sub Index refers to the main areas where Part IIIA does not apply to the disposal of a particular asset, or where there is deemed to be no capital gain or capital loss resulting from the disposal of an asset.
·
A Roll-overs Sub Index refers to the main areas where roll-over relief is given. The general effect of roll-over relief is to maintain the pre-CGT status of an asset or to defer a CGT liability which has accrued in respect of an asset.
·
The Main Index refers to the other main areas, both within and outside Part IIIA, where the scheme of Part IIIA is modified.

However, the index is not intended to be comprehensive. It is intended to indicate the more usual circumstances in which the scheme of Part IIIA is modified. Nor should the index be relied upon as indicating the CGT treatment of a particular situation - that will only be determined according to the provisions relevant to the concept, to which reference should be made. For example, where an item is listed in the Exemptions Sub Index, the relevant section will indicate whether a full or partial exemption is available, and whether the exemption is subject to any conditions.

Example of use of index

A person's principal residence is an asset to which the general scheme of Part IIIA would apply. However, a person's principal residence is generally exempt from CGT. The Exemptions Sub Index indicates that section 160ZZQ is the provision which deals with the principal residence exemption. That section sets out the conditions under which a full or partial exemption is available. Where a full exemption is available, no capital gain or capital loss is taken to result from the disposal of the residence. Where a partial exemption is available, the section provides for the way in which the amount of the capital gain or capital loss is to be calculated.

Australia-United States Coral Sea Commemorative Council Incorporated

Summary of proposed amendments

Purpose of amendment: To allow, for a limited period, income tax deductions for gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated.

It is proposed that the amendments be backdated to apply to gifts made on or after 26 November 1991 and on or before 30 June 1992.

Date of effect: 26 November 1991.

Background to the legislation

On the 18 June 1992 the Treasurer announced that gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated would be tax deductible under the gift provisions of the income tax laws.

Tax deductibility status is to apply to gifts made on or after 26 November 1991 and on or before 30 June 1992. Such status is to assist the Council in satisfying its objective:-


"To promote and foster commemoration of the Australian-United States friendship and co-operation, particularly in relation to the Battle of the Coral Sea."

Explanation of proposed amendments

The Bill proposes to amend paragraph 78(1)(a) of the Act to insert new subparagraph 78(1)(a)(cviii). This subparagraph will authorise deductions for gifts made to the Australia-United States Coral Sea Commemorative Council Incorporated [Clause 7, new subparagraph 78(1)(a)(cviii)] .

The Bill also proposes to insert subsection 78(6AL) into the Act to limit the time period for which tax deductibility status is given to gifts that are made under subparagraph 78(1)(a)(cviii) of the Act. It is proposed to limit deductibility to those gifts that are made on or after 26 November 1991 and on or before 30 June 1992 [Clause 7, new subsection 78(6AL)] .

These amendments will authorise deductions for gifts made on or after 26 November 1991 and on or before 30 June 1992, to the Australia-United States Coral Sea Commemorative Council Incorporated.

Gifts to Gift Funds of Environmental Organisations

Summary of proposed amendments

Purpose of amendment: To give effect to a 1992 Budget announcement to allow deductions for gifts made directly to a gift fund of an environmental organisation admitted to the Register of Environmental Organisations. Treasurer's Press Release No. 125 of 1992 outlined the arrangements for the implementation of the announcement.

The amendment will allow gift funds of environmental organisations to be eligible to receive tax deductible donations where they have obtained entry on the Register. To be listed on the Register, a fund must be approved by the Treasurer and the Minister responsible for the Environment (the Environment Minister).

The amendment will take effect from the date the Bill receives Royal Assent. This is the date from which organisations become eligible to be included on the Register and therefore receive tax deductible donations.

A deduction will continue to be allowed for donations made to the five environmental organisations that are presently listed in the gift provisions provided two new requirements are met. These organisations also have the option of seeking admission to the Register of Environmental Organisations if they meet the requirements for entry.

Date of Effect: The amendments to include the Register of Environmental Organisations in the income tax gift provisions apply to gifts made from the date the Bill receives Royal Assent.

The amendments to require the five organisations presently listed in paragraph 78(1)(a) to satisfy two new requirements if they are to continue to have tax deductible gift status apply from the year commencing 1 July 1993.

Background to the legislation

There are five environmental organisations listed in the existing gift provisions (paragraph 78(1)(a)) that are allowed to receive tax deductible donations. These organisations are:

·
the Australian Conservation Foundation Incorporated
·
the World Wide Fund for Nature Australia
·
various National Park Associations and Conservation Bodies (see below)
·
Greening Australia Limited
·
Landcare Australia Limited

The National Park Associations and Conservation Bodies referred to above, and as listed in subparagraph 78(1)(a)(lxxiii), are the National Parks Association of New South Wales, the Victorian National Parks Association, the Victoria Conservation Trust, the National Parks Association of Queensland, The Nature Conservation Society of South Australia Incorporated, the National Parks Foundation of South Australia Incorporated, the Western Australian National Parks and Reserves Association Incorporated, the Tasmanian Conservation Trust Incorporated and the National Parks Association of the Australian Capital Territory Incorporated.

Other environmental organisations have had access to tax deductible donations indirectly through some of the above bodies, in particular, the Australian Conservation Foundation Incorporated and the Tasmanian Conservation Trust Incorporated. The Foundation itself is a listed organisation under subparagraph 78(1)(a)(xliv).

Under the proposal a gift fund administered by an environmental organisation that has been approved by the Treasurer and the Environment Minister will be listed on a register known as the Register of Environmental Organisations. Donations of $2 or more of money or of certain property to a fund listed on the Register will be tax deductible [Subclause 7(b), new subparagraph 78(1)(a)(cviv)] . To be included on the Register, an organisation and its fund need to satisfy certain eligibility criteria [Clause 9, new section 78AB] .

The five environmental organisations which are presently listed in paragraph 78(1)(a) will be required to satisfy two new requirements as from the year commencing 1 July 1993 [Clause 7(c), new subsection 78(6)] .

The Register is to be administered by the Department of the Arts, Sport, the Environment, and Territories (DASET) [Clause 9, new subsection 78AB(5)] .

Explanation of proposed amendments

What is the effect of the amendments?

i.
Organisations which have separate listing in 78(1)(a)
Paragraph 78(1)(a) of the income tax law operates to allow tax deductible gifts to, among others, five environmental organisations that are presently listed in the gift provisions. Under the proposal, these organisations may seek to be admitted to the Register of Environmental Organisations. If they do not seek admission to the Register and continue to rely on their separate listing for tax deductibility gift status they will be required to satisfy two new requirements as from the year commencing 1 July 1993.
The first requirement is that the organisations must agree to give to the Department of the Arts, Sport, the Environment and Territories, within a reasonable period after the end of the financial year, statistical data about gifts made to the institution during the financial year. The Environment Minister would regard a period of four months after the end of a financial year as a reasonable period.
The second requirement is that these organisations must have a policy of not acting as a mere conduit, or umbrella organisation, for other environmental bodies. In other words, an organisation's policy must state that any allocation of funds or property to other institutions, bodies or persons will be made in accordance with the established objectives of the organisation and not be influenced by the expressed preference or interest of a particular donor to the organisation. Organisations can not act as a mere collection agency for moneys intended by a donor to be transferred onto other preferred institutions, bodies or persons. [Clause 7(c), new subsection 78(6)] .
ii.
Organisations admitted to the Register
Donations to gift funds administered by environmental organisations which are listed on the Register of Environmental Organisations will be tax deductible [Subclause 7(b), new subparagraph 78(1(a)(cviv)] . Donors will be able to make donations to gift funds directly and it will no longer be necessary for such funds to seek assistance through the organisations currently listed in paragraph 78(1)(a). In fact, this type of assistance will be difficult to obtain given one of the new requirements for those organisations which are currently separately listed (see point i. above).

What is an 'environmental organisation'?

The eligibility criteria for registration of a body as an environmental organisation include the following:

(a)
its principal purpose, or each of its principal purposes, must be an environmental purpose [Clause 9 , new paragraph 78AB(2)(a)]. 'Environmental purpose' is defined in new subsection 78AB(1).
(b)
it must be non-profit distributing and must not give any of its property or financial surplus to its members, shareholders, beneficiaries, controllers or owners [Clause 9, new paragraph 78AB(2)(b)].
(c)
it must maintain a 'gift fund' which is a public fund to which gifts of property or money for its environmental purpose or purposes are to be made [Clause 9, paragraph 78AB(2)(c)].
(d)
in the event of winding up, any surplus assets or funds are to be transferred to another fund that is listed on the Register of Environmental Organisations [Clause 9, paragraph 78AB(2)(d)].
(e)
it must agree to give to the Environment Department, within a reasonable period after the end of each year, statistical data about gifts to its gift fund during the financial year [Clause 9, new subparagraph 78AB(2)(e)]. The Environment Minister would regard a period of four months after the end of a financial year as a reasonable period.
(f)
it must agree to comply with any rules made from time to time by the Environment Minister and Treasurer to ensure that gifts to its gift fund are used only to support its environmental purpose or purposes [Clause 9, new paragraph 78AB(2)(f)].
(g)
it must have a policy of not acting as a mere conduit, or umbrella organisation, for other organisations, bodies or persons [Clause 9, new subparagraph 78AB(2)(g)].
In other words, an organisation's policy must state that any allocation of funds or property to other organisations, bodies or persons will be made in accordance with the established objectives of the organisation and not be influenced by the expressed preference or interest of a particular donor to the organisation. Organisations can not act as a mere collection agency for moneys intended by a donor to be transferred onto other preferred organisations, bodies or persons.
(h)
if the body is a body corporate (other than a statutory authority) or a co-operative society the membership must consist wholly or principally of bodies corporate; or there must be at least 50 members of the body who are natural persons and who are also regarded as financial members and entitled to vote at general meetings [Clause 9, new paragraph 78AB(2)(h)].

New subparagraph 78AB(2)(h)(iii) provides that the Environment Minister may determine that because of special circumstances, a body does not have to meet either of these two criteria. This may happen, for example, where a body is constituted in such a way as to render membership of more than 50 individuals inappropriate or impractical.

What is meant by an "environmental purpose"?

One of the conditions for registration as an environmental organisation is that its principal purpose (or each of its principal purposes) must be an "environmental purpose". Environmental purpose means:

·
the protection or enhancement of the environment or a significant aspect of the environment; or
·
a purpose relating to providing information, education or carrying on research about the environment or a significant aspect of the environment.

Environment in this context is the natural environment and includes all aspects of the natural surroundings of humans. The term natural to describe the environment is used here to make a distinction between this type of the environment other types of the environment, such as the 'built' , 'cultural' and 'historic' environments.

The 'natural environment' would exclude, for example, constructions such as the retaining walls of dams; cultivated parks and gardens; zoos and wildlife parks, except those principally carried on for the purpose of species preservation; and heritage properties.

The 'natural environment' and concern for it would include, for example, significant natural areas such as rainforests; wildlife and their habitats; issues affecting the environment such as air and water quality, waste minimisation, soil conservation, and biodiversity; and promotion of ecologically sustainable development principles.

What is a gift fund?

A gift fund is a public fund to which donations of money or property are made. Money from interest on donations, income derived from donated property, and money from the realisation of such property are to be deposited into the fund. The fund needs to be kept separate from other funds. [Clause 9, paragraph (c) of subsection 78AB(2) which lists the eligibility criteria for registration as an 'environmental organisation'] .

How does a gift fund become eligible to receive tax deductible donations?

To satisfy the eligibility criteria a gift fund needs to:

(a)
be established and maintained for environmental purposes. 'Environmental purpose' is defined in new subsection 78AB(7);
(b)
be administered by a body that has been certified by the Environment Minister to be an environmental organisation [Clause 9, new subsection 78AB(1)] ;
This certification has to be in writing but it is sufficient that it is by way of letter signed by the Environment Minister stating that a body is eligible for admission to the Register.
(c)
be included by DASET on the Register of Environmental Organisations at the direction of the Treasurer and the Environment Minister [Clause 9, new subsection 78AB(3)] . Gifts to the fund will be deductible from the date specified in the direction. A fund cannot be included on the Register retrospectively.

In exercising their discretion whether to give a direction to DASET, the Treasurer and the Environment Minister need to take into account the policies and budgetary priorities of the Australian Government [Clause 9, new subsection 78AB(4)] .

The term 'may' in relation to a Minister's discretion in section 78AB means in 'his or her discretion' as provided for in subsection 33(2A) of the Acts Interpretation Act.

Can an environmental organisation and it's gift fund be removed from the Register?

An environmental organisation and its gift fund may be removed from the Register on the direction of the Treasurer and the Environment Minister [Clause 9, new subsection 78AB(6)] . Whether an organisation and its gift fund is removed is at the discretion of the above Ministers. Gifts made to that fund would cease to be deductible from the date specified in the direction. A fund cannot be removed retrospectively.

Miscellaneous amendments to gift provisions

Subparagraph 78(1)(a)(cvii) amended so "register" is omitted and substituted by "Register of Cultural Organisations" [Subclause 7(a)].

Section 78AA amended by omitting "Tourism" from the definitions of "Arts Department" and "Arts Minister" [Clause 8].

Contributions to registered political parties

A minor technical amendment will relocate and renumber subsection 51(7A) of the Act to subsection 78(1B). The cross reference in subsection 51(7A) to paragraph 78(1)(aaa) now becomes a cross reference to paragraph 1(aaa).

Provisional Tax

Summary of proposed amendments

Purpose of amendment: This Bill proposes to amend various provisions of the Principal Act, to implement certain changes to the provisional tax system. The proposed changes are threefold:

·
to vary the provisional tax uplift factor down from 10% to 8% for the 1992-93 income year and 10% for later income years;
·
to give credit for tax deducted from investment income when ascertaining the amount of provisional tax payable; and
·
to increase the margin for error allowed, when varying down provisional tax, in underestimating taxable income or overestimating PAYE tax instalment deductions without incurring additional tax from 10% to 15%.

Date of Effect: These amendments will apply in ascertaining provisional tax (including instalments) payable for the 1992-93 year of income and for all later years of income.

Background to the legislation

provisional tax uplift factor

In calculating provisional tax for the current year of income, tax rates and the medicare levy for the current year are applied to the preceding years taxable income increased by the provisional tax uplift factor. The resulting figure is then reduced to take into account various rebate and credit entitlements of the taxpayer in relation to the preceding years notice of assessment. The rebate and credit entitlements are adjusted to reflect amounts that are expected to appear in the current years notice of assessment.

The " provisional tax uplift factor" is a percentage that is used to allow for the effects of inflation and other factors in ascertaining provisional tax payable for the current year. Currently the uplift factor is set at 10% (subsection 221YA(1)).

In Press Release 110 of 1992, the Treasurer announced that as part of the provisional tax concession package there would be a reduction in the provisional tax uplift factor from 10% to 8% in ascertaining provisional tax payable for the 1992-93 income year.

This Bill proposes to amend subsection 221YA(1) of the Act to ensure that in ascertaining provisional tax payable the provisional tax uplift factor is 8% for the 1992-93 year of income and 10% for later years of income.

Tax File Number Credits

From the 1 July 1991, the failure by an investor to quote a tax file number (TFN) in connection with an investment meant that the investment body would withhold an amount of tax ( TFN tax) on behalf of the taxpayer. This amount of tax is calculated at the highest marginal tax rate plus the Medicare levy. For the 1991-92 year of income TFN tax was deducted at the rate of 48.25%.

A taxpayer is entitled to a credit for TFN tax deducted once the annual tax return is lodged (section 221YHZK). However, in ascertaining the amount of provisional tax payable the Act does not provide for TFN tax credits to be taken into account.

This Bill proposes to amend subsection 221YCAA(2) of the Act to allow TFN tax credits to be taken into account in ascertaining provisional tax payable.

Margin for Error

Provisional tax is an anticipatory tax based on the assumption that taxable income of the current year will not be less than that of the preceding year (as increased by the provisional tax uplift factor). However, taxpayers who estimate that their taxable income for the current year will be more or less than the preceding year's income as uplifted in the provisional tax calculation may apply for a variation and recalculation of their provisional tax. This variation and recalculation can only occur after the taxpayer has received a notice of assessment in relation to the preceding year of income or has received an instalment notice in respect of an instalment of provisional tax for the current year of income (paragraphs 221YDA(1)(a) and (b)).

Additional tax is imposed under section 221YDB of the Act if taxable income is underestimated or PAYE tax instalment deductions are overestimated by more than 10% in an application for variation of provisional tax payable.

This Bill proposes to amend section 221YDB of the Act to ensure that the margin for error allowed in estimating taxable income and PAYE tax instalment deductions before additional tax is imposed is increased from 10% to 15%.

Explanation of proposed amendments

provisional tax uplift factor

The amendment to subsection 221YA(1) will ensure that the provisional tax uplift factor is 8% for the 1992-93 year of income and 10% for later years of income [Clause 10].

Tax File Number Credits

The amendments to paragraphs 221YCAA(2)(m) and (q) will ensure that TFN tax credits are included in the provisional tax calculation. These credits will be treated in the same way as foreign tax credits under section 160AF (paragraph 221YCAA(2)(q)). That is, TFN tax credits will be uplifted by the provisional tax uplift factor and taken into account in calculating provisional tax payable [Clause 11].

Margin for Error

Section 221YDA provides that taxpayers may lodge an application to have their provisional tax or an instalment of provisional tax recalculated on the basis of their own estimate of their taxable income and rebates and credits for the current year of income.

In an application for this purpose the taxpayer is required to estimate the taxable income and the amount of PAYE tax instalment deductions which will be made in accordance with sections 221C and 221D of the Act from the taxpayer's salary or wages during the year.

Section 221YDB provides that taxpayers are liable to additional tax, by way of penalty, if they underestimate their taxable income or overestimate their PAYE tax instalment deductions by more than 10% in their application for a variation of provisional tax.

The amendments to section 221YDB ensure that the margin for error allowed in estimating taxable income and PAYE tax instalment deductions before additional tax is imposed is increased from 10% to 15% [Clause 12, paragraphs (a) and (b)].

Zone and related rebates

Summary of proposed amendments

Purpose of amendment: The Bill will amend the income tax law to increase the current fixed dollar amounts in these rebates by 12.5% for the 1992-93 assessments and 25% for assessments in subsequent years of income.

Date of Effect: The amendments will apply to assessments for the 1992-93 and subsequent years of income.

Background to the legislation

Special income tax arrangements, through zone rebates, have applied to taxpayers residing in remote areas since 1945.

Section 79A of the Principal Act provides that the level of a taxpayer's zone rebate is equal to a fixed dollar value applicable to the taxpayer's zone of residence and a specified percentage of the sum of any dependent, housekeeper, sole parent and notional child rebates to which the taxpayer is entitled ('the relevant rebate amount' (RRA)). The fixed dollar amounts of the rebates have not been increased since 1984 but the RRA has increased because of increases in the component rebates. Some components in the RRA have been indexed anually for the 1990-91 and subsequent income years through the application of section 159HA.

The rebates at present are -

Special Area Zone A $938 + 50% of RRA
Special Area Zone B $938 + 50% of RRA
Ordinary Zone A $270 + 50% of RRA
Ordinary Zone B $45 + 20% of RRA

Sections 23AB and 79B of the Principal Act also provide rebates comparable to those for ordinary zone A for certain persons serving with an armed force under the control of the United Nations, and members of the defence forces serving overseas.

Explanation of proposed amendments

The Bill proposes to amend sections 23AB, 79A and 79B of the Act to increase the current fixed dollar components in the rebates by -

(a)
12.5% for assessments in respect of the 1992-93 year of income; and
(b)
25% for assessments in respect of the 1993-94 and subsequent years of income.

[Clauses 14, 15, 16 and 17]

Deductible Losses on Disposal of Traditional Securities

Summary of proposed amendments

Purpose of amendment: To prevent deductions being allowable for a capital loss on the disposal or redemption of a traditional security that is attributable to the inability or unwillingness of the issuer to discharge its obligations to make payments under the security. Losses incurred on the forgiveness of loans will not be treated as deductible losses on the disposal of traditional securities.

Date of Effect: The amendments apply to disposals or redemptions of traditional securities on or after 1 July 1992.

Background to the legislation

Sections 26BB and 70B are complementary provisions that deal with gains and losses on the disposal of traditional securities acquired after 10 May 1989. They require all gains to be included in assessable income (section26BB), and treat all losses as allowable deductions (section 70B). Profits and losses on the disposal of traditional securities are excluded from the coverage of the capital gains tax rules (subsection 160ZB(6)).

Traditional securities are, broadly, investments like debentures, bonds or loans that do not have a deferred income element. Securities issued under terms such that the investor's return on investment (other than periodic interest) will be no more than 1.5 per cent per annum are treated as not having a deferred income element.

That can be contrasted with securities that are subject to the accruals taxation regime contained in Division 16E. That Division applies to discount and other deferred income securities with a term exceeding one year and a likely return on investment (other than periodic interest) in excess of 1.5 per cent.

Sections 26BB and 70B were enacted to fill a gap that was perceived to exist following the introduction of Division 16E. While Division 16E provided an accruals basis for taxing income of longer term deferred interest, discounted or capital indexed securities, the treatment of similar gains from traditional securities was less certain, particularly in relation to taxpayers who were not traders in financial securities.

To counter the possibility that some gains on the disposal of traditional securities by non traders might be treated as capital gains - for example the sale of a bond, originally issued at par, in the secondary market at a premium - section 26BB specifies that the gains are included in assessable income. Conversely, section 70B authorises a tax deduction for losses on disposal. In these circumstances, for tax purposes the gains and losses are treated as the equivalent of a return on funds invested.

It was not intended that gains and losses of a genuinely capital kind would be affected by the traditional securities rules contained in sections 26BB and 70B. What was intended to be brought onto revenue account were gains and losses in value attributable to movements in interest rates or other market adjustment.

However, claims for deduction under section 70B have been sought for losses of the capital amount of an investment that relates to the inability or unwillingness of the financial institution or other borrower to meet its obligations under the terms of the security, that is, for capital losses due to default. Some capital losses in that category have been caused by failures of financial institutions and from the forgiveness of loans, the latter particularly in relation to inter group company loans or related partnership loans. In these kinds of circumstances, of course, there could be no corresponding assessable gain to which section 26BB could apply.

Explanation of proposed amendments

Section 70B is therefore being amended to ensure that capital losses on the disposal of a traditional security arising from the issuer's perceived inability or unwillingness to discharge payment obligations under the security are not deductible, nor losses incurred by waiving or releasing a debt [new subsections 70B(4) and 70B(5)].

There will be no such loss of deduction, however, in cases where the traditional security is a marketable security and the loss arises from a disposal that takes place in the ordinary course of trading on a securities market.

Application of those tests is assisted by the insertion of definitions of "marketable security" and "securities market". In combination, those definitions mean that marketable securities are stock, bonds, debentures, certificates of entitlement, bills of exchange, promissory notes or other securities that would be regularly sold, purchased or exchanged on a market, stock exchange or like facility [new subsection 70B(7)].

In other cases - that is, where the security is not sold routinely through a securities market - losses will not be deductible under section 70B if they are capital in nature and a reason for the disposal (or redemption) was an apprehension or belief (whether founded or unfounded) that the issuer of the security might default on its payment obligations under the security. That apprehension or belief could be based on the issuer's financial position or perceived financial position - whether or not such perceptions were generally held in the market place - or any other matter bearing on its likely ability or willingness to discharge its payment obligations [new paragraph 70B(4)(e)].

To make it clear that a loss incurred on the forgiveness of a debt due under a traditional security is not to be deductible under section 70B, the Bill provides that the waiver or release of a debt (or part of a debt) or other right under a security is not to be taken as the disposal or redemption of the security. That rule nullifies the operation of subsection 70B(2) which authorises a deduction for a loss only on the disposal or redemption of a traditional security [new subsection 70B(5)].

The "non-disposal" rule pertaining to debt forgiveness, however, must be read as applying strictly for the purposes of the operation of section 70B. Moreover, that rule is expressly not to be taken into account in interpreting the meaning of disposal or redemption in relation to transactions that occurred before 1 July 1992. In particular, it cannot be implied from the enactment of the rule that the waiver or release of a debt prior to 1 July 1992 constituted the disposal or redemption of a traditional security [new subsection 70B(6) and Clause 22].

Definitions

Three new definitions are being inserted to facilitate the amendments being made to section 70B:

(i)
"issuer" means the person who at any time has a liability to pay amounts under a security. The definition is relevant to the tests in new subsection 70B(4) relating to the financial position of the issuer and its ability or willingness to make payments under a security;
(ii)
"marketable security", as mentioned in the notes on new subsection 70B(7), is stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security;
(iii)
"securities market", also mentioned in the notes on new subsection 70B(7), is a market, stock exchange or like facility through which marketable securities (as defined) would be regularly sold, purchased or exchanged. Such a facility would include networks of traders who may trade by telephone or computer links.

The effect of new paragraph 70B(4)(d) in conjunction with the expressions "marketable security" and "securities market" is that the deductibility of losses on the ordinary market disposal of securities that are tradeable on a securities market - whether or not the taxpayer is a securities trader - is not subject to the test in paragraph 70B(4)(e) relating to an apprehension or belief that the securities issuer might not discharge its payment obligations under the security.

Associated amendments

Section 23E exempts from tax any premium paid on the redemption of Special Bonds issued by the Commonwealth. A reference in paragraph 23E(2)(b) to subsection 160ZB(6), which is being omitted by this Bill, is being deleted as redundant.

The effect of subsection 160ZB(6) is that gains or losses on the disposal of traditional securities affected by section 26BB or section 70B are not treated as capital gains accrued or capital losses incurred. In conjunction with the amendments being made by this Bill to deny deduction under section 70B for certain losses of a capital nature, subsection 160ZB(6) is being deleted. In relation to disposals of traditional securities after 30 June 1992, that means that subsection 160ZA(4) would operate to reduce the amount of a capital gain to the extent that such a gain was included in assessable income under section 26BB, in order to prevent double taxation. Section 160ZK would operate in a corresponding manner in relation to any capital loss that might also be deductible under section 70B by appropriately reducing the cost base of the relevant security.

The removal of subsection 160ZB(6) will also mean that Division 19A of Part IIIA (the capital gains rules) will apply, where appropriate, to loans which are traditional securities. For example, it will apply to eliminate multiple deductions for capital losses generated within a company group by forgiving loans that have been on-lent through various group companies.

Application

The limits on deductibility under section 70B that are being implemented by this Bill apply only to disposals or redemptions of traditional securities that occur after 30 June 1992.

Reduced accelerated write-down for horse breeding stock

Summary of proposed amendments

Purpose of amendment: To amend the special option available to horse breeders for valuing breeding stock on hand at the end of a year of income.

Under the proposed amendments:

·
male horse breeding stock will be able to be written-down at a maximum rate of 25% on a prime cost basis; and
·
female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12, with a maximum write-off of 33 1/3% of cost price.

There is no change to the options available for valuing live stock (other than horse breeding stock) on hand at the end of a year of income. Such stock will continue to be valued at cost price or market selling price at the option of the taxpayer.

Date of effect: 19 August 1992.

Background to the legislation

The existing law requires horses that are more than three years old and are not geldings or spayed females, referred to as "eligible horses", to be taken into account as live stock at the end of the year of income. The value at which these horses are to be taken into account is, at the option of the taxpayer: cost price, market selling value, a general closing value or, for mares only, a special closing value. Only horses acquired under a contract entered into after 20 August 1985 can be valued using the general or special closing value. (Section 32)

The general closing value allows eligible male and female horses to be written-down on a diminishing value rate of 50% and 33 1/3%, respectively. Female horses valued at the special closing value can be written-down on a prime cost basis, so that their value is not less than $1 by the end of the year in which the horse is age 12, with a maximum rate of write-down of 33 1/3% of cost price.

Explanation of proposed amendments

The Bill will amend the Principal Act to repeal the existing arrangements that allow eligible horses acquired under a contract entered into after 20 August 1985 to be valued at "general closing value" and "special closing value".

The Bill will provide a new option to horse breeders for valuing breeding stock on hand at the end of a year of income. This new option will be available for horses that are over three years old and are acquired under a contract entered into on or after 19 August 1992.

Under the new option:

·
male horse breeding stock will be able to be written-down at a maximum rate of 25% on a prime cost basis; and
·
female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12, with a maximum write-off of 33 1/3% of cost price.

The Bill proposes to effect these amendments by repealing existing section 32 and inserting new sections 32 and 32A. New section 32 will contain the same options for valuing all live stock other than horse breeding stock as the existing section 32. New section 32A will apply to horse breeding stock and will contain all the valuation options available to horse breeders in relation to their breeding stock [Clause 23]

The live stock valuation provisions have been restructured in the interests of clarity and simplicity.

live stock other than horse breeding stock

Live stock on hand at the end of a year of income will continue to be taken into account for the purpose of determining taxable income at its cost price or, at the taxpayer's option, its market selling value [New subsection 32(1)].

A taxpayer will continue to be able to adopt a value other than cost or market selling value for the whole or part of the live stock if the taxpayer satisfies the Commissioner that there are circumstances which justify another value [New subsection 32(2)].

In determining what other value is to be adopted, the Commissioner will allow named and identified stud stock to be taken into account at market selling value, even if the balance of the breeder's stock is valued at cost. As a general rule, valuing such stock at an estimated market selling value that is obtained by writing 20% off the cost price each year would be acceptable, provided there is no concrete evidence that the animal's value had in fact been maintained or increased.

Where a taxpayer does not exercise one of the options available in new subsection 32(1) within the time prescribed, the value of live stock to be taken into account at the end of the year of income is to be the cost price of the live stock [New subsection 32(3)].

Live stock acquired by a taxpayer before 19 August 1992, whether under a contract or otherwise, will continue to be valued under the previous section 32 as if it had not been repealed [Subclause 24(2)].

Value of horse breeding stock at the end of the year of income

The options available to a taxpayer for valuing horse breeding stock on hand at the end of a year of income for the purposes of ascertaining taxable income will be:

·
its cost price; or
·
market selling value; or
·
a special closing value.

[New subsection 32A(2)]

A value other than cost, market selling value or special closing value will be able to be adopted if the taxpayer satisfies the Commissioner that there are circumstances which justify the adoption of another value [New subsection 32A(3)].

In determining what other value is to be adopted, the Commissioner will allow named and identified stud stallions and mares to be taken into account at market selling value, even if the balance of the breeder's stock is valued at cost. As a general rule, valuing such horses at an estimated market selling value that is obtained by writing 20% off the cost price each year would be acceptable, provided there is no concrete evidence that the horse's value had in fact been maintained or increased.

Where the taxpayer does not exercise one of the options available for valuing horse breeding stock, the stock will be taken into account at its cost price [New subsection 32A(4)].

What is horse breeding stock?

Live stock will qualify as horse breeding stock to which the new provision applies if it has these three characteristics:

·
the taxpayer acquired the horse under a contract entered into on or after 19 August 1992 [new paragraph 32A(5)(a)];
·
the horse is three years old at the end of the year of income [new paragraph 32A(5)(b)]; and
·
the horse is held for breeding purposes [new paragraph 32A(5)(c)] .

Contract

The horse must have been acquired under a contract and the contract must have been entered into on or after 19 August 1992. The horse need not have been acquired as breeding stock. So horses not acquired under a contract (say, because they are bred by the taxpayer) will not have the option of being valued at the special closing value.

Age of the horse

The age of the horse will be relevant in determining whether the horse is three years old and therefore eligible to be valued at the special closing value. It will also be relevant in calculating the special closing value of female breeding stock.

The age of a horse will be the number of years after its "birth date" [New subsection 32A(10)].

The "birth date" (a defined term) depends on whether the horse was foaled before or after 1 August. If the horse was foaled on or after 1 August the birth date is 1 August in that calendar year. If the horse was foaled before 1 August, the birth date will be 1 August in the previous year. For example, a horse foaled on 1 September 1989 will have a birth date of 1 August 1989, and one foaled on 1 July 1989 will have a birth date of 1 August 1988 [New subsection 32A(13)].

Held for breeding purposes

Horses must be held for breeding purposes to qualify for the special valuation options. The horse must not merely be capable of breeding.

This requirement is different from the previous concession which was available as long as the horse was at least three years old, and was not a gelding or a spayed female horse at the time the contract to acquire it was entered into.

Special Closing Value

The special closing value will be the " opening value" less a "reduction amount" or $1 [New subsection 32A(6)].

The special closing value will be $1 where:

·
a female horse is 12 years of age or older (see earlier notes: "Age of the horse") [new paragraph 32A(6)(a)] ; and
·
a horse (male or female) has been written-down to the point where the "reduction amount" exceeds the " opening value" [new paragraph 32A(6)(b)].

Opening value

Where the horse was live stock at the end of the previous year of income and was held for breeding purposes for the whole of the year of income, the opening value will be the value of the horse at the end of the previous year of income [New paragraph 32A(7)(a)].

If the horse became breeding stock during the year of income, even if it had been previously been held as breeding stock, the opening value will be the lessor of:

·
the original cost of the horse; or
·
the depreciated value of the horse (section 62) when it became live stock of the taxpayer [New paragraph 32A(7)(b)].

Depreciated value

The depreciated value of a horse (or any depreciable asset) is its cost less the amount of depreciation allowed as a deduction, or which would have been allowable if the horse (or other asset) had been used wholly for the purposes of producing assessable income.

Where a horse that became breeding stock during the year of income was not previously used by the taxpayer for the purpose of producing assessable income, it will have a notional "depreciated value". That is, the depreciated value of the horse will be the difference between its cost and the amount of depreciation that would have been allowable as a deduction if the horse had been used wholly for the purpose of producing assessable income.

Where a taxpayer has used a horse for the purpose of producing assessable income, and then uses it for breeding purposes, its "depreciated value" will be its actual depreciated value.

Reduction Amount

The reduction amount is the amount by which horse breeding stock will be able to be written down for the year of income. An amount is deducted from the opening value to arrive at the special closing value of a horse.

The maximum amount by which male horse breeding stock will be able to be written-down will be 25% of the cost. The reduction amount for male horses will be calculated using the formula:

base amount * nominated percentage * ( holding days in year of income/Total days in year of income)

[New subsection 32A(8)]

Female horse breeding stock will be able to be written down on a prime cost basis so that the value is not less than $1 by the end of the year in which the horse is age 12. The reduction amount for any year, however, cannot be greater than 33 1/3% of the cost of the horse.

The reduction amount for female horse breeding stock will be calculated using the formula:

( base amount/ reducing factor) * ( holding days in year of income/Total days in year of income)

[New subsection 32A(9)]

Formula items

" base amount" is the lessor of either the original cost price of the horse, or its depreciated value. (See earlier notes on "Depreciated value")

" nominated percentage" (male horses only), is the percentage of the cost of a horse which the taxpayer nominates to write down for a particular year of income. It cannot be greater than 25%. A horse will not have to be written down by the same percentage each year.

" reducing factor" (female horses only) is the greater of:

·
three; or
·
12 less the age of the horse (in whole years) on the day it began to be held for breeding purposes. If the horse has been held for breeding purposes on more than one occasion, the number of years to be deducted from 12 is the age the horse was on the last occasion it began to be held for breeding purposes.

" Holding days in year of income" is the number of days the horse is actually held for breeding purposes unless the horse was not held for breeding purposes continuously. If there was a break in the period the horse was held for breeding purposes during the year of income, the holding days for the purposes of the formulae is the number of days from the last occasion the horse began to be held for breeding purposes.

"Total days in year of income" will mean 365 days or 366 days in a leap year.

Horse becomes live stock more than once in a year

Where the horse becomes livestock more than once before the end of the year, the horse is taken to have become live stock of the taxpayer on the last occasion before the end of the year of income on which it became the live stock of the taxpayer [New subsection 32A(11)].

Therefore, where a horse that was live stock of the taxpayer was sold but subsequently was re-purchased by the taxpayer and taken into account again as live stock, the horse will be taken to have become live stock on that later occasion on which it became the taxpayer's live stock.

Horse becomes breeding stock more than once in a year

A taxpayer may hold a horse as breeding stock more than once during a year of income. This might happen because the horse has been transferred in and out of the breeding programme since the beginning of that year of income, or it might have been breeding stock at the beginning of the year of income but was not used for breeding purposes for the whole of the year of income. In such cases, the horse will be taken to have become breeding stock of the taxpayer on the last occasion before the end of the year of income when it became breeding stock [New subsection 32A(12)].

Examples illustrating the new provisions Example 1 A male horse was acquired under a contract on 1 July 1993 for $6000. It was used alternatively for different purposes during the year as follows:

i)
1/7/93 to 1/9/93 breeding purposes
ii)
2/9/93 to 1/1/94 racing purposes
iii)
2/1/94 to 30/6/94 breeding purposes

For the purposes of calculating the special closing value, the reduction amount will calculated according to the formula in subsection 32A(8).The base amount is the lesser of the cost price or the depreciated value at the time the horse became the live stock of the taxpayer.The depreciation for the period based on the period from 2/9/93 to 1/1/94 (121 days) is calculated as follows:

$6000 * 10% * (121/365) = $198.90

Therefore the depreciated value (and the base amount) as at 1/1/94 would be:

$6000 - 198.90 = $5801.10

The number of holding days in the year of income is the period from 2/1/94 to 30/6/94 (based on subsection 32A(12) ie. 180 days.Assuming the taxpayer's nominated percentage to be 25%, the reduction amount is calculated using the formula in subsection 32A(8):

$5801.10 * 25% * (180/365) = $$715.20

Therefore, the opening value (paragraph 32A(7)(b)) is the lesser of the cost price of the horse or its depreciated value. In this case the opening value is the depreciated value which is $5801.10.The special closing value (ie, opening value less reduction amount) is:

$5801 - 719 = $5082

Example 2 A female horse was acquired for breeding purposes under a contract on 1 September 1992 for $8000. The horse was foaled on 1 October 1987. Its birth date is 1 August 1987 and it is therefore 5 years old when acquired. When determining the special closing value at 30 June 1993, the reduction amount is calculated under subsection 32A(8) as:

($8000/12-5) x (303/365) (days from 1/9/92 to 30/6/93) = $948.73

The special closing value would be:

$8000 - 948.73 = $7051.27

Environment Protection Expenditure

Summary of proposed amendments

Purpose of amendment: Environment protection expenditure incurred by a business may not qualify for deduction. This Bill will amend the Income Tax Assessment Act 1936 (the Act) to:

·
allow a deduction for certain environment protection expenditure incurred by a taxpayer carrying on an income-producing activity, where the expenditure is incurred on or after 19 August 1992; and
·
allow property used for certain environment activities to be treated as if used for producing assessable income (so that depreciation or other amortizing deductions will be available). [New section 82BH]

The deduction will be available to taxpayers for certain environment expenditure in relation to pollution or waste:

·
resulting from a taxpayer's income-producing activity or on a site used for that income-producing activity; .
produced by a taxpayer's own income-producing business, whether before the taxpayer became the owner of the business or while they own it;
·
likely to result from a proposed income-producing activity of the taxpayer or on a site that will be used for that activity.

If a deduction for the cost of environment activities is allowable under another provision of the Act, the cost will not be allowable environment expenditure.

Date of effect: 19 August 1992.

Background to the legislation

Environment protection expenditure that is necessarily incurred in the course of producing assessable income or carrying on a business for that purpose is an allowable deduction under section 51 of the Act. Depreciation on plant and equipment and amortization of buildings and structures which have an environment function and are used for the purpose of producing assessable income is also deductible under the existing law.

However, some environment expenditure of a taxpayer who carries on an income-producing activity may be incurred before the income-producing activity or business commenced or after it has ceased, or it may be of a capital nature. It is therefore not deductible.

In many cases the law requires that such environment activities be carried out. Even where not required to do so by law, many businesses will undertake environment activities. The amendments proposed by this Bill will ensure that allowable environment expenditure, whether capital or current, will be deductible.

Explanation of proposed amendments

A new Subdivision will be inserted in Division 3 of the Income Tax Assessment Act 1936 to allow a deduction for allowable environment expenditure . [Clause 25.]

This is expenditure, whether capital or current, incurred for the sole or dominant purpose of an eligible environment activity . In summary, it is expenditure incurred for the sole or dominant purpose of:

·
preventing, combating or rectifying pollution of the environment; or
·
treating, cleaning up, removing or storing waste.

In order to be eligible for the deduction, a taxpayer must have carried on, carry on or propose to carry on an income-producing activity . This includes any business or investment activity (such as leasing out a site) which is carried on by the taxpayer in order to earn assessable income.

The pollution or waste may result from the income-producing activity or be on the site or proposed site of that activity. Where the site is a source of pollution of other sites, the deduction is also allowable for expenditure to clean up those sites. A taxpayer is also eligible to clean up a site on which a predecessor of the taxpayer carried on a business activity . So, a taxpayer who buys a business and carries on the same business as the predecessor but on a new site, is eligible for a deduction for expenditure to clean up the old site of the business on which the predecessor, whether immediate or otherwise, carried on the business.

The deduction does not depend on whether expenditure is mandatory, nor does it treat expenditure as allowable environment expenditure just because it is mandatory. The deduction is only available to the extent that expenditure is for an eligible environment activity.

The deduction is not available for bonds and security deposits. Nor is it available for depreciable expenditure on plant, or the cost of acquiring land, or the capital cost of constructing or altering buildings, structures or structural improvements.

Instead, items of property which are used for eligible environment activities will be taken to be used for producing assessable income. This means that plant and equipment used for eligible environment activities will be depreciable in the usual way under section 54 of the Act. Capital costs of buildings, structures and structural improvements used for eligible environment activities will be able to be amortised under Division 10C or Division 10D of the Act.

Amendments will be made to Division 10D of the Act to enable the capital cost of environment earthworks (permanent earthworks constructed for environment purposes) to be amortised as if such earthworks were buildings [Clauses 26 and 27].

The provisions are discussed in more detail below.

Allowable environment expenditure

Allowable environment expenditure incurred on or after 19 August 1992 will qualify for deduction in the year of income in which the expenditure is incurred.

The deduction will be allowable from income derived from any source and will be a "non-loss" deduction under section 79E. So, any losses may be carried forward indefinitely in the normal way [New section 82BK]. The deduction will operate in the same way as a deduction under section 51 of the Act and will be subject to the same general limitations; see Limits on the Deduction below [New subsection 82BK(2)].

Allowable environment expenditure includes capital or current expenditure for the sole or dominant purpose of carrying on one or more eligible environment activities. [New subsection 82BL(1)]

However, it does not include depreciable expenditure [New subsection 82BN(2)] . Nor does it include the cost of land, construction, or bonds and securities for the performance of eligible environment activities [New subsection 82BN(1)]. Depreciation of plant, and amortization of the capital cost of buildings, structures and structural improvements, are allowed for these items where used for eligible environment activities; this is discussed in more detail below.

Expenditure will only be for the sole or dominant purpose of carrying on an eligible environment activity if it is primarily directed to that environment protection activity. A deduction will not be available if the protection of the environment is only a residual or subsidiary purpose of the taxpayer [New paragraph 82BL(1)(a)].

For example, suppose a taxpayer who operated a dump covers it with soil and plants it with grass and trees at the end of its life. This might have the dual purposes of protecting the environment by preventing noxious substances leaching out and beautifying the site to improve its resale value. If the landscaping is primarily to improve the resale value of the site it will not be deductible as allowable environment protection expenditure.

Expenditure for the sole or dominant purpose of carrying on an eligible environment activity is only deductible to the extent that it is in respect of that activity. Expenditure for the dominant purpose of carrying on an eligible environment protection activity will be apportioned so that only that portion of the expenditure on the eligible environment protection activity will be deductible [New paragraph 82BL(1)(b)].

For example, a company buys a polluted site for a manufacturing plant. The company tests for contaminants across the whole site and finds one quarter of it is polluted. It removes all the contaminated soil, leaving a large hole. It then brings in fresh soil to fill in the hole and also to level the rest of the site, which is slightly uneven.

The cost of testing for contaminants and removing the contaminated soil will be fully deductible. These expenditures are for the sole or dominant purpose of cleaning up waste, an eligible environment activity, and are incurred entirely for that activity. The dominant purpose of bringing in fresh soil to the site is to fill in the hole where there was contamination. This is part of the waste clean-up. However, a part of this expenditure was on soil to level the rest of the site. The expenditure on bringing in fresh soil is allowable environment expenditure only to the extent that it is for the purpose of filling the hole where there was contamination.

Eligible environment activity

An eligible environment protection activity of a taxpayer is an environment protection activity of the taxpayer that relates to an income-producing activity of the taxpayer.

Environment protection activities may prevent, combat or rectify pollution, or may treat, clean up, remove or store waste.

Income-producing activities include the carrying on of a business to earn assessable income, or investments for the same purpose.

The environment protection activities must be related to the income-producing activities in one of five possible ways:

(i)
the pollution or waste has resulted or is likely to result from the income-producing activity of the taxpayer; [New subparagraphs 82BM(1)(a)(i) and (b)(i)]
(ii)
the pollution or waste is on a site on which the taxpayer carried on, carries on or will carry on the income-producing activity; [New subparagraphs 82BM(1)(a)(ii) and (b)(ii)]
(iii)
the source of pollution or waste is a site on which the taxpayer carried on, carries on or will carry on the income-producing activity; [New subparagraphs 82BM(1)(a)(iii) and (b)(iii)]
(iv)
the pollution or waste is on a site on which the predecessor, whether immediate or otherwise, of the taxpayer carried on a business activity; [New subparagraphs 82BM(1)(a)(iv) and (b)(iv)]
(v)
the source of the pollution or waste is a site on which the predecessor, whether immediate or otherwise, of the taxpayer carried on a business activity. [New subparagraphs 82BM(1)(a)(v) and (b)(v)]

If expenditure is incurred on environment protection activities where the pollution or waste is not a result of the taxpayer's income-producing activity or linked to its site, no deduction will be allowable except in the limited situations (iv) and (v) above; see Site on which the predecessor of the taxpayer carried on a business activity below.

A deduction will be allowable for expenditure incurred on an eligible environment protection activity where the activity is only partly complete. For example, the cost of treatment of only some contaminants on a site will be deductible. Similarly, a deduction is allowable where only part of a site is the subject of eligible activity. An activity need not prevent, combat or rectify all pollution to be undertaken to prevent, combat or rectify some pollution; and an activity need not treat, clean up, remove or store all waste to be undertaken to treat, clean up, remove or store some waste.

The environment protection activity may be carried out by or on behalf of the taxpayer. [New subsection 82BM(1)]

Environment protection activity

An environment protection activity is an activity undertaken to either:

·
prevent, combat or rectify pollution of the environment; [New paragraph 82BM(1)(a)] or
·
treat, clean up, remove or store waste. [New paragraph 82BM(1)(b)]

pollution of the environment

Environment is not limited to the natural environment but includes all aspects of the environment including the demographics of a community. It has the same meaning as in the provisions relating to expenditure on environmental impact studies (section 82BA), based on the broad definition used in the environment (Impact of Proposals) Act 1974. [New section 82BJ]

pollution has its ordinary common sense meaning. Pollution will include contamination by harmful or potentially dangerous substances such as explosive chemicals and greenhouse gases, and will include noise pollution. It will also include contamination by elements which once may not have been considered to be pollutants but which are now so considered because more is now known about their effects, for example asbestos and controlled foreign companies.

Although eyesores are sometimes loosely referred to as visual pollution, pollution does not include merely presenting an unattractive or unappealing appearance.

Preventing, combating or rectifying pollution of the environment will not include merely improving the aesthetics of a site, although eyesores are sometimes loosely referred to as visual pollution. It also will not include removing a structure no longer used by the taxpayer. The removal of a redundant structure because it is unattractive or is likely to collapse will not be an environment protection activity. However, if the structure is contaminated or it is removed to enable pollution under it to be rectified, the removal may be an environment protection activity.

Work of a preventive nature such as the removal of underground storage tanks because they may leak and cause loss or injury to a future owner or user of the site will be an environment protection activity.

Waste

Waste has its ordinary common sense meaning. The treatment, clean up, removal or storage of waste will include any operation which leads to resource recovery, recycling, reclamation, direct re-use or alternative uses of waste at any stage of an industrial process. It will also include any means of disposing of waste such as landfill, storage, chemical conversion and incineration.

income-producing activity

This is defined broadly. It will encompass all business activities that are carried on for the purpose of generating income. Investment activities undertaken for the purpose of generating assessable income will also be income-producing activities for environment protection purposes. However, an investment made for the purpose of producing a capital gain when the investment is realised will not be an income-producing activity. [New section 82BJ]

Income from a passive investment, such as leasing a site, is treated under existing law as income from property and not as an income-producing activity conducted on the site. Under the amendments, a taxpayer who earns income from leasing a site which he or she owns, or from granting a right (or anything similar) to use a site which he or she owns or controls, will be taken to be carrying on an income-producing activity on that site. The taxpayer will be entitled to a deduction (or depreciation) for environment activities. So a landlord may claim deductions for expenditure on environment activities. [New subsection 82BM(2)]

For example, a taxpayer runs a small business repairing cars from her backyard. She also owns a small block of four flats by the beach which she rents out except for one which she uses herself. Both the car repair business and the renting of the flats would be income-producing activities for environment purposes.

A taxpayer who proposes to carry on an income-producing activity must have a real intention to carry on this activity. Evidence of this intention includes actions of the taxpayer such as expenditure on buying a site for the business, advertising, establishing goodwill and developing an infrastructure. Where a taxpayer who does not go on with a venture because of a change in circumstances has incurred expenditure on eligible environment activities associated with that venture, those costs will be allowable environment expenditure. [New subparagraphs 82BM(1)(a)(i) and (b)(i)]

pollution or waste resulting from an income-producing activity

Where an income-producing activity results or has resulted in pollution or waste, eligible environment activities will not be limited to the site on which the income-producing activity was or is carried on. The deduction will be available for environment activities carried out wherever they are needed. [New subparagraphs 82BM(1)(a)(i) and (b)(i)]

For example, an industrial plant accident pollutes a lake downstream from the plant. The taxpayer who carries on the industrial activity cleans up the pollution in the lake. The pollution has resulted from the income-producing activity of the taxpayer and therefore the cost of the clean-up will be allowable environment expenditure.

Site or proposed site of an income-producing activity

The site of an income-producing activity is the site which is used for that activity. It need not be owned by the taxpayer who carries on the activity. A site which is leased out or over which a licence or other right is granted by a taxpayer for the purpose of producing assessable income is a site of an income-producing activity of the taxpayer. So more than one taxpayer may use, or propose to use, a site to carry on an income-producing activity. [New subsection 82BM(2)]

Environment protection expenditure incurred on only one part of a site which a taxpayer uses for an income-producing activity will be allowable, as the definition of site includes part of a site. [New section 82BJ]

The deduction will be allowable whether the site was used in the past for the taxpayer's income-producing activity, is presently being used, or is proposed to be used in the future. [New paragraphs 82BM(1)(a)(ii), (iii) and (b)(ii), (iii)]

The cost of acquiring a site will not be deductible as allowable environment expenditure. A taxpayer must hold an interest in a proposed site of an income-producing activity before the taxpayer can carry out an eligible environment protection activity on that site. Particular costs may be deductible under other provisions of the income tax law, however. [New subsection 82BN(1)(a)]

Pollution of or waste on a site

Tests carried out by a taxpayer to see if a site is contaminated and to discover the nature of the contaminants for the purpose of deciding what environment action to take will be environment activities. The cost of these will be deductible where the necessary link with the taxpayer's income-producing activity exists. [New subparagraphs 82BM(1)(a)(ii) and (b)(ii)]

Pollution or waste sourced on a site

Pollution or waste which is widespread may have its source on a site used by a taxpayer for an income-producing activity. For example, chemicals in the soil of the site of a taxpayer's business may have leached into other sites. The taxpayer will be entitled to a deduction for expenditure incurred in cleaning up those other affected sites. A taxpayer will also be entitled to a deduction for measures taken on the site of his or her income-producing activity to prevent pollution of other sites, for example an emergency dam wall. [New subparagraphs 82BM(1)(a)(iii) and (b)(iii)]

More than one person may be in a position to carry out an eligible environment protection activity on a particular site. Of course, a deduction will only be available to the person who actually incurs the clean-up expenditure. For example, A may earn assessable income from leasing a site. The tenant, B, may earn assessable income from a business conducted on that site. If the site is polluted already or if pollution of the site results from the business conducted by B, either A or B will be able to carry out eligible environment activities to clean up the site. [New section 82BM]

Site on which the predecessor of the taxpayer carried on a business activity

Where a taxpayer acquired his or her business from a person who carried on that business on another site, the taxpayer will be eligible for a deduction for eligible environment activities in relation to pollution of or waste on the site on which the predecessor of the taxpayer carried on the business (the "old site"). The taxpayer will be eligible for the deduction whether the old site was used by the person who sold the business to the taxpayer (the immediate predecessor), or by a predecessor of that person. [New subparagraphs 82BM(1)(a)(iv) and (b)(iv) ]

Similarly, the taxpayer will be eligible for a deduction for eligible environment activities in relation to pollution or waste sourced on the old site of the business. [New subparagraphs 82BM(1)(a)(v) and (b)(v)]

This deduction applies in strictly limited circumstances. The taxpayer must be carrying on an income-producing activity, on a new site, which consists of the carrying on of a business by the taxpayer. This is narrower than the broad meaning given to income-producing activity in the rest of the amendments. Further, the business must have been acquired by the taxpayer from another person who carried on the business on the old site, or had a predecessor in the business who did so. [New paragraphs 82BM(3)(a), (b), (c)]

Apart from the change of site, the taxpayer's business must be the same, or substantially the same, as that carried on by the predecessor (or, as the case requires, the predecessor's predecessor) - the person who carried on the business on the old site. Evidence of this will include where the taxpayer carries on the same activities as the predecessor, using assets and goodwill purchased from the predecessor, and operates under the same business name. [New paragraph 82BM(3)(d)]

For example, B acquires a textile business called Cloth Co. from A. B continues to operate Cloth Co. but on a different site from the one A used. The old site of Cloth Co. is polluted by chemicals that were used in the textile business. B is entitled to a deduction for allowable environment expenditure incurred cleaning up the old Cloth Co. site.

Suppose C then acquires Cloth Co. from B and continues to operate it on the new site. C is also eligible for a deduction for cleaning up the old Cloth Co. site.

Expenditure on plant, equipment, buildings, structures and structural improvements

Plant, equipment, buildings, structures and structural improvements used for eligible environment activities will be treated as if they had been used for the purpose of producing assessable income. [New subsection 82BR(1)]

Depreciation of plant and equipment

Expenditure incurred on plant or equipment used by a taxpayer for eligible environment activities will not be deductible as allowable environment expenditure in the year of income in which it was incurred. [New subsection 82BN(2)]

However, expenditure incurred on or after 19 August 1992 on such plant or equipment will be depreciable under section 54 of the Act as if the property was used for the purpose of producing assessable income of the taxpayer. [New subsection 82BR(1)]

Amortization of buildings and structures

Capital expenditure on constructing buildings, structures and structural improvements which are used by a taxpayer for eligible environment activities will not be deductible as allowable environment expenditure in the year of income in which it was incurred. Similarly, a deduction will not be allowed (as allowable environment expenditure) for expenditure on extensions, alterations or improvements to these items. [New paragraphs 82BN(1)(b) and (c)]

Buildings, structures and structural improvements used on or after 19 August 1992 for eligible environment activities will be taken to be used to produce assessable income of the taxpayer. Expenditure on acquiring or constructing such property on or after 19 August 1992 will qualify for amortization under section 54, Division 10C (traveller accomodation) or Division 10D (capital improvements on certain buildings and structural improvements) of the Act if the other requirements of those provisions are satisfied. [New subsection 82BR(1)]

This applies to structural improvements which are earthworks that are reasonably likely to require replacement, cannot be economically maintained for an indefinite period, or are integral to the construction of a building.

The same treatment will be accorded expenditure on extensions, alterations or improvements to a building, structure or structural improvement incurred for environment purposes. [New subsection 82BR(1)]

For example, a new, specially designed filter is added to a factory chimney to filter out solid particles to prevent pollution. The filter, as an item of plant or a structural improvement, will be depreciable in the normal way.

Deductions for depreciation and amortization are limited by any provision of the Act that expressly provides that a particular use of property is not to be taken to be for the purpose of producing assessable income. [New subsection 82BR(2)]

environment earthworks

An environment earthwork is an earthwork which is constructed as the result of carrying out an eligible environment protection activity, is permanent and is not integral to the construction of a building. [New subsection 124ZFC(1)]

Unlike the earthworks discussed above, environment protection earthworks are earthworks that are not reasonably likely to require replacement, can be economically maintained in reasonably good order and condition for an indefinite period, and are not integral to the construction of a building. They therefore do not qualify for amortization under the existing law (section 124ZFB).

An environment earthwork will be amortized under Division 10D as if it were a building. [New subsection 124ZFC(2); subsection 124ZF(1)]

Expenditure incurred on or after 19 August 1992 on the construction or extension, alteration or improvement of an environment earthwork will be eligible for amortization. [New subsection 124ZFC(3)]

For example, a permanent earth embankment constructed to prevent noise pollution from an industrial plant will be amortized over 40 years.

Where an earthwork is actually part of a process of waste treatment or clean-up, it will still be deductible in the year of income in which the expenditure was incurred.

For example, the cost of treating contaminated soil by piling it in mounds, controlling the temperature and moisture content and introducing bacteria capable of digesting the contaminant (later placing the treated soil elsewhere) will be allowable environment expenditure. This is because such work is not considered to produce a structural improvement. [New subsection 82BN(1)]

Repairs

Repairs to plant or equipment used in an eligible environment activity will be deductible in the year of income in which the cost is incurred. The cost of replacing a worn part of an item of plant or equipment with its modern, environmentally friendly equivalent will be deductible as a repair (section 53). However, where the replacement amounts to an improvement to the plant or equipment it will be depreciable at the relevant rate because the property is used for an eligible environment protection activity.

Record-keeping requirements

There are no specific record-keeping requirements in the amendments. Taxpayers will be expected to maintain the records necessary to demonstrate that expenditure is incurred for environment purposes.

Most taxpayers will maintain records for their own purposes of types and levels of pollution or waste which result from their business activities, and of the methods and costs of dealing with these emissions. These could be used to substantiate a claim for deduction of allowable environment expenditure.

Where a taxpayer proposes to carry on an income-producing activity, the taxpayer should have records of the types and quantities of pollution or waste likely to result and of the mechanisms and plant needed to control or manage this pollution or waste. These records could be used to substantiate claims for pollution prevention measures or waste management expenses incurred before commencement of the income-producing activity.

Bonds and security deposits

Environmental bonds or securities of any description deposited or paid by a taxpayer will be excluded from deduction under the amendments. [New paragraph 82BN(1)(d)]

Therefore, if a company is required by a government authority to contribute a sum of money to a fund for environmental disasters, this payment will not qualify as allowable environment protection expenditure. It may in some circumstances be deductible under another provision of the Act.

Compensation payments for environmental damage will not qualify as allowable environment expenditure under the amendments. Such payments may be deductible in certain circumstances under another provision of the Act.

Limits on the Deduction for Allowable Environment Protection Expenditure

Provision of last resort

Deductions for expenditure on environment activities that would qualify for deduction under any other provision of the Act will be allowable under that provision and not under the amendments. For example, the cost of an environment protection activity which is also expenditure necessarily incurred in carrying on a business will qualify for deduction under section 51 of the Act and not under new Subdivision CA. [New subsection 82BL(3)]

Expenditure on a study to determine, for example, the quantity and type of pollutants which will be produced from a process used in a proposed business may qualify as allowable environment expenditure. Such expenditure may also be environmental impact expenditure. In this case, it will be deductible over 10 years or the life of the project under Division 3 Subdivision C of the Act, and will be excluded from allowable environment expenditure. [New subsection 82BL(2)]

Limits on Section 51

Where a provision of the Act limits the operation of section 51, the provision will also apply to limit the operation of new Subdivision CA. [New subsection 82BK(2)]

For example, certain costs which would be deductible under the environment measures may be associated with a leveraged lease arrangement between the taxpayer and a tax-exempt body. If these costs were deductible under section 51 of the Act, the deductions would be prevented or restricted by section 51AD. This limitation will also apply to environment expenditure under the amendments.

Recoupment

Where a taxpayer receives or becomes entitled to receive:

·
a grant to carry out eligible environment activities; or
·
any recoupment for expenses incurred on eligible environment activities,

then no deduction will be allowable for the expenditure if the grant or recoupment is not included in the taxpayer's assessable income. [New subsection 82BP(1)]

The test as to the extent to which a payment constitutes a recoupment or grant in respect of allowable environment expenditure is an objective test. [New subsection 82BP(2)]

An amendment can be made at any time to disallow a deduction previously allowed to the taxpayer where a grant or recoupment is made. [New subsection 82BP(3)]

Transactions not at arm's length

Where a deduction under the amendments arises from a transaction under which the taxpayer and another party are not dealing at arm's length and the amount of the expenditure incurred is not reasonable, the deduction will be limited to the amount which would have been incurred had the parties been dealing at arm's length. [New section 82BQ]

For example, if a manufacturing company engages a related company to clean up a site polluted by the manufacturing process and pays double the usual rate because the related company is in financial difficulties, the deduction allowable to the manufacturing company will be limited to the amount which would be reasonable had the parties been trading at arm's length.

Research and Development Expenditure

Summary of proposed amendments

Purpose of amendment: This Bill will amend the provisions of the Income Tax Assessment Act 1936 (the ITAA) relating to the research and development (R&D) tax concession to:

(a)
retain indefinitely the deduction for the research and development expenditure at the rate of 150 per cent;
(b)
remove the $10 million limit applying to pilot plant; and
(c)
deny a deduction for R&D expenditure to companies involved in syndicates, or other financing schemes, which include government bodies or their associates where investors are guaranteed a return on their investment.

Date of Effect:

Amendment (a):
the 1993-94 year of income;
Amendment (b):
plant acquired or commenced to be constructed on or after 19 August 1992:
Amendment (c):
companies which are registered or seeking registration under sections 39J or 39P of the Industry Research and Development Act 1986 on or after the 19 August 1992.

Purpose of amendment: This Bill will amend the Industry Research and Development Act 1986 (the IR&D Act) to provide the Industry Research and Development Board with:

(a)
increased discretionary power over finance schemes to declare such a scheme to be an ineligible finance scheme;
(b)
the authority and duty to develop and publish guidelines outlining the criteria by which this discretionary authority will be exercised in relation to finance schemes; and
(c)
the authority to deny registration to a company, or to issue a certificate that will have the effect of denying tax deductibility to R&D expenditure, where it is of the opinion that an ineligible finance scheme exists in relation to particular research and development activities.

Date of Effect: 19 August 1992 - except for companies which:

·
were or are registered under section 39J or section 39P; or
·
applied for registration under either section 39J or section 39P; or
·
applied for or were given an advance eligibility ruling;

between 31 March 1992 to 10 June 1992 (ie, within the "interim period").

Background to the legislation

The R&D concession is available to an eligible company for expenditure incurred, on or after 1 July 1985, on qualifying research and development in Australia. The concession is in the form of a 150 per cent deduction for expenditure on qualifying R&D activities. The concession was to be reduced to 125 per cent for expenditure incurred after 1 July 1993.

Expenditure on the acquisition or construction of plant (including pilot plant) that is used exclusively on R&D activities qualifies for deduction at the increased rate (ie, 150 per cent). The cost of such plant, increased by the relevant acceleration factor, is deductible over three years, subject to the R&D expenditure threshold.

Pilot plant is plant which is used for experimental purposes and which is not for use in commercial production (subsection 73B(1)). However, the cost of pilot plant that can be taken into account for the purposes of the R&D concession is limited to $10 million (subsection 73B(6)). Expenditure on pilot plant that exceeds $10 million can be depreciated under other provisions of the Act after the three years. That is, the cost of the pilot plant in excess of $10 million is depreciable after the deduction has been allowed under the R&D concession.

Under the R&D tax concession, syndicates can be formed to finance R&D expenditure. Many syndicates are structured in a way that ensures that investors are guaranteed at least a return on their original investment. Where research funded by a syndicate is undertaken on the basis that the investors are not at risk, the allowable deduction for such expenditure is limited to 100 per cent of that expenditure (section 73CA).

Where a tax-exempt researcher undertakes R&D activities for a syndicate and guarantees the syndicate a return on its investment, the syndicate derives a tax benefit because of the tax-exempt status of the researcher.

Explanation of proposed amendments

Amendments to the Income Tax Assessment Act 1936

R&D expenditure deductible at the rate of 150%

Under the proposed amendments qualifying R&D expenditure incurred after 30 June 1993 will be deductible at the maximum rate of 150 per cent indefinitely. This will be achieved by amending:

·
the definition of "deduction acceleration factor" (the term used to describe the factor by which qualifying expenditure on R&D activities is multiplied to determine the amount of the deduction allowable) (subsection 73B(1)); and
·
provisions relating to deductions allowable for contracted expenditure (subsection 73B(13)) and plant first used before the 1993-94 year of income (subsection 73B(15B)).

[Subclause 28(1)]

Pilot plant

The $10 million limit on the cost of an item of pilot plant used exclusively for R&D purposes (subsection 73B(6)) will be removed. Thus pilot plant will qualify for the R&D concession on the same basis as other plant where the pilot plant:

·
is acquired under a contract entered into on or after 19 August 1992; or
·
the construction of which has commenced on or after 19 August 1992; or
·
a contract was entered into on or after 19 August 1992 for the construction of pilot plant;

In the case of pilot plant acquired before 19 August 1992 the cost of the pilot plant will continue to be taken to be $10 million for the purposes of the R&D concession [Subclause 28(2), new subsection 73B(6)].

Government bodies and guaranteed returns

The Bill will amend the Principal Act to deny a company a deduction for expenditure on R&D activities that would otherwise be allowable (section 73B) where the following conditions are satisfied:

·
the company has entered into a contract with the Commonwealth, a State or Territory or an authority of the Commonwealth, of a State or of a Territory or an associate of the above; and
·
under the contract the company will receive a guaranteed return (section 73CA), directly or indirectly, from the Commonwealth, a State or Territory or an authority of the Commonwealth, a State or a Territory or an associate of the above [Clause 30, new section 73CB].

This new section will be construed as part of section 73B, which is the provision under which the R&D tax concession is provided [Clause 30, new subsection 73CB(1)].

Paragraph 73CB(2)(b) and subsection 73CB(3) tie in the concept of not being at risk (for the contracting company) to the same criteria as those under subsection 73CA(5). Broadly, a company will not be at risk if it could reasonably have expected a return or reimbursement for all or part of its investment [Clause 30, new paragraph 73CB(2)(b) and subsection 73CB(3)].

Universities, other educational institutions and research institutions that are owned by the public sector, will be taken to be authorities of the Commonwealth, a State or Territory, and therefore will be a government body, for the purposes of determining whether a deduction for R&D expenditure is allowable [Clause 30, new subsection 73CB(4)].

The meaning of the term "associate" (defined in section 73B(1) to have the same meaning as in 26AAB) will be extended to government bodies. Hence, Commonwealth, State and Territory authorities will be taken to be associates of their respective governments ( which include government departments, commissions etc) and of other authorities of the same government. In the same way, the respective governments will be associates of the respective Commonwealth, State of Territory authority [Clause 30, new subsection 73CB(5)].

For the purposes of the R&D tax concession "government body" means the Commonwealth, State or a Territory government, government department or commission etc., or an authority (extended definition) of the Commonwealth, a State or a Territory [Clause 30, new subsection 73CB(6)].

The Commissioner is to be able to go back at any time and amend an assessment under section 170 of the ITAA where the operation of section 73CB is attracted [Clause 31].

Section 73CB will apply on or after 19 August 1992 to companies making an application under section 39J or 39P of the IR&D Act seeking registration. Also, it will apply to companies making an application or registered prior to 19 August 1992 under section 39J or 39P and who enter into, or vary, a finance scheme on or after 19 August 1992 [Clause 32].

If a government body, or an associate of a government body

·
undertakes contract research and development activities for a company or companies on an arms length basis; and
·
there is no direct or indirect causal link between the government body and the guaranteed return;

new section 73CB will not operate to deny the deductions otherwise allowable for qualifying R&D expenditure. Even though new section 73CB will not automatically apply to the particular arrangements to deny the deduction, the arrangements will be required to satisfy the eligibility requirements contained in the new guidelines (see later notes under "guidelines") relating to finance schemes to be developed by the I R&D Board.

In summary, where any guarantee (including a guarantee in relation to core technology expenditure) comes into existence or is varied on or after 19 August 1992, and the researcher is a government body or an associate of a government body, then the company or companies involved in the R&D financing arrangement would be denied tax deductions under section 73B in relation to the R&D activities subject to the guarantee. (The term "guarantee is used in the sense of the company not being "at risk" in respect of the expenditure in the terms of section 73CA.) However, these provisions do not affect the deductibility of any expenditure or depreciation under other provisions of the Act.

Example

A government body (which may or may not be taxable) contracts to do R&D for a private syndicate on or after the 19 August 1992. It sells core technology to the syndicate. The government body enters into an agreement that if the R&D it performs is not successful it, or an associate, must buy back the core technology as well as any 'value added' to the core technology. The price at which the core technology is bought back need not be the entire amount of R&D expenditure incurred by the syndicate. This arrangement would attract the operation of the new section 73CB and the whole of the R&D expenditures claimed (core technology, contract expenditure etc.) would not be allowable under section 73B.

Deduction not allowable for activities not approved by the Board

Section 39P of the IR&D Act authorises the IR&D Board to jointly register two or more companies in respect of a year of income in relation to a proposed project or projects. Where the Board refuses to register the company no deduction is allowable for the R&D expenditure (section 73B(10) of the ITAA).

Under the amendments joint registrations of companies under section 39P of the IR&D Act will relate to specific projects. Hence when the Board refuses to register a particular project, the other projects that are registered or to be registered by a company will not be affected by one project's disqualification [Paragraph 28(3)(a), new subsection 73B(10)] .

Effect of a certificate issued to the Commissioner by the IR&D Board.

The IR&D Board has the authority (under the IR&D Act) to issue a certificate to the Commissioner (under section 39M) where the Board is of the opinion that the company or jointly registered companies have not exploited the R&D results

·
on normal commercial terms; or
·
in a manner that is of benefit to the Australian economy; or
·
the R&D activities do not have adequate Australian content.

Where a certificate is issued to the Commissioner, a deduction for expenditure in relation to R&D activities referred to in the certificate is not allowable (subsection 73B(33) of the ITAA).

Under the proposed amendments to the IR&D Act, the IR&D Board will be able to issue a certificate to the Commissioner under a new provision, section 39MA, to disallow deductions for R&D expenditure where an ineligible finance scheme (see later notes) exists in relation to those R&D activities. The deduction will be able to disallowed on the basis of a certificate issued under section 39MA of the IR&D Act (subsection 73B(33B)). Such deductions will not be allowable for all the R&D activities described in the certificate issued by the Board. The deductions will not just be disallowed from the time the company or companies were given notice by the Board [Paragraph 28(3)(b)].

Amendments to the Industry Research and Development Act 1986

Ineligible finance schemes

When a company or companies seek registration the Board will determine, at the time of registration, whether or not the company or companies have entered into or carried out an ineligible finance scheme in relation to research and development activities. The Board will deny registration where there was or is such a scheme [Clause 101]

An ineligible finance scheme is a finance scheme that the IR&D Board has determined to be ineligible. A company or companies that is a party to such a scheme will not be able to be registered, or in the case of a company that is already registered, a certificate may be issued to the Commissioner of Taxation that will have the effect of denying tax deductions for any R&D expenditure incurred [Clause 100, new section 39MA] .

Guidelines

In making its decision the Board will have regard to finance scheme guidelines to be formulated.

The guidelines which will also confer particular functions and powers on the Board will be contained in a disallowable instrument under the Acts Interpretation Act 1901 and will published in the Commonwealth of Australia Gazette. They will be made available on request, without charge, to any eligible company. The guidelines will be developed in consultation with interested parties, within 90 days of the commencement of the provision [Clause 99, new subsection 39EA(2)] .

The need for guidelines, as opposed to the inclusion of the provisions within the legislation itself, reflects the complexity and diversity of the finance schemes currently operating in the market. Further, even were the legislation to delineate exhaustively the type of schemes currently considered unacceptable, financiers could relatively easily and quickly develop alternative schemes to circumvent the provisions. The result would be a continual process of "catch-up" legislative amendments.

Development of guidelines that also confer certain discretionary powers on the Board will act as a disincentive to companies to enter into ineligible finance schemes. At the same time, the process of consultation with interested parties prior to the drafting of the guidelines will ensure that all parties clearly understand the limits of such schemes which the Board deems to be consistent with the spirit and intent of the legislation and therefore acceptable.

The guidelines will identify a range of criteria by which both eligible companies and the Board will be able to determine whether or not particular finance schemes constitute ineligible finance schemes for the purpose of the legislation [Clause 99, new subsection 39MA(3)] .

These criteria will include but not be limited to:

·
the form and substance of the agreements entered into;
·
the intent of the parties entering into the agreement;
·
the nature of the R&D to be undertaken as part of the syndicate;
·
the likelihood that deductions under section 73B will be derived because there are guaranteed returns and a government body is involved, under new section 73CB (see above for discussion);
·
the financial, legal and administrative arrangements to be entered into;
·
the arrangements for commercialisation; and
·
the experience of the commercialisation agency.

Certificate issued by the Board

Where the Board is of the opinion that an ineligible finance scheme exists then the Board may issue a certificate to the Commissioner stating that it is of that opinion [Clause 100, new subsection 39MA(1)] .

The certificate referred to above will have the effect of deeming the concession never to have been allowable in respect of the research and development activities specified in the certificate. (See earlier notes under "Effect of a certificate issued by the Board") This mechanism will allow the Board to be selective in the application of its discretionary authority in those circumstances where a company may have entered into unacceptable arrangements with respect to only some of its activities.

The eligibility or otherwise of finance schemes will be assessed by the Board at the registration stage. This will increase the degree of certainty for both investors and researchers before funds are fully committed. It will not in any way restrict the ability of the Commissioner of Taxation to exercise his authority under the ITAA.

The new provisions will encourage both syndicated R&D as well as other forms of structured finance arrangements to focus more on commercially oriented R&D, to ensure that commercialisation is undertaken by those experienced in the technology and with a proven track record in commercialising technology and that the route to market is both known and established at the outset.

As with other decisions formalised in certificates issued by the Board, a certificate under new section 39MA will be subject to internal review and to review by the Administrative Appeals Tribunal [Clauses 102 and 103] .

The Board is also required to provide notice in writing to the company or companies in such circumstances advising them of their rights of appeal [Clause 104] .

Transition period

Because of the nature of the administrative processes associated with syndication in particular, and the fact that the Government announced an amnesty period relating to syndicated proposals that were lodged and under active consideration by the Board, the legislation also defines the manner in which the new provisions are to apply [Clause 105].

The proposed amendments to the IR&D Act will not apply to existing finance arrangements where a company or companies:

·
applied for an advance eligibility ruling under section 39P(1) in the period 31 March 1992 to 10 June 1992 (interim period);
·
received an advance eligibility ruling from the Board in the period 31 March 1992 to 10 June 1992; or
·
were registered under subsection 39P(3) before 10 June 1992.

[Subclauses 105(2) and (3)]

In all other circumstances, the Board will be able to make decisions in relation to ineligible finance schemes [Clause 105] .

The Bill makes it clear that the IR&D Board has power to jointly register companies in relation to a particular project or projects. Registration is granted by the Board in accordance with the provisions of section 39P(3) for a specified year or years of income [Clause 106] .

Deductibility of interest on borrowings to finance superannuation contributions and life insurance premiums

Summary of proposed amendments

Purpose of amendment: To ensure that an income tax deduction is not allowable for interest and other borrowing expenses incurred on loans used to finance personal superannuation contributions and certain life insurance premiums.

Date of Effect: From 19 August 1992

Background to the legislation

Superannuation Contributions

Allowing a deduction for interest on borrowings undertaken to finance superannuation contributions allows people to access the superannuation tax concessions without having to use their own savings. This is inconsistent with the Government's policy objective of encouraging greater savings by future retirees for their own retirement.

In addition, allowing a deduction for interest on moneys borrowed to finance personal superannuation contributions creates scope for taxpayers to obtain a tax advantage through taxation arbitrage. (This can arise where there is a difference between the tax rates applying to the deduction for interest and the assessable income earned from investing the money in the superannuation fund.)

Life Insurance Policies

Under the existing tax law a deduction is generally not allowable under subsection 51(1) (or any other provision) for interest on moneys borrowed to pay premiums on life insurance policies. This is because the life insurance policy is either of a private or capital nature and because the connection between the payment of interest and the possibility of earning assessable income is too remote. (Bonuses derived from such policies may only be considered to be assessable income if the policy is redeemed within 10 years). The Commissioner considers this to be the case even where the premiums paid on the life insurance policy contain an investment component. (The Commissioners views on this issue are clearly set out in Taxation Ruling No. IT 2504.)

There is an exception to this general rule that interest on moneys borrowed to pay life insurance premiums is not deductible. The exception is where a loan is used to finance premiums on a life insurance policy which does not have an investment component (ie they are pure risk policies) where the benefits of the policies would constitute assessable income. For example, employers can claim a deduction for premiums paid on (stand alone) term life insurance policies taken out on key employees; the benefits from such a policy are assessable income in the hands of the employer.

An employer may also be able to claim a deduction for the RISK COMPONENT of premiums in a "split dollar arrangement" where the proceeds of that policy would be assessable income. (The term "split dollar arrangement" is explained in the Glossary.)

Explanation of proposed amendments

Superannuation Contributions

The Bill proposes to insert new section 67AAA into the Act. Subsection 67AAA(1) will deny a deduction for " financing costs" (see the meaning below) in relation to superannuation contributions paid to a superannuation fund by a taxpayer for the purpose of providing superannuation benefits for the taxpayer or another person (or for the dependants of the taxpayer on the other person) unless those contributions are deductible under existing subsection 82AAC(1) of the Act.

Broadly, existing subsection 82AAC (1) allows a deduction for contributions made by a taxpayer to a superannuation fund for the purpose of providing superannuation benefits for an eligible employee or for the dependants of an eligible employee. The meaning of " eligible employee" and " dependant" is set out in the Glossary at the end of this chapter.

Essentially the amendments will deny tax deductions for personal superannuation contributions. However, employers will still be able to claim a tax deduction for contributions to a superannuation fund for their employees (including the directors of a company or the employees of a partnership).

What expenses are effected by the amendment?

This amendment only applies to a " financing cost" incurred on a loan (or any other financing arrangement) entered into after 18 August 1992 or a loan resulting from a "rollover" after 18 August 1992 of the whole or part of a previous loan.

The term " financing cost" is defined in subsection 67AAA(3) to include expenditure incurred in obtaining finance to pay superannuation contributions such as interest or a payment in the nature of interest and borrowing expenses.

A loan will be taken to be the result of a "roll over" if the loan exists on or before 18 August 1992 and it is renewed or a new loan is granted in its place after 18 August 1992.

If the period of a loan which existed prior to 19 August 1992 is extended on or after that date then any financing costs incurred in respect of the period of the loan extension are not deductible.

Example

A self employed business woman borrows money to pay superannuation contributions for herself and her employees. The interest on this loan would only be deductible to the extent that it was incurred to fund the employee's superannuation contributions. The portion of interest which related to her personal contributions would not be an allowable deduction.

Would a contract for a loan which was made prior to 18 August 1992 be caught by these amendments if the contract contained a provision entitling the borrower to extend the loan and the borrower does so after 18 August 1992?

Once the borrower extends the loan any financing costs in relation to the extended loan will not be an allowable deduction if the loan is or has been used to pay personal superannuation contributions. This is because the loan was extended after18 August 1992.

Life Insurance Premiums

The proposed amendment relating to life insurance premiums is intended to clarify (by legislation) the Commissioner's existing view that interest and other borrowing expenses incurred on loans used to finance premiums on life insurance policies are generally not tax deductible.

New subsection 67AAA(2) will deny a taxpayer a deduction for " financing costs" (see the meaning below) in relation to premiums for a life insurance policy unless:

·
the proceeds of the policy (when paid out) would be included in the taxpayer's assessable income; and
·
the whole of the premium received by the insurer consists of a " RISK COMPONENT" in terms of section 110 of the Act.

The whole of a premium received by the insurer will consist of a " RISK COMPONENT" where the premium is received in respect of a:

·
term insurance policy; or
·
a rider or supplementary benefit attached to another policy where the sum insured is payable on death within a specified term.

Can a premium payable on a life insurance policy which contains an investment component consist wholly of a RISK COMPONENT?

Where a life insurance policy contains an investment component the whole of the premium will not consist of a RISK COMPONENT; part of the premium will consist of an investment component (in terms of section 110 of the Act). Consequently, financing costs would not be deductible if they were incurred in relation to such a premium.

What expenses are effected by the amendment?

This amendment applies to a " financing cost" incurred on a loan (or other financing arrangement) entered into after 18 August 1992 or a loan resulting from a "rollover" after 18 August 1992 of the whole or part of a previous loan.

The term " financing cost" is defined in subsection 67AAA(3) to include expenditure incurred in obtaining finance to pay life insurance premiums such as interest or a payment in the nature of interest and borrowing expenses.

A loan will be taken to be the result of a roll over if the loan exists on or before 18 August 1992 and it is renewed or a new loan is granted in its place after 18 August 1992.

If the period of a loan which existed prior to 19 August 1992 is extended on or after that date then any financing costs incurred in respect of the period of extension are not deductible.

How does this amendment alter the existing tax law?

The proposed amendment does not alter the existing tax treatment of interest and other borrowing expenses on loans taken out to finance premiums on stand alone life insurance policies (such as term insurance policies) where the benefits are assessable income; interest and other borrowing expenses will continue to be deductible in these circumstances.

Nor does the amendment alter the existing tax treatment of other life insurance policies (other than "split dollar arrangements") such as those which contain an investment component; the finance costs associated with these policies are non-deductible under the existing tax law. The Commissioner has made this clear in Taxation Ruling No. IT 2504.

These amendments will affect the tax treatment of interest and other borrowing expenses incurred in financing "split dollar arrangements" on or after 19 August 1992. At present under a split dollar arrangement, the premiums are usually split between the employer and the employee, ie. the employer finances the RISK COMPONENT and the employee finances the investment component. Because premiums on such policies are not wholly made up of a RISK COMPONENT, neither the employer or employee will be able to claim a tax deduction under the proposed amendment.

Amendments to extend the meaning of Crown leases for the purposes of the depreciation provisions

Summary of proposed amendments

Purpose of amendment: To extend the meaning of Crown lease under the plant depreciation provisions to include commercial leases, easements and other interests in land that are granted by governments or tax-exempt government authorities.

Date of effect: The amendments apply from the same time as existing measures. That is, they apply to expenditure incurred after 26 February 1992 in installing plant on Crown leases. They also apply to expenditure incurred on or before that date, based on notional written down values on 27 February 1992.

Background to the legislation

The plant depreciation provisions enable taxpayers to obtain income tax deductions for the otherwise non-deductible capital cost of plant used in income producing activities.

Taxpayers must own plant [subsection 54(1)] if they are to obtain depreciation deductions for that plant. In some instances, taxpayers may not be treated at law as the owners of plant they install on land owned by others because, owing to the degree of the plant's attachment to the land, the law treats the plant as owned by the person who owns the land.

The "One Nation" economic statement of 26 February 1992 announced that the plant depreciation provisions would be amended so that plant installed by a lessee on leased Crown land would attract depreciation allowances in the hands of the lessee.

The purpose of the amendment was to allow depreciation deductions for private sector investment in public infrastructure projects which can involve private investors installing property on Crown leases. The law at that time could inappropriately deny depreciation deductions for such investments.

Those amendments were introduced in Taxation Laws Amendment Bill (No.3) 1992, and are contained in new section 54AA. Under 54AA, persons installing plant on land over which they hold a Crown lease, and subsequent holders of the lease, are treated as owners for depreciation purposes if the law would otherwise treat them as not being the owners.

Explanation of proposed amendments

Meaning of Crown lease

The present meaning of Crown lease for depreciation purposes is the same as that under the capital gains tax provisions and means a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or Territory or a similar lease granted under a statutory law of a foreign country.

This present meaning of Crown lease for depreciation purposes is unduly restrictive because some infrastructure projects involve taxpayers installing plant on land over which they hold an interest which is not a Crown lease. Those taxpayers may be inappropriately denied depreciation deductions for some or all of their investment in the plant.

There are three issues. The first relates to the requirement under the existing definition that the lease be granted under a statutory law of the Commonwealth, a State or Territory. Many authorities, such as those responsible for the provision of water and electricity supplies for the public, issue normal commercial leases of land, not statutory leases.

The second relates to the requirement that plant be installed on leased land. Some facilities necessarily involve the installation of plant on land where only an easement, right of way, permit, etc. is held by the plant installer and operator. For instance, water pipes and electricity transmission lines are commonly installed on easements over private lands.

The third relates to the meaning of the "Crown". That expression is not defined in income tax law and so takes its meaning from the ordinary useage and understanding of it. Some Government authorities may not, by the nature of their functions, constitute the Crown.

Against that background, a new definition of "Crown lease" is to be inserted in section 54AA [New definition of "Crown lease" to replace existing definition in subsection 54AA(8)].

This new definition does not require leases to be granted under a relevant statute and so ordinary commercial leases are now covered. Further, it extends beyond leases and now covers easements and other rights, powers or privileges over or in connection with land (such as licences and "rights of way").

Also covered are "sub-interests" in land such as sub-leases and licences in relation to easements. For instance, a Commonwealth authority may hold a lease of land granted by a State and a sub-lease of that land granted by the authority would constitute a Crown lease.

Similarly, a State authority may hold an easement over private lands for the purposes of installing water or gas pipes. A licence or other right in relation to that easement granted by the authority will again constitute a Crown lease.

Finally, the concept of the Crown has been removed and replaced by the more precise concept of "eligible government body" [New subsection 54AA(7A)].

The meaning of eligible government body covers the various governments of Australia (namely, the Commonwealth, the States and Territories) and their tax exempt authorities. It also includes foreign governments and their tax-exempt authorities.

Municipal corporations and other local governing bodies are also covered as they are considered to be an emanation or an authority of the relevant State or Territory government [The Municipal Council of Sydney and the Commonwealth (1904) 1 CLR 208].

Complementary amendments

The following complementary amendments are to be made.

The expression "Crown lease" and certain cognate expressions are stated to have an extended meaning for depreciation purposes [Clause 35(a) inserts new subsection 54AA(1A)].

The expression "the lease", where ever occurring, is to be replaced with the expression "the Crown lease", to reflect the position that the new definition of " Crown lease" extends to interests in land that are not leases [Clause 35(b)].

The purpose of paragraph 54AA(2)(a) and subsection 54AA(4) is to specify that, in the relevant circumstances, the holder of a Crown lease is to be treated for certain purposes as the owner of property affixed to land which the law treats as owned by the person who owns the land. The expression "the lessor" in that paragraph and subsection is to be replaced by the expression "any other person", reflecting the fact that a person other than the person granting a Crown lease may be the owner of the land and thus the legal owner of property affixed to the land [Clause 35(c)].

Ordinarily, the words lessor and lessee respectively denote a person who grants a lease of land and a person who holds a lease of land. On the basis that a Crown lease is to include other interests in land such as easements, licences and "rights of way", those words are to have the following extended meanings [Clause 35(f)].

"Lessee" will mean the person who is the holder of a Crown lease within the extended meaning of Crown lease in subsection 54AA(8).

"Lessor" will mean the eligible government body which granted the Crown lease. To cater for instances where ownership of the relevant land has changed after the Crown lease was granted, lessor will include the new owner of the land. In cases where a Crown lease is a sub interest in land and the grantor's interest in the land has been assigned to another person, "lessor" will also include the assignee of the grantor's interest in the land.

Crown lessees to be eligible lessees entitled to deductions for capital expenditure on buildings and structural improvements

Summary of proposed amendments

Purpose of amendment: To make deductions allowable to taxpayers for capital expenditure they incur on the construction of buildings and other structural improvements on land over which they hold a Crown lease as that expression is defined for the purposes of the plant depreciation provisions.

Date of Effect: Applies where construction commences after 26 February 1992.

Background to the legislation

Capital expenditure on the construction of buildings and other structural improvements, including alterations, additions or improvements to buildings and structural improvements, is evenly deductible over 40 years at the rate of 2.5 per cent per annum under Division 10D (a higher rate of 4 per cent per annum over 25 years applies to certain industrial buildings).

Entitlement to deductions rests with owners, including eligible lessees. An eligible lessee is a person who incurs capital expenditure on the construction of a building, or structural improvement, on land over which that person holds a lease. Subsequent holders of the lease would also be treated as eligible lessees in relation to the building or structural improvement.

Explanation of the proposed amendments

Structural improvements, such as roads, bridges and tunnels, may be constructed by taxpayers on land over which they hold an easement, right of way or some other interest in the land. Under the existing provisions, they would be denied deductions because they neither own, nor hold a lease over, the land.

To be consistent with the depreciation amendments described in Chapter 10 , the concept of eligible lessee is to be extended to include persons who hold a "Crown lease". Crown lease for depreciation purposes is to include easements and other rights, powers or privileges over land, or in connection with land, where granted by a government (including foreign governments) or by a tax-exempt authority of a government. [Definition of "Crown lease", "lease" and "lessee" to be inserted in subsection 124ZF(1)]

As this amendment is principally directed to structural improvements (though not so limited), it will apply from the time when the cost of income producing structural improvements that do not qualify as depreciable plant was made deductible on the same basis as income-producing buildings; that is, where construction commenced after 26 February 1992. [Application clause 38]

Development Allowance on Property Installed on Leased Crown Land

Summary of proposed amendment

Purpose of amendment: The amendment will extend the development allowance provisions to permit the allowance in respect of capital expenditure incurred on installation of plant on leased Crown land, provided the expenditure satisfies all other existing criteria to qualify for the deduction.

Date of Effect: This amendment applies in respect of expenditure incurred by a taxpayer under contracts entered into, or in respect of construction which commenced, after 26 February 1992.

Background to the legislation

The development allowance legislation was introduced into the Income Tax Assessment Act 1936, through Taxation Laws Amendment (No. 3) Act 1992, as part of the "One Nation" policy. The development allowance gives a tax deduction of 10% of capital expenditure on plant and equipment acquired by taxpayers for use in conducting large Australian projects, costing $50 million or more, which meet certain other criteria. The allowance is in addition to the depreciation of the capital expenditure.

Subsection 82AQ(3) establishes an ownership test, as a pre-condition for the development allowance deduction. Under existing law the deduction may be denied to taxpayers who incur capital expenditure installing units of property on leased land. Depending on the degree of attachment of the property to the land, the law may treat the lessor as owner of the property - not the taxpayer who incurs the expenditure.

The depreciation provisions of the income tax legislation also contain an ownership test. Those provisions were revised, in the same legislation in which the development allowance was introduced, to extend the depreciation deduction to taxpayers who were otherwise denied the deduction for plant installed on leased Crown land - by treating them as if they are the owners of the plant. Those provisions are further revised in other proposed amendments contained in this Bill.

The expansion of the depreciation provisions should have been extended to the development allowance. At present, taxpayers who incur capital expenditure installing property on leased Crown land, which would otherwise meet the development allowance provisions, could qualify for a depreciation deduction but be denied the development allowance - due to different ownership tests. The proposed amendment will ensure the same ownership test is applied for depreciation and for development allowance purposes. That test will be as revised by this Bill.

Explanation of proposed amendment

The effect of the amendment is that lessees of leased Crown land will be treated as owners of property installed on that land, for development allowance purposes, where they are treated as the owners for depreciation purposes.

The same treatment will be assured by :

·
providing that where a taxpayer is the lessee of a Crown lease and is treated by the application of section 54AA as the owner, for depreciation purposes, of property installed on leased Crown land, such a taxpayer will also be treated as the owner of that property under the development allowance provisions; and
·
defining terms in the new development allowance provision to have the same meaning as in section 54AA.

The extended meaning of "Crown lease" (as proposed in Clause 35) and the term "lessee" (proposed to be inserted by Clause 35), in section 54AA, will apply to the extended development allowance provision. For further explanation, see the comments above on Division 11 of this Bill.

As the effective owner of such unit of property, a taxpayer who is the lessee of Crown land will not now be denied the development allowance deduction solely on ownership tests. Taxpayers must still satisfy all other existing provisions of the development allowance legislation to qualify for the deduction, including the requirement to incur expenditure on a new unit of eligible property and hold a pre-qualifying certificate in respect of such plant expenditure.

The amendment applies in accordance with the original development allowance provisions, ie. in respect of expenditure incurred by a taxpayer under contracts entered into, or in respect of construction which commenced, after 26 February 1992.

Research and Development Rollover Relief

Summary of proposed amendments

Purpose of amendment: These amendments will provide for a deferral (or "rollover") of assessable adjustments that could otherwise arise from disposals of property to which the research and development provisions have applied.

Date of Effect: This rollover relief will apply where capital gains tax rollover relief is obtained on the disposal of property between eligible companies, applicable to disposals occurring after [date of introduction] .

Background to the legislation

Concessional deductions are available for expenditure incurred by eligible companies on research and development (R&D) activities - sections 73B, 73C, 73CA, proposed 73CB and 73D of the Income Tax Assessment Act ("The Act").

The concession presently consists of:

·
outright deductions for "core technology" expenditure - broadly, expenditure incurred in acquiring knowledge for use in R&D activities;
·
immediate deductions for 150% of expenditure incurred in respect of R&D work performed by approved research agencies on behalf of an eligible company;
·
immediate deductions for up to 150% of expenditure incurred by eligible companies in respect of their R&D activities;
·
a three year write-off of up to 150% of the cost of plant used exclusively in R&D activities; and
·
a three year write-off of the cost of buildings used exclusively in R&D activities where either acquired, or commenced to be constructed, before 21 November 1987.

A disposal of property to which the R&D provisions have applied can result in assessable adjustments.

On the disposal of plant, any consideration for the disposal is compared with the written down value of the plant (broadly, cost less the portion of cost for which deductions have been claimable). The excess of the disposal consideration over written down value is assessable up to the value of the difference between cost and written down value (that is, the portion of the plant's cost which has been allowed as deductions).

In the case of buildings, a disposal of a building within 5 years of it first becoming eligible for deductions can result in a disallowance of all previously allowed deductions. Disposals occurring after 5 years can lead to assessable adjustments similar to those for plant.

Finally, any consideration received on a disposal of either the results of R&D activities or core technology is assessable.

In the case of plant and buildings, taxpayers cannot avoid the operation of the R&D disposal rules by transferring the property below market value. Where that occurs, anti-avoidance rules treat the disposal as occurring at market value, ensuring that the appropriate amounts are brought to account as income.

Similar outcomes can occur on the disposal of property for which deductions have been allowed under other capital allowance provisions which permit deductions for the capital cost of income producing property, eg. plant depreciation, the mining concessions, etc.

However, under those other capital allowance provisions, companies can obtain a deferral of the disposal rules where there is no change in the real ownership of the property, as occurs when the disposal is between companies within a wholly-owned company group. This deferral or "rollover relief" applies when capital gains tax (CGT) rollover relief is obtained for the disposal.

Explanation of proposed amendments

CGT derived R&D rollover relief

A form of rollover relief, similar to that available under the other capital allowance provisions, is to apply under the R&D provisions to disposals of plant, buildings, and certain industrial property where the disposals are between companies within a wholly-owned company group and CGT rollover relief is obtained under section 160ZZO of the Act. No separate election will be required - the rollover relief will apply automatically where CGT rollover relief is obtained.

The broad effect of this rollover relief is to treat disposals as if they had not occurred and treat the transferor company and transferee company as if a single taxpayer.

There will be no claw back of previously allowed deductions on the disposal of plant or buildings for which R&D deductions have been allowed and the transferee company will inherit the transferor company's deduction entitlements in respect of any undeducted cost of the property.

As a safeguarding measure, the transferee will be taxable on any subsequent recoupment of deductions allowed to the transferor.

Similarly, any consideration receivable on the disposal of either the results of R&D activities or core technology will not be assessable. However, the transferee will be assessable on any consideration receivable on a subsequent disposal of such property.

This R&D rollover relief will be available successively; that is, the "deferral and inheritance" mechanism described above will occur whenever the relevant CGT rollover relief is obtained.

A more detailed explanation of how R&D rollover relief works is contained in the appendices to this chapter.

Record keeping

R&D rollover relief will apply whenever a valid election is made for CGT rollover relief and a separate election will not be needed.

Transferors will need to provide transferees with such information as is necessary for transferees to work out how the rollover provisions will apply to them. For example, on the disposal of an item of plant, a transferor would need to provide the transferee with details of the item's original cost and its written down value.

That information needs to be given within six months of the end of the year of income in which the rollover disposal occurs. Transferees need to keep that information for 5 years after the date on which they dispose of the asset or it is lost or destroyed. [Amendment to existing subsection 262A(4AC), Clause 43]

Commencement date

The amendments are to apply from the same time as the existing capital allowance rollover provisions.

Those other capital allowance rollover relief provisions provided an optional form of rollover relief for disposals that occurred after 6 December 1990 (the date the concession was announced) and on or before 19 December 1991 (the date of introduction of the amending legislation).

Under that option, companies could elect for rollover relief to apply to intra group company disposals irrespective of whether CGT rollover relief was obtained under section 160ZZO.

Disposals occurring after 19 December 1991 (the date those measures were introduced) automatically obtain rollover relief where CGT rollover relief applies.

A similar optional form of rollover relief is to be available for disposals of the type to which these amendments relate that occurred after 6 December 1990 and on or before [date of introduction] .

That optional rollover relief can be obtained by the transferor and transferee companies making a written election within 6 months of the later of the end of the transferor's income year in which the disposal occurred or [date of introduction] .

Such elections do not need to be lodged but should be retained until the end of 5 years after the date on which the property is disposed of or lost or destroyed.

Assessments affected by an election will be amended on receipt of an application from the relevant taxpayer (that follows from existing law - subsection 170(6) of the Act). [Transitional clause 45]

For disposals occurring after [date of introduction], R&D rollover relief will automatically apply where section 160ZZO CGT rollover relief is obtained. [Application clause 44]

Appendices To Chapter 13

Detailed explanation of R&D rollover relief

Appendix 1

Research and development rollover relief - plant

Summary of the existing law

A1.1 Expenditure on plant used exclusively in R&D activities is deductible over three years, commencing in the first year of that exclusive use. Broadly, annual deductions are calculated as one third of expenditure incurred in acquiring or constructing plant (qualifying expenditure), increased by a concessional component of up to 50% depending on the annual level of R&D expenditure.

A1.2 If the property is pilot plant acquired or commenced to be constructed before 20 August 1992 and its cost exceeds $10M, the amount of qualifying expenditure is limited to the first $10M. The excess cost would be deductible under the plant depreciation provisions in years subsequent to the initial three year deduction period where the pilot plant is used for income-producing purposes. This $10M limit does not apply to pilot plant acquired or commenced to be constructed after 19 August 1992.

A1.3 A cessation of exclusive R&D use of plant in the first three years terminates an entitlement to further R&D deductions. However, the undeducted portion of the cost of the property would be depreciable under the plant depreciation provisions if used in income-producing activities.

A1.4 Balancing adjustments may arise on the disposal of plant for which R&D deductions have been allowed. If deductions have also been allowed under the plant depreciation rules, then those rules (section 59 of the Act) would apply to the disposal. If the disposal was between companies within a wholly-owned company group and CGT rollover relief was obtained, then depreciation rollover relief would be available under section 58 of the Act.

A1.5 However, if the plant depreciation rules have not applied to the property, the R&D disposal rules would apply. An assessable recoupment of deductions would accrue if the actual or deemed consideration for disposal of plant exceeded its written down value (the portion of the cost of property which has not been deductible). Similarly, a deductible loss is available where the consideration for disposal is less than written down value.

Threshold conditions for rollover relief

A1.6 R&D rollover relief will automatically apply on the disposal of plant, for which R&D deductions have been allowed or are allowable, between eligible companies within a wholly-owned company group if capital gains tax (CGT) rollover relief applies to the disposal. CGT rollover relief applies when a valid election for CGT rollover relief is made under section 160ZZO of the Act. [New subsection 73E(1)]

A1.7 R&D rollover relief is not necessary on the disposal of plant to which the R&D provisions have applied if the plant depreciation provisions have also applied - a similar form of rollover relief is already available under section 58 of the plant depreciation rules.

A1.8 Successive R&D rollover relief is to be available; that is, R&D rollover relief can be obtained for successive disposals of particular R&D plant between companies within wholly owned company groups.

A1.9 The threshold requirement that a transferor has obtained, or can obtain, deductions for plant under the R&D provisions will only apply to the first of successive transferors. [New subsection 73E(11)]

A1.10 That measure will facilitate rollover relief where subsequent successive transferors have not obtained deductions; for example, group company reorganisations that necessarily involve successive transfers of plant within a single year.

A1.11 It will also facilitate rollover relief for transfers of property which had been fully written off before the transferor acquired it.

Consequences for the transferor

Disposal rules not to apply

A1.12 Where rollover relief is obtained in relation to a disposal of R&D plant, the balancing adjustment provisions of subsections 73B(23) & (24) will not apply to the company disposing of the property. Any consideration received by the transferor for the disposal will be ignored. [New subsection 73E(2)]

Termination of R&D deduction entitlements

A1.13 Under the usual rules, a taxpayer disposing of R&D plant is not entitled to any R&D deduction that would have otherwise been available in the disposal year or later year. That rule will not change. Instead, as explained below, the transferee is to "inherit" the transferor's R&D deduction entitlements.

Termination of depreciation entitlements

A1.14 In some cases, plant eligible for deduction under the R&D provisions could also be eligible for deduction under the plant depreciation provisions. That is, the R&D activities of a company may also constitute income producing activities. In those situations, it is not appropriate to allow deductions under both provisions and depreciation deductions are not available.

A1.15 However, unlike the R&D provisions, the plant depreciation provisions do permit deductions in the year that eligible plant is disposed of, calculated by reference to the period of time the property is owned and used for producing income in the year of disposal. Accordingly, it is appropriate under normal circumstances to allow depreciation deductions in the year that R&D plant is disposed of where its use in R&D activities is such that it is also eligible for depreciation deductions.

A1.16 Under R&D rollover relief, transferees are to inherit transferors' R&D entitlements and so it would not be appropriate for transferors to obtain depreciation deductions in the disposal year for the period up to the time of disposal. Accordingly, pro rata depreciation deductions will not be available to a transferor of plant to which R&D rollover relief applies. [New subsection 73E(3)]

Consequences for the transferee

Actual expenditure ignored

A1.17 The actual expenditure incurred by the transferee company in acquiring the plant will be ignored. [New subsection 73E(4)]

A1.18 Instead, the transferee is to "inherit" any deduction entitlements of the transferor.

Inheritance of qualifying plant expenditure

A1.19 Deductions in respect of plant are calculated by reference to the amount of "qualifying plant expenditure" in relation to that plant; that is, the cost of plant that is taken to be an amount of qualifying plant expenditure in relation to that plant in the year in which the plant is first used exclusively in R&D activities and in relation to each of the next 2 succeeding years.

A1.20 Deductions in each of those 3 years are calculated as one third of the amount of qualifying plant expenditure, increased by up to 50% depending on the amount of relevant R&D expenditure.

A1.21 So, if at the time of the disposal, there is an amount of qualifying plant expenditure in relation to the property in the disposal year or the subsequent year and the transferee immediately commences to use the property exclusively in R&D activities, the transferee will inherit the transferor's qualifying plant expenditure in respect of the same years.

A1.22 That is achieved by specifying that:

·
the transferee is taken to have acquired the plant for an amount equal to the transferor's qualifying plant expenditure; and
·
that amount is qualifying plant expenditure in relation to the transferee in the disposal year and, where appropriate, the subsequent year.

A1.23 The effect of that inheritance mechanism is to place the transferee in the same position as the transferor for the purposes of calculating R&D deductions for the transferred plant. [New paragraphs 73E(5)(a) - 5(c)]

A1.24 A precondition for the transferee to inherit the transferor's qualifying plant expenditure is that the transferee immediately commence to use the plant exclusively in R&D activities. If that does not happen, the transferee may instead be entitled to depreciation deductions.

Depreciation deductions

A1.25 Plant for which R&D deductions have been allowed can become eligible for depreciation deductions in respect of that portion of cost which is not deductible under the R&D rules. That can occur either where the exclusive R&D usage of plant ceases before its cost has been fully deducted or the plant is pilot plant costing to which the $10M limit applied (the amount exceeding $10M becomes eligible for depreciation after the end of the 3 year deduction period where the plant is used in income-producing activities).

A1.26 Consistent with those rules, depreciation deductions are to be also available to a transferee for any portion of the original cost of plant which has not been allowed as deductions.

A1.27 The amount to be eligible for depreciation is to be based on the plant's "modified written down value" at the relevant time (that is, the original cost of the property less the portion of that cost which has been allowed as a deduction to both the transferee and transferor, or prior transferors in the case of multiple rollovers). [New paragraphs 73E(5)(d) & (5)(e), new paragraphs 73E(6)(a) & (6)(b) and new subsection 73B(9)]

A1.28 The following are situations where depreciation could become available to a transferee of plant to which R&D rollover relief has applied:

·
a transferee acquires pilot plant, to which the $10M limit applied in the hands of the transferor, in either the second or third year of the three year period during which R&D deductions are available; the transferee obtains deductions in the remaining 1 or 2 deduction years in relation to the first $10M and then becomes entitled to depreciation deductions for the excess cost;
·
a transferee acquires pilot plant, to which the $10M limit had applied in the hands of the transferor, which has been fully written off by the transferor for R&D purposes but which has not become eligible for depreciation deductions; the transferee would not inherit any R&D entitlements, but would be entitled to depreciation deductions for the excess cost if the plant is subsequently used for income producing purposes;
·
a transferee acquires plant which ceased to be eligible for R&D deductions in the hands of the transferor before the end of the 3 year deduction period because of a cessation of exclusive R&D usage but which had not become eligible for depreciation deductions; the transferee would be entitled to depreciation deductions for the undeducted portion of the cost of the plant if it is subsequently used in income-producing activities;
·
a transferee acquires plant and inherits an entitlement to R&D deductions but subsequently becomes disentitled because of a cessation of exclusive R&D usage before the end of the period for which R&D deductions are available; the plant is then, or later, used in income-producing activities and so eligible for depreciation deductions; and
·
a transferee acquires plant for which the transferor was entitled to R&D deductions but the transferee does not immediately commence to use it exclusively in R&D activities and the transferee is therefore not entitled to the otherwise available R&D deductions; instead, the plant is used for income producing purposes and eligible for depreciation deductions.

Depreciation deductions where transferee not entitled to continue with transferor's R&D deduction entitlement in disposal year

A1.29 There could be instances where a transferee acquires plant for which there is an R&D deduction entitlement but the transferee is not entitled to R&D deductions in the disposal year but is nevertheless entitled to depreciation deductions. That could occur either where the transferee does not immediately commence to use the property exclusively in R&D activities or subsequently terminates that exclusive use before the end of the disposal year.

A1.30 It was explained at paragraphs A1.14-16 that, where R&D rollover relief applies, a transferor of plant would not be entitled to depreciation deductions in the disposal year in lieu of the lost entitlement to R&D deductions, because the transferee would inherit the transferor's R&D deduction entitlements.

A1.31 Under the normal depreciation rules, the transferee would be only entitled to deductions for the period after the transferee acquired the property. That would not be appropriate if the transferor would have been entitled to depreciation deductions in the disposal year but for the rule mentioned in the previous paragraph.

A1.32 In those circumstances, a transferee's depreciation entitlement in the disposal year is to be calculated by reference to both the transferor's and transferee's income-producing use of the property in that year. [New paragraph 73E(6)(c)]

Disposal of property by transferee where rollover relief does not apply

A1.33 Paragraph A1.12 explained that a consequence of R&D rollover relief is that transferors will not be required to calculate balancing adjustments on the disposal of plant.

A1.34 Instead, transferees will assume an obligation to account for any subsequent recoupment of the cost of the property that has been allowed as deductions to the transferor or, in the case of successive rollovers, prior transferors.

A1.35 So, if the amount received by a transferee for the disposal, loss or destruction of plant exceeds its written down value, the transferee will be assessable on that excess to the extent that it does not exceed that portion of the cost of the property that has been allowed as deductions to both the transferee and transferor(s).

A1.36 If the plant depreciation provisions have not applied to such property in the hands of the transferee, the R&D disposal rules, sections 73B(23) and (24), will operate in a modified manner to give effect to the rollover. [New subsections 73E(7) & (9)]

A1.37 However, if the plant depreciation provisions have applied to the property in the hand of the transferee, then the disposal rules under those provisions will instead apply.

A1.38 Those rules make taxpayers who have obtained deductions for the cost of a particular item of plant under both the R&D and depreciation provisions assessable on any subsequent recoupment of the plant's cost that has been allowed as deductions under both of those provisions.

A1.39 That is achieved by specifying, in effect, that the cost of property that has been allowed as a deduction to a taxpayer under the R&D provisions is to be taken to be an amount allowed to that taxpayer in respect of depreciation (subsection 59(2AA) of the Act).

A1.40 A similar rule will apply for depreciation purposes on the disposal, loss or destruction of property for which deductions have been allowed under both the R&D provisions and depreciation provisions to two or more companies and either R&D rollover relief or depreciation rollover relief applied on the transfer of that property between those companies.

A1.41 In such cases, the cost of the property that has been deductible to those companies under the R&D provisions will be treated as depreciation allowed to the last company for the purposes of calculating balancing adjustments on the disposal, loss or destruction of the property. [New subsection 59(2AB)]

Recoupment of expenditure

A1.42 Deductions for R&D expenditure are either disallowed or reduced on the receipt of amounts representing either a grant or a recoupment of the expenditure (sections 73C and 73D of the Act). Similarly, deductions can be disallowed for certain expenditures that are not "at risk" (proposed section 73CB). (The Commissioner of Taxation has, or is proposed to have, unlimited time to amend assessments to give effect to those provisions (subsection 170(10) of the Act).

A1.43 There may be instances where a company obtains R&D rollover relief on the disposal of plant to another company and subsequently receives a grant or recoupment amount in respect of expenditure on that plant. That company's assessments would be amended, as described in the preceding paragraph.

A1.44 However, the taxation position of the transferee may also need to be adjusted to reflect the adjustments made to the transferor's assessments. For example, the transferee may have sold the plant and been assessed on a recoupment of expenditure allowed as a deduction to the transferor but which was subsequently disallowed.

A1.45 Accordingly, the Commissioner is to have unlimited time to also amend transferees' assessments to reflect adjustments made to transferors' assessments on the recoupment of expenditure which has been allowed as deductions. [New subsection 73E(11)]

Motor vehicles not eligible for CGT rollover relief

A1.46 Certain motor vehicles, such as ordinary cars, utilities and passenger vans, are not assets for CGT purposes and as CGT rollover relief is not necessary it cannot be made. Such vehicles could qualify for deduction under the R&D provisions and ought to qualify for R&D rollover relief in circumstances where CGT rollover relief would be available if such vehicles were subject to CGT.

A1.47 R&D rollover relief is to be available for disposals of such vehicles and can be obtained by making an election for CGT rollover relief under section 160ZZO as if those vehicles were assets for CGT purposes. [New subsection 73E(12)]

Appendix 2

Research and development rollover relief - buildings

Summary of the existing law

Nature of the concession

A2.1 The R&D concession provides a three year write-off for capital expenditure on buildings (including alterations, extensions or improvements) used exclusively in R&D activities, commencing with the first year of that exclusive use.

A2.2 The concession is now largely redundant as it is only available to eligible companies where either the building was acquired under a contract made before 21 November 1987 or, if the building was constructed by or for the company, construction either commenced before 21 November 1987 or the contract for construction was made before that date.

A2.3 Expenditure on buildings commenced to be constructed on or after 21 November 1987 for use in R&D activities is evenly deductible over 40 years at the rate of 2.5% per annum under Division 10D of the Act.

Disposals of buildings

A2.4 Different rules apply on the disposal of an R&D building depending on whether the disposal occurs within five years of the building first being used exclusively in R&D activities or later.

A2.5 If the disposal occurs within that five year period, deductions allowed under the R&D rules in respect of a building can be withdrawn. Deductions can also be withdrawn if the exclusive R&D usage ceases within five years.

A2.6 Where deductions are withdrawn in that manner and the building would have otherwise qualified for deduction under another provision - for example, under one of the mining provisions or under division 10D as an income-producing building - alternative deductions are then available under that other provision.

A2.7 If the disposal of an R&D building occurs after the end of the 5 year period, the consideration for the disposal is assessable to extent it does not exceed the cost of the building (that is, the amount for which deductions have been allowed).

A2.8 However, if deductions would have been allowable under the income-producing building provisions (Division 10D) had the R&D concession not applied, the amount otherwise assessable on the disposal is reduced by the sum of the deductions that would have been otherwise allowable under those provisions.

Destruction of buildings

A2.9 Separate rules apply on the destruction of buildings. Unlike disposals, no distinction is made as to the time of the destruction.

A2.10 If any amount received in respect of the destruction of a building, such as insurance proceeds, exceeds the amount of undeducted building expenditure, the excess is assessable to the extent of the sum of deductions allowed in respect of the building.

A2.11 Similarly, if any amount received in respect of the destruction is less than the undeducted building expenditure, the deficiency is deductible.

Threshold conditions for rollover relief

A2.12 R&D rollover relief will apply on the disposal of buildings, for which deductions have been allowed under the R&D provisions, between eligible companies within a wholly-owned company group if capital gains tax (CGT) rollover relief applies to the disposal; that is, a valid election for CGT rollover relief is made under section 160ZZO of the Act. [New subsection 73F(2)]

A2.13 Successive R&D rollover relief is to be available; that is, R&D rollover relief can be successively obtained for successive disposals of a building between companies within wholly owned company groups.

A2.14 The threshold requirement that a transferor has obtained, or can obtain, building deductions under the R&D provisions will only apply to the first of successive transferors. [New subsection 73F(14)]

A2.15 That measure will facilitate rollover relief where subsequent successive transferors have not obtained deductions; for example, group company reorganisations that necessarily involve successive transfers of property within a single year (transferors are not entitled to deductions in the year of disposal).

A2.16 It will also facilitate rollover relief for transfers of property where its cost had been fully written-off by the time it was acquired by the transferor.

Consequences for the transferor

Disposal rules not to apply

A2.17 If the disposal occurs within 5 years of the building first being used exclusively in R&D activities, there will be no clawback of previously allowed deductions. [New subsection 73F(4)]

A2.18 Where the disposal occurs after the end of the five year period, the balancing adjustment provisions will not apply to the company disposing of the property. Any consideration received by the transferor for the disposal will be ignored. [New subsection 73F(3)]

Termination of R&D deduction entitlements

A2.19 There may be instances where buildings are still eligible for R&D deductions despite the limitation of the concession to buildings that were (broadly speaking) acquired before 21 November 1987, commenced to be constructed before that date or, if construction commenced after that date, the construction contract was made before that date.

A2.20 For example, a company may have committed itself to the construction of a major R&D facility before 21 November 1987. It might be some years later before construction was completed and R&D activities commenced, meaning that the company is still eligible for deductions.

A2.21 Consistent with the usual rule, a company disposing of an R&D building will not be entitled to any R&D deduction that would have otherwise been available in the disposal year or later year. Instead, as explained below, the transferee will "inherit" the transferor's R&D deduction entitlements.

Consequences for the transferee

Actual expenditure ignored

A2.22 The actual expenditure incurred by a transferee company in acquiring a building will be ignored. [New subsection 73F(5)]

A2.23 Instead, the transferee will "inherit" any deduction entitlement of the transferor.

Inheritance of qualifying building expenditure

A2.24 R&D deductions for buildings are calculated by reference to the amount of "qualifying building expenditure" in relation to that building. The capital cost of building becomes qualifying building expenditure in relation to the building in the year in which the plant is first used exclusively in R&D activities and in relation to each of the next 2 succeeding years.

A2.25 Deductions in each of those 3 years are calculated as one third of the amount of qualifying building.

A2.26 So, if at the time of the disposal, there is an amount of qualifying building expenditure in relation to the building in the disposal year or the subsequent year and the transferee immediately commences to use the building exclusively in R&D activities, the transferee will inherit the transferor's qualifying building expenditure in respect of the same years.

A2.27 That is achieved by specifying that:

·
the transferee is taken to have acquired the building for an amount equal to the transferor's qualifying building expenditure; and
·
that amount is qualifying building expenditure in relation to the transferee in the disposal year and, where appropriate, the subsequent year.

A2.28 The effect of that inheritance mechanism is to place the transferee in the same position as the transferor for the purposes of calculating R&D deductions for the transferred building. [New subsections 73F(6) and (7)]

Disposal of building by transferee within 5 years where rollover relief does not apply or cessation of use within 5 years

A2.29 As discussed at paragraph A2.5 , either a disposal of a building or a cessation of its exclusive R&D usage, within 5 years of it first being used exclusively in R&D activities, can result in a withdrawal of previously allowed deductions. Where that happens, deductions will instead be available under any other relevant provision.

A2.30 Where R&D rollover relief applies to the disposal of a building, that 5 year rule will not apply where the disposal has occurred within the five year period. However, the transferee will be subject to that rule.

A2.31 For the purposes of applying that 5 year rule to a transferee, the 5 year period will commence from the date that the transferor or, if there have been successive rollovers, the first of those transferors, first used the building exclusively in R&D activities. [New subsection 73F(8)]

A2.32 If a transferee does not immediately commence to use a building exclusively in R&D activities, the transferee will be taken to have ceased using that building exclusively in R&D activities immediately after acquiring it. [New subsection 73E(9)]

Adjustments where 5 year deduction disallowance rule applies to a transferee

A2.33 Where the 5 year rule applies, the transferee's assessable income for the year in which the transferee acquired the building will include the sum of the deductions allowed to the transferor or prior successive transferors in respect of the building. [New paragraph 73F(10)(c)]

A2.34 Also, any deductions allowed to the transferee will be disallowed in respect of the income years in which they were allowed (that follows from existing law and no amendment is necessary).

A2.35 As an offset, if the use of the building by the transferor or prior successive transferors was such that deductions would have otherwise been available to them under another provision, the transferee will obtain a deduction in the year in which the transferee acquired the building for an amount equal to the sum of those otherwise allowable deductions. [New paragraph 73F(10)(d)]

A2.36 The transferee will also obtain deductions in the years in which its use of the building entitle it to deductions under another provision. Those deductions will be based on the cost of the building to the transferor, or first of prior successive transferors, not the actual cost of the building to the transferee. [New subparagraph 73F(10)(e)(i)]

A2.37 If the disallowance was due to a cessation of the exclusive R&D use of the building, the transferee will be able to continue with deductions under that other provision.

A2.38 If the deduction disallowance was triggered by the transferee's disposal of the building, the balancing adjustment rules, if any, under that other provision will apply to the disposal.

A2.39 Deductions allowed to a transferee under another provision in respect of the transferor's or transferors' period of ownership of the property will be taken to be deductions allowed to the transferee under that other provision (to ensure that such amount are subject to any relevant balancing adjustments rules under that other provision). [New subparagraph 73F(10)(e)(ii)]

Example of application of 5 year rule

Company A incurs $3M pre-21 November 1987 expenditure in constructing a building. The building is first used exclusively in R&D activities in the 1990/91 income year and deductions of $1M are obtained by A in each of the 1990/91 and 1991/92 income years.

The building is sold to group company B in the 1992/93 income year for $2.5M (which is ignored under the rollover provisions). An election is made for CGT rollover relief to apply and R&D rollover relief therefore applies.

Company B immediately commences to use the building in R&D activities and continues to do so until the building is sold to a third party in the 1994/95 income year, within 5 years of A first using it for R&D activities.

The deduction disallowance rules would operate as follows:

·
Bs 1992/93 assessment would be amended to include $2M, representing a disallowance of the deductions of $1M allowed to A in each of the 1990/1991 and 1991/1992 income years; and
·
B's 1992/93 assessment would be amended to disallow the $1M deduction obtained in that year as the result of B inheriting A's remaining deduction entitlement, under the rollover rules.

A and B both carried on prescribed mining operations in the relevant years and the R&D activities were in connection with those operations. Expenditure on buildings in such activities is evenly deductible over the lesser of the life of mine or ten years.

Assuming that the life of the mine was greater than 10 years, an annual deduction of $.3M over 10 years would have been available under the mining provisions but for the application of the R&D provisions to the building.

Accordingly:

·
B would obtain a deduction of $.6M in 1992/93 for the amounts that would have otherwise been allowed to A under the mining provisions in 1990/1991 and 1991/1992 (ie. 2 x $.3M = $.6M); and
·
B's assessments for the 1992/93 and 1993/94 will each be amended to allow a deduction for $.3M.

As B has sold the building, B will not obtain any deduction in the disposal year. B may derive an assessable balancing charge, or incur a deductible balancing loss, depending on the amount received from the sale of the building.

Disposal of buildings after 5 years

A2.40 It was explained at paragraph A2.7 that on the disposal of an R&D building after the end of the 5 year period, the consideration for the disposal is assessable to extent it does not exceed the amounts allowed as deductions. The assessable amount is reduced to the extent deductions would have been allowable under Division 10D if the R&D provisions have not applied.

A2.41 Transferees will assume an obligation to account for any subsequent recoupment of the cost of the property that has been allowed as deductions to the transferor or, in the case of successive rollovers, prior transferors.

A2.42 However, they will be able to reduce such recoupments by any amount that would have been allowable to the transferor (or prior successive transferors) under Division 10D as well as any amounts that would have similarly been allowable to them. [New subsection 73F(11)]

Destruction of buildings

A2.43 Paragraph A2.10 explained that any amount received in respect of the destruction of a building that exceeded the amount of undeducted building expenditure, is assessable to the extent of the sum of deductions allowed in respect of the building.

A2.44 Where rollover relief has applied, amounts allowed to the transferor (or prior successive transferors) will be treated as deductions allowed to the transferee. [New subsection 73F(12)]

Recoupment of expenditure

A2.45 Deductions for R&D expenditure are either disallowed or reduced on the receipt of amounts representing either a grant or a recoupment of the expenditure (sections 73C and 73D of the Act). The Commissioner of Taxation has unlimited time to amend assessments to give effect to those provisions (subsection 170(10) of the Act).

A2.46 There may be instances where a company obtains R&D rollover relief on the disposal of a building to another company and subsequently receives a grant or recoupment amount in respect of expenditure on that building. That company's assessments would be amended, as described in the preceding paragraph.

A2.47 However, the taxation position of the transferee may also need to be adjusted to reflect the adjustments made to the transferor's assessments. For example, the transferee may have subsequently sold the building and been assessed on a recoupment of expenditure that had been disallowed as a deduction to the transferor.

A2.48 Accordingly, the Commissioner is to have unlimited time to also amend transferees' assessments to reflect adjustments made to transferors' assessments on the recoupment of expenditure which has been allowed as deductions. [New subsection 73F(13)]

Appendix 3

Research and development rollover relief - industrial property

Summary of the existing law

A3.1 Where deductions have been obtained for expenditure on R&D activities, the R&D rules (section 27A) treat as assessable income, amounts received either in respect of the results of those activities or attributable to the expenditure having been incurred.

A3.2 Such amounts could be in respect of the disposal of assets to which the CGT provisions apply. For example, the amount received could be for the disposal of a patent (one form of industrial property) arising from R&D activities or a patent that was acquired for use as "core technology" in R&D activities.

R&D rollover relief

A3.3 R&D rollover relief will apply on the disposal of a unit of industrial property, if the consideration for the disposal would have been assessable income under section 73B(27A), between eligible companies within a wholly owned company group if capital gains tax (CGT) rollover relief applies to the disposal; that is, a valid election for CGT rollover relief is made by the companies under section 160ZZO of the Act. [New subsection 73G(1)]

A3.4 Successive R&D rollover relief is to be available; that is, R&D rollover relief can be successively obtained for successive disposals of industrial property between companies within wholly owned company groups. [New subsection 73G(5)]

A3.5 Where rollover relief is obtained, the amount received by the transferor company for the disposal of the property will not be assessable income. [New subsection 73G(2)]

A3.6 The amount paid by the transferee company to acquire the property will not be deductible under any provision for the Act. [New subsection 73G(3)]

A3.7 The transferee company will be assessable on any amount received from a subsequent disposal of the property if R&D rollover relief does not also apply to that disposal. [New subsection 73G(4)]

Amendments to capital allowance rollover relief

Summary of proposed amendments

Purpose of amendment: To make capital allowance rollover relief available where:

·
assets are disposed of more than once in a single year; or
·
assets that were fully written-off at the time they were acquired are disposed of again.

Date of Effect: Applies from the same time as the existing provisions.

Background to the legislation

Taxpayers are able to obtain deductions for the capital cost of income producing assets under a number of provisions; examples of those capital allowances include: plant depreciation, mining and quarrying, and industrial property.

Where such deductions have been allowed, the disposal of an asset can result in assessable recoupments of deductions. That happens when the amount received for the disposal of an asset is more than its written down value (that is, cost less deductions allowed).

Most of the capital allowance provisions permit taxpayers to obtain a deferral (that is, rollover) of liability to tax on the disposal of assets where there is no real change in the ownership of the assets (for example, on the transfer of assets within wholly-owned company groups).

Under rollover relief, the taxpayer acquiring the assets is required to include as assessable income any subsequent recoupment of deductions allowed to the earlier owner.

Explanation of proposed amendments

A requirement of the various capital allowance rollover relief provisions is that deductions have been allowed to the taxpayer disposing of an asset. That is an obvious requirement. However, that requirement can inappropriately deny rollover relief in certain circumstances.

For instance, most of the capital allowance provisions only permit deductions to taxpayers who own assets at the end of an income year. So, deductions are not available if a taxpayer both acquires and disposes of an asset within the same year. [An exception is plant depreciation which permits proportional deductions for property owned for only part of a year of income.]

Some business reorganisation can involve successive transfers of particular assets within a single year. For example, a company group comprising a large number of companies may wish to rationalise the number of companies. To obtain stamp duty concessions for the reorganisation, it may be necessary to transfer assets successively through a chain of companies rather than directly to the company which is to hold the assets.

Under the existing rules, if those successive transfers were to occur within a single year, rollover relief would be denied to all but the first of such successive transfers because the subsequent transferors would not be entitled to deductions - they didn't own the assets at the end of the year. In effect, rollover relief would not be available for such reorganisations.

Similarly, there could be cases where a group company acquires an asset from another group company and that asset had been fully written-off at the time of acquisition. The new owner would not be entitled to any deductions and so rollover relief would not be available on any subsequent disposal.

Accordingly, the various capital allowance rollover relief provisions are to be amended so that the requirement that deductions have been allowed to a taxpayer disposing of an asset only applies to the first taxpayer in a chain of disposals which otherwise qualify for rollover relief.

The following provisions are covered by these amendments:

Clause Subsection Description
46 58(7A) Plant and articles
47 73AA(7) Scientific research buildings
48 122JAA(22A) Mining (other than petroleum)
49 122JG(12A) Quarrying
50 123BBA(16) Transport of minerals
51 123BF(9) Transport of quarry materials
52 124AMAA(18A) Petroleum mining
53 124GA(5) Access roads in timber operations
54 124JD(5) Timber mill buildings
55 124PA(6) Industrial property

Date of effect

The existing measures - which confer rollover relief either where certain forms of capital gains tax rollover relief apply or, in the case of partial changes in ownership of assets, where an election is made by all the persons owning the property both before and after that change - apply to disposals occurring after 19 December 1991.

Prior to those measures, an optional form of rollover relief was available for intra company group asset transfers occurring after 6 December 1990 and before 20 December 1991.

The amendments apply to both measures. [Clauses 56 and 57]

Taxpayers can obtain amendments to assessments affected by these amendments by making an application under existing subsection 170(6).

Royalty Withholding Tax

Summary of proposed amendments

Purpose of amendment: Taxation Laws Amendment Bill (No. 5) 1992 will amend the Income Tax Assessment Act 1936 to introduce a final withholding tax of 30% on royalties paid or credited to non-residents in place of the current assessment basis of taxation.

The Bill will also amend section 17A of the Income Tax (International Agreements) Act 1953 to ensure that where Australia and another country have a double tax agreement that limits the tax imposed in the country from which royalties are paid (generally to 10%), the lesser rate is to apply. This will ensure that any reduction in the Australian tax rate is confined to cases where Australian residents getting royalties from other countries are entitled to the same lower tax rate in that other country.

A second bill, Income Tax (Dividends and Interest Withholding Tax) Amendment Bill 1992, will amend the Income Tax (Dividends and Interest Withholding Tax) Act 1974 to impose a final withholding tax of 30% upon royalties derived by non-residents.

A final withholding tax

The two bills will give effect to the Government's decision to introduce a final withholding tax for royalties paid or credited to, or otherwise dealt with on behalf of non-residents in place of the present assessment system. Film and video royalties are already taxed on a withholding basis.

The Government announced the change in the 1992-93 Budget. The new arrangements are to apply to royalties paid or credited from the commencement of the recipient's 1993-94 year of income. For most recipients this will be 1 July 1993.

Residents of Treaty Countries

Where the recipient is resident in a country with which Australia has concluded a double tax agreement (DTA), the rate of withholding tax will be limited to that specified in the agreement.

Over 85% of Australian royalty payments abroad are to countries with which a DTA limits the tax payment to 10% of gross royalties.

It should be noted, however, that Australia's DTAs generally provide that the withholding tax limitation does not apply where the royalties are effectively connected with an Australian permanent establishment (eg, a branch) or fixed base of a treaty country resident. In such a case, the royalties are taxable by assessment under the "business profits" article or "independent personal services" article of the DTA.

Income tax deduction - payer of the royalty

To prevent possible abuse, an income tax deduction for royalty payments to non-residents will not be allowable to the payer until any withholding tax payable is in fact paid to the Tax Office.

Film and video royalties

Film and video royalties will be subject to the same tax regime as any other royalties and will be taxed at the same rate.

Royalty definition to include electronic transmission fees

The definition of the term "royalty" will be amended to make it clear that it includes payments for the public transmission by satellite or cable, including payments for the use of such facilities in television and radio broadcasting whether or not the material is edited or the broadcast is delayed.

Amendments to the present withholding tax provisions

The Bill will align, as far as possible, the present withholding tax provisions for interest and dividends with royalties.

Date of Effect: The royalty withholding tax regime will first apply to amounts derived during the recipient's 1993-94 year of income. For most recipients of royalties this will be as from 30 June 1993 [Clauses 74 and 81].

Background to the legislation

How are royalties presently taxed?

Royalties (excluding film and video royalties) derived by non-residents are subject to Australian tax by normal assessment procedures. They form part of assessable income and Australian tax is imposed at the ordinary rate of tax applicable to the non-resident's taxable income on the net royalties after deduction of allowable expenses.

Where the recipient is resident in a country with which Australia has concluded a double tax agreement (DTA), the terms of the DTA generally provide for tax to be limited to 10% of the gross amount of the royalties. Where the royalties are effectively connected with a permanent establishment (e.g. a branch) in Australia they are taxed at normal rates with allowance for expenses incurred in deriving the royalty income.

Why is the Government introducing a final withholding tax for royalties?

There are several reasons.

The change will serve to counter tax avoidance, will produce administrative savings, will improve service to taxpayers through simplified administrative procedures, and will be in accord with the move to self-assessment.

How do other countries tax royalties?

The UK, USA, Japan, Germany, France, Italy, Canada, New Zealand and almost all other OECD member countries apply a flat rate withholding tax to the gross amount of royalty payments to non-residents.

Explanation of proposed amendments

Division 11A of Part III, which provides for a withholding tax on both dividends and interest paid to non-residents, is to be expanded to cover royalties paid to non-residents. The withholding tax on royalties is, as is the case with dividends and interest, to be a final tax to be deducted by the payer.

The present machinery provisions for the collection of interest and dividend withholding tax - Division 4 of Part VI - are also to be extended to cover royalty withholding tax.

Who will be liable for withholding tax?

From the commencement of the 1993-94 year of income royalties derived by a non-resident will, with certain specific exceptions, be liable for withholding tax where they are paid by an Australian resident, the Commonwealth, a State, or an authority of the Commonwealth or a State. This will not be the case where the royalty is an expense incurred in carrying on business through a permanent establishment (eg, a branch) offshore. It should be noted that in this latter case the royalty will not have an Australian source and the payment will generally not be deductible for tax purposes in Australia.

Royalties paid after the commencement of the 1993-94 income year are also liable to withholding tax if they are paid to a non-resident by another non-resident and they are an expense incurred in a business conducted by the payer through a permanent establishment (eg, a branch) in Australia [Clause 64].

Royalties derived by a resident of a country with which Australia has concluded a double tax agreement will generally not be subject to withholding tax if the royalty is derived in carrying on business in Australia through a permanent establishment (eg, a branch) in Australia. In this case the royalty will be treated as business income and liability will continue to be determined by assessment at normal rates of tax.

What is the rate of the royalty withholding tax?

30% of the gross amount of the royalty, subject to any reduction agreed on a reciprocal basis in a DTA.

That rate will be imposed by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974.

What is the effect of Double Taxation Agreements on the rate of royalty withholding tax?

The terms of the DTAs generally provide for tax to be limited to 10% of the gross amount of the royalty. However, as mentioned above, if the royalty is "effectively connected" with a permanent establishment (eg, a branch) in Australia it is treated as business income and subject to tax by assessment at normal rates of tax. The standard rate is 15% in the case of New Zealand, Malaysia, Korea, Thailand, Fiji and Kiribati, up to 20% in the case of India and up to 25% in the case of the Philippines.

Section 17A of the Income Tax (International Agreements) Act 1953 is being amended to provide that where the rate of Australian tax payable under a DTA in respect of a royalty is less than the proposed 30% rate, the tax payable is to be at the lesser rate agreed in the DTA [Clause 88].

Deductions of Royalty Withholding Tax

Payers of royalties will have similar responsibilities to those of borrowers who are required to make interest withholding tax deductions from payments of interest to non-residents. They will be required to deduct withholding tax no later than the date the royalty is paid or credited to the non-resident. They will be required to deduct withholding tax in all cases where, the recipient is shown in the payer's records etc. as having an overseas address or where the payer is authorised to pay the royalty at a place outside Australia.

Where a royalty is paid to a person in Australia who receives the royalty on behalf of a non-resident, the person receiving the royalty will be obliged to deduct any necessary withholding tax when the royalty is received, whether or not that person actually remits the royalty to the non-resident [Clause 70].

Where the property of a royalty payer becomes vested in or under the control of a trustee, for example in a bankruptcy or liquidation, section 221YU is to be amended to ensure the trustee is liable to pay the withholding tax to the Commissioner [Clause 76].

The payer will be given a statutory defence to any claim under contract law by the non-resident for any amount deducted from a royalty payment deducted by the payer to meet withholding tax [Clause 77].

Penalty for failure to deduct

Failure to deduct withholding tax is to be an offence punishable under subsection 221YL(4A) by a maximum fine of $1000. However, where a person is convicted by a court of a failure to deduct, the court will be given power under section 221YL(4B) to also order the convicted person to pay to the Tax Office an amount not exceeding the deduction that should have been made [Clause 70].

Exemptions and Variations

As is the case with dividend and interest withholding taxes, the Commissioner will have the power to authorise, in special circumstances, an exemption from the liability to deduct royalty withholding tax or a variation in the amounts to be deducted [Clause 71].

This authority is necessary, for example, in cases where a trustee resident abroad receives royalties on behalf of an Australian resident beneficiary. Other cases arise where Australian residents arrange for their royalties to be remitted overseas during a temporary absence from this country.

Australian residents are subject to assessment under the general provisions of the law and, as the withholding tax provisions do not apply to income derived by them, an exemption from the liability to make deductions may be granted.

Withholding tax deducted to be forwarded to the Tax Office

A royalty deduction must be paid to the Tax Office by the 21st day of the month following the month in which the deduction was made. Failure or refusal to comply can carry, on conviction by a court, a maximum fine of $5000 and/or a maximum gaol term of 12 months [Clause 72].

Reconciliation statement

A reconciliation statement must be forwarded to the Tax Office at the end of each year providing details of the deductions made. Failure to do so can result, on conviction by a court, in a maximum fine of $1000 [Clause 72].

Late payment penalty

The withholding tax regime provides for late payment penalty of 16% per annum. As with other types of late payment penalties, the penalty can be remitted or reduced by the Tax Office where there are special circumstances [Clause 72].

The Tax Office has released Taxation Ruling IT2570 which outlines the Tax Office's guidelines concerning the remission of late payment penalties.

Liability of person who fails to make deductions

A person who has refused or failed to make a deduction of withholding tax as required will be liable under section 221YQ to pay to the Tax Office the amount that should have been deducted, together with any late payment penalty which has been incurred [Clause 73] .

Although the person who makes the payment out of his or her own funds to the Tax Office will have a right of recovery of the tax from the non-resident recipient, there will be no right of recovery of any late payment penalty.

An amount paid to the Tax Office in these circumstances will be allowed as a credit against the withholding tax as if the deduction had been made at the appropriate time.

These rules are consistent with the rules applying in relation to withholding tax on dividends and interest [Clause 73].

Credits in respect of deductions made from royalties

A credit is allowed to a non-resident for any amount deducted from the royalty payment on account of Australian tax against the withholding tax liability [Clause 75].

Miscellaneous

No deduction for royalty payment until payment made to Tax Office

To prevent any possible abuse, an income tax deduction for royalty payments will not be allowable to the payer until the withholding tax has been paid [Clause 74].

Royalty definition to include electronic transmission fees

The definition of the term "royalty" in section 6 of the Income Tax Assessment Act 1936 will be amended to make it clear that it includes television transmission and radio broadcasts, and other transmission to the general public - whether edited or delayed - by means of satellite and cable. That technology has replaced, to a significant extent, film and video tapes. The payments are normally made to a person who has exclusive rights in relation to the matter which is the subject of the transmission or broadcast [Clause 59].

Film and video royalties

This will bring the tax treatment of royalties into line with the existing tax rules for film and video royalties. Accordingly, as the existing definition of "royalty" in section 6 includes payments for the use of or right to use films and video tapes, Division 13A of Part III of the Income Tax Assessment Act 1936 and the Income Tax (Film Royalties) Act 1977 are no longer necessary and are to be repealed [Clauses 65 and 80].

Collection of tax in respect of certain payments

Division 3B of Part VI of the Income Tax Assessment Act 1936 presently provides a collection mechanism for tax on royalties (other than film and video royalties), natural resource payments and the amounts withheld by investment bodies from income where the investor has not quoted a tax file number. All references to royalty payments are to be removed from the Division as the collection mechanism for royalty payments will now be contained in Division 4 - "Collection of withholding tax" [Clauses 66, 67 and 68].

Minor Technical Amendments

As a result of the repeal of Division 13A of Part III of the Act (film and video royalties), amendments will be made to sections 6C, 103 and 389 to remove any references to that Division [Clauses 60, 61 and 79].

Division 11A of Part III (Dividends and Interest paid to non-residents) will be expanded to also cover royalties paid to non-residents. Section 128A of that Division will be amended to define 'income' as including a royalty and to deem a royalty to have been paid where it is reinvested, accumulated, capitalised etc but not actually paid [Clause 63].

Subsection 255(2A) will be amended to remove any reference to a royalty as royalties will now be subject to the same collection mechanism as interest and dividends [Clause 78].

Foreign Source Income Amendments

Amendment to limit the clawback provision in subsection 47A(13)

Summary of proposed amendments

Purpose of amendment: To provide, in certain cases, a sunset clause for subsection 47A(13) so that a group of companies is not locked into a given company structure indefinitely for fear of triggering the provision in that subsection that creates a tax liability.

Date of Effect: 3 June 1990

Background to the legislation

In broad terms, section 47A treats certain benefits provided to a shareholder of an unlisted country ' CFC' ( CFC), or to an associate of the shareholder, as a dividend paid to the shareholder or associate. The amount of the deemed dividend is limited to the profits of the CFC at the time the benefit was provided. Benefits which may give rise to these deemed dividends are called "eligible benefits".

The main provisions of the Income Tax Assessment Act which include such dividends in the assessable income of an Australian taxpayer are sections 44, 458, and 459.

Broadly:

·
section 44 will apply if the unlisted country CFC pays the deemed dividend to an Australian taxpayer;
·
section 458 will apply where the deemed dividend is paid to a listed country CFC and that CFC holds a 10 percent or greater voting interest in the unlisted country CFC which paid the dividend;
·
section 459 will apply where the deemed dividend is paid to a listed country CFC and that CFC does not have a 10 percent or greater voting interest in the unlisted country CFC which paid the dividend.

These provisions may also apply where such dividends are paid to a partnership or trust.

Under subsection 47A(8), a CFC which acquires shares in another company or units in a unit trust is taken to have provided an eligible benefit to the company or unit trust from which those shares or units were acquired.

Subsection 47A(9) provides an exception to the circumstances where subsection 47A(8) applies.

Broadly, the exception operates in situations where the shareholder, or an associate of that shareholder, of an unlisted country CFC which provides an eligible benefit to a listed country CFC (or an Australian company) is not, at the same time, a shareholder of the listed country CFC or Australian company which received the benefit. In other words, the exception will not operate where the shareholder, or an associate of that shareholder, of the unlisted country CFC which provided the legible benefit is also a shareholder of the listed country CFC or Australian company which received the benefit.

Subsection 47A(13) provides a clawback to the exception provided by subsection 47A(9). Subsection 47A(13) provides that if, at a later time, circumstances change such that subsection 47(9) would not apply, then subsection 47A(9) is deemed to have never applied. Consequently, the taxpayer's assessments for previous years would be required to be amended to include any amounts which were previously excluded from the taxpayer's assessable income because of the operation of subsection 47A(9).

Reason for amendment

Presently, the clawback under subsection 47A(13) may still operate even though the shares or units originally acquired may have been redeemed or bought back prior to the breach of the conditions in subsection 47A(13).

Explanation of proposed amendments

The proposed amendment will limit the operation of the clawback provision in subsection 47A(13) so that it will not apply where, prior to the breach of the conditions in subsection 47A(13), the shares or units which gave rise to the eligible benefit under subsection 47A(8) are redeemed or bought back by the recipient of that benefit for consideration equal to or greater than the arm's length value of the share or unit [Paragraph 47A(13)(ba)] .

The "arm's length value" in relation to the redemption or buy-back of a share in a company or a unit in a unit trust is the amount that the company or trustee could reasonably be expected to have been required to pay to obtain the redemption or buy-back of the share or unit under a transaction where the parties to the transaction are dealing with each other at arm's length [Subsection 47A(21)] .

Amendment to limit the clawback provision in subsection 47A(14)

Summary of proposed amendments

Purpose of amendment: The amendment will limit the clawback provision in subsection 47A(14) so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax.

Date of Effect: 3 June 1990

Background to the legislation

The notes on the amendments to subsection 47A(13) explain the general effect of section 47A.

Under subsection 47A(8), a CFC which acquires shares in another company or units in a unit trust is taken to have provided an eligible benefit to the company or unit trust from which those shares or units were acquired. Under subsection 47A(11), an eligible benefit arises where funds are transferred to a company by an unlisted country CFC to pay for call on partly paid up shares.

Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and Subsections 47A(9) and 47A(12) provide exceptions to the circumstances where subsections 47A(8) and 47A(11), respectively apply. Broadly, the exceptions operate in situations where the shareholder, or an associate of that shareholder, of an unlisted country CFC which provides an eligible benefit to a listed country CFC (or an Australian company) is not, at the same time, a shareholder of the listed country CFC or Australian company which received the benefit. In other words, the exception will not operate where the shareholder, or an associate of that shareholder, of the unlisted country which provides the eligible benefit is also a shareholder of the listed country or Australian company which receives the benefit.

Subsection 47A(14) operates as a clawback to the exception provided by subsections 47A(9) or 47A(12). Subsection 47A(14) will apply if the recipient of the eligible benefit (the first eligible benefit) provides an eligible benefit (the second eligible benefit) to:

·
the company which provided the first eligible benefit; or
·
an associate of the company which provided the first eligible benefit; or
·
an associate of the company which received the first eligible benefit,

and the first eligible benefit facilitated, directly or indirectly, the provision of the second eligible benefit.

If subsection 47A(14) applies, the taxpayer's assessments for previous years are to be amended to include any amounts which were previously excluded because of the operation of subsection 47A(9) or 47A(12) in relation to the provision of the first eligible benefit.

Reason for amendment

Section 47A of the first draft Bill on the Controlled Foreign Income measures (Taxation of Foreign Source Income, December 1989) included provisions along the lines of subsections 47A(8) and 47A(11) but did not include provisions along the lines of subsections 47A(9), 47A(12), or 47A(14).

A press release issued on 3 June 1990 announced that there would be changes to the original draft Bill and that these changes would be incorporated in a second draft Bill. In the second draft Bill (Taxation of Foreign Source Income, June 1990), section 47A was modified to include provisions along the lines of subsections 47A(9) and 47A(12).

There was no indication, until the Bill was introduced into Parliament on 13 September 1990, that there would be a clawback provision as currently provided in subsection 47A(14). This clawback provision operated from 3 June 1990, the commencement of section 47A.

The proposed amendment is intended to provide relief from the retrospective application of subsection 47A(14) to eligible benefits covered by subsection (8) or (11) made during the period 3 June 1990 to 12 September 1990 where those benefits do not have the effect of avoiding Australian tax.

Explanation of the proposed amendments

The clawback provision in subsection 47A(14) will be amended so that it will not apply to an acquisition of shares or the payment of calls made before 13 September 1990 unless the Commissioner of Taxation is of the opinion that this had the effect of enabling any taxpayer to avoid tax [Paragraph 47A(14)(ca)] .

The clawback provision in subsection 47A(14) may be applied at any time by the Commissioner of Taxation if the Commissioner is of the opinion that the relevant acquisition of shares or the payment of calls made during the period 3 June 1990 to 12 September 1990 had, or would be likely to have, the effect of enabling any taxpayer to avoid tax [Paragraph 47A(14)(e)] .

Offset of Carry Forward Primary Production Losses Against Foreign Income

Summary of proposed amendments

Purpose of amendment: To enable taxpayers who have carry forward domestic primary production losses to choose whether to offset those losses against their assessable foreign income.

Date of effect: The election will be available to taxpayers in respect of assessments for the 1991-92 and subsequent years of income.

Background to the legislation

Prior to the 1989-90 income year, the carry forward of general domestic losses was limited to seven years. However, due to the particular circumstances of primary producers, primary production losses could be carried forward indefinitely. This was achieved by section 80AA.

The decision to allow the indefinite carry forward of all domestic losses from the 1989-90 year of income meant that it was not longer necessary to deal with the carry forward of domestic primary production losses on a different basis to general domestic losses. Consequently, section 79E which deals with the carry forward of general domestic losses incurred from the 1989-90 income year also applies to primary production losses incurred from the 1989-90 income year. Thus, section 80AA only applies to primary production losses incurred prior to the 1989-90 income year.

Reason for amendment

Section 80AA does not contain equivalent provisions to subsections 79E(5)-(7) or subsections 80(2B)-(2D) (section 80 deals with the carry forward of general domestic losses incurred prior to the 1989-90 income year). Consequently, unlike general domestic losses or primary production losses incurred form the 1989-90 income year, taxpayer's must offset their pre-1989-90 carry forward domestic primary production losses against their assessable foreign income. In other words, such taxpayers are unable to choose whether or not to deduct their carry forward domestic primary production losses from their assessable foreign income.

Explanation of proposed amendments

The proposed amendment will, from the 1991-92 year of income, enable taxpayers who have carry forward domestic primary production losses to which section 80AA applies, to elect whether to offset those losses against their assessable foreign income. This will be achieved by the insertion of subsections (5A), (5B), (5C) and (5D) into section 80AA.

Subsection 80AA(5A) will ensure that carry forward domestic primary production losses under section 80AA will only be offset against a taxpayer's assessable foreign income to the extent that the taxpayer elects to offset those losses under subsection 80AA(5B).

Subsection 80AA(5C) defines 'assessable foreign income' to have the same meaning as in section 160AFD. 'Assessable foreign income' as defined in section 160AFD comprises two kinds of amounts derived by a taxpayer. First, it encompasses amounts that are foreign income within the meaning of section 6AB. The term also includes a capital gain or a profit from a source in a foreign country to the extent that the profit or gain is included in the taxpayer's assessable income for the year of income. However, it does not include that part of a profit or gain which is included in the taxpayer's assessable income under Part IIIA (i.e., the capital gains tax provisions).

Subsection 80AA(5D) provides that an election by a taxpayer to offset domestic primary production losses against assessable foreign income must be made within 6 months after the commencement of subsection 80AA(5D) (i.e., within 6 months from when this Bill receives Royal Assent) or when the taxpayer lodges an income tax return for a year of income to which the election relates. An election may also be made within such further period as the Commissioner of Taxation allows.

Amendments to the Taxation Administration Act 1953

Method of payment of taxation and child support liabilities

Summary of proposed amendments

Purpose of amendment: This Bill will insert a provision into the Taxation Administration Act 1953 (the Act) to permit the making of Regulations under that Act in relation to the payment of taxation and child support liabilities. These Regulations will enable taxpayers to pay their taxation and child support liabilities through the recently introduced BILLPAY and Electronic Funds Transfer systems.

Date of Effect: The amendments will take effect from the date on which the amending Act receives Royal Assent.

Background to the legislation

The Australian Taxation Office recently introduced, as part of its Modernisation Program, the Agency Billpay Service (BILLPAY) and the Electronic Funds Transfer (EFT) systems.

BILLPAY will enable taxpayers to pay their taxation debts and other levies and charges administered by the Commissioner of Taxation, as well as any child support liabilities, through any Australia Post branch in the Commonwealth of Australia. EFT will enable taxpayers to pay these debts and charges etc. by using the "Direct Entry" system made available by Australian financial institutions.

Existing Regulations, made under a number of taxation laws, provide for payment to the Commissioner of Taxation and a very limited range of Commonwealth agents.

The introduction of BILLPAY and EFT, as well as making payment more convenient, will provide the opportunity to simplify the relevant laws by inserting one set of Regulations that deal with all payment arrangements into the Taxation Administration Regulations. To achieve this objective the Principal Act is to be amended to authorise the making of Regulations which will set out the payment arrangements for all taxation, levy, charge and child support liabilities.

Explanation of proposed amendments

The proposed amendment will enable Regulations to be made under new section 16A of the Act. These Regulations will apply to any liability that arises under any Act, or any Regulation, that is administered by the Commissioner of Taxation.

The liabilities to be covered by these Regulations will include taxation debts, levies, charges and child support debts [Clause 117 - new subsection 16A(1)].

The amendment will enable Regulations to be made under the Act which will provide for the methods by which these debts may be paid [Clause 117 - new subsection 16A(2)].

In addition, the amendment will allow Regulations to be made that will provide for the making of payments under BILLPAY and EFT and the use of credit and debit cards [Clause 117 - new subsection 16A(3)].

Amendments relating to taxation offences

Summary of proposed amendments

Purpose of amendment: To make technical amendments and correct an inconsistency in the Act in relation to penalties for taxation offences.

Date of Effect: Date of Royal Assent of the amending Act

Background to the legislation

Part III of the Act contains the provisions relating to prosecutions and offences.

The four amendments proposed to Part III in this Bill are intended to correct inconsistencies in those provisions and formalise a 1990 amendment to the Act, which was made with other amendments to the Crimes Act 1914 (the Crimes Act), concerning the time at which a prosecution may commence.

Explanation of proposed amendments

Court may order payment of amount in addition to penalty

Section 8W currently contains a penalty regime for persons convicted of an offence for making (section 8K), recklessly making (section 8N) or knowingly making (section 8P) false or misleading statements.

The current regime does not provide for penalties in respect of convictions for offences under sections 8C (failure to comply with taxation law requirements), 8D (failure to answer questions when attending before the Commissioner) and 8H (failure to comply with an order to comply).

The first amendment proposed [Clause 117] will insert a new section into the Act [New section 8HA] to provide penalties for persons convicted under sections 8C, 8D or 8H. New section 8HA is similar to section 8W but refers to convictions for offences under sections 8C, 8D and 8H.

Proposed new subsection 8HA(2) is similar in operation to new subsection 8W(3) and provides that a matter dealt with under section 19B of the Crimes Act, which is explained below, will be treated as a conviction for penalty purposes.

Under section 19B of the Crimes Act, a court does not necessarily have to record a conviction where an offence has been proven. For example, a court making an order, commonly referred to as a good behaviour bond, has the effect of discharging the defendant without proceeding to a conviction.

This means that despite the fact that the offence with which the person was charged has been proved, no conviction will be recorded against the defendant and the person will be released without conviction.

The operation of section 19B of the Crimes Act is currently recognised in subsections 8B(4) and 8J(5) of the Act. Those subsections provide that, for specific purposes in the Act, a reference to the conviction of a person includes a reference to an order made under section 19B of the Crimes Act.

The second amendment proposed [Clause 119] will amend section 8W of the Act to ensure that a matter dealt with under section 19B of the Crimes Act 1914 will be treated as a conviction for penalty purposes [New subsection 8W(3)].

Prosecution of taxation offences

A person charged with several offences against sections 8T (keeping incorrect records with intent to deceive or mislead) or 8U (falsifying or concealing the identity or location of a person with intent to deceive or mislead) is guilty of an offence.

These offences will generally be dealt with together and will be summary offences when the proceedings commence. When the person is convicted of one of the summary offences, the other offences become second or subsequent offences and therefore indictable offences by the operation of these provisions. This is the case even when the offences are heard in the same sittings in the same court.

The third amendment [Clause 120] proposed will prevent a second summary offence becoming an indictable offence where a person is convicted of the first summary offence before the same court in the same sitting. [New subsections 8ZA(5) to (7)]

The fourth amendment [Clause 121] proposes to formalise an amendment to subsection 8ZB(2) of the Act which currently refers to section 21 of the Crimes Act. The reference to section 21 should be a reference to section 15B. The correct reference was achieved through subsection 35(3) of Act No.4 of 1990 which amended the Crimes Act. However, that amendment was not formally made to the Act. This amendment formalises the position.

Petroleum Resource Rent Tax Technical Amendments

Summary of proposed amendments

A. Transfer of expenditure from a lapsed project or exploration right

Purpose of amendment: To enable a person to transfer expenditure incurred on a petroleum project or exploration right to another petroleum project, where the person holds an interest in both entities but the project licence or exploration right on which the expenditure was incurred has ceased to be in force.

Date of Effect: 1 July 1991

B. Transfer of expenditure associated with transfer of entire interest in a petroleum project

Purpose of amendment: To ensure that when a person (the vendor) transfers his or her entire entitlement to assessable receipts from a petroleum project to another person (the purchaser), all exploration expenditure of the vendor on or after 1 July 1990 is taken to be incurred by the purchaser.

Date of Effect: 1 July 1991

A. Transfer of expenditure from a lapsed project or exploration right

Background to the legislation

Under the Petroleum Resource Rent Tax Assessment Act 1987 (the PRRT Act), taxpayers who have an interest in a petroleum project carry forward their expenditure on that project, with augmentation, until their receipts have absorbed the expenditure. Taxpayers who have an interest in more than one petroleum project must transfer unused exploration expenditure incurred on or after 1 July 1990 between projects, if possible. They then pay PRRT on their net receipts.

The transfer must be in accordance with general transfer rules in the Schedule to the PRRT Act. Part 5 of the Schedule deals with project interests of a single taxpayer and Part 6 with project interests of group companies.

The person must transfer unused expenditure incurred on a petroleum project (that is, associated with a production licence) or on an exploration right. Exploration right is defined in Clause 1 of the Schedule to include a retention lease or exploration permit. Transfers can only be made to a project with a notional taxable profit (calculated under the Schedule), that is, to projects which would have a taxable profit if expenditure were not transferred to them. Transfers are made preferentially to the most recent production licence.

The common interest rule requires that the taxpayer has an interest in:

·
the project or exploration right on which the expenditure was incurred (the transferring entity); and
·
the project to which it is transferred (the receiving entity) from the beginning of the financial year in which the expenditure was incurred to the end of the financial year in which it is transferred (the transfer year).

The common interest rule is contained in clause 22 of the Schedule in relation to a single with interests in more than one petroleum project and in clause 31 in relation to a group of companies. For group companies, it requires one group company to have held the interest in the transferring entity, another to have held an interest in the receiving entity, and both to have been group companies for the relevant period. The rule ensures that during the transfer year, a person cannot buy up a PRRT-liable project to receive expenditure from a failed exploration project, or buy up a failed project in order to transfer expenditure to a PRRT-liable project.

Explanation of proposed amendments

Where the production licence or exploration right associated with the transferring entity lapses before the end of the transfer year, the taxpayer is unable to transfer expenditure associated with the lapsed licence or right because the common interest rule is not satisfied. In effect, the transferring entity has ceased to exist before the expenditure could be transferred; so the taxpayer's interest has also ceased to exist.

This Bill amends the Schedule to enable transfer of expenditure where the licence or exploration right associated with the transferring entity has ceased to be in force.

The day the licence or exploration right associated with the transferring entity has ceased to be in force will be the finishing day in relation to the transferring entity [Clause 1 of the Schedule to the Act; Clause 110].

Where the transferring entity is a petroleum project, the finishing day is the first day on which there is no longer in force a production licence in relation to the project. This is because there may be more than one licence associated with the project. Where the transferring entity is an exploration right, the finishing day is the day on which the retention lease or exploration permit ceases to be in force [Clause 1 of the Schedule to the Act; Clause 110].

The common interest rule in clause 22 will be amended so that a person transferring expenditure is not required to have held an interest in the transferring entity after the finishing day in relation to that entity [New subclause 22(2A) of the Schedule to the Act; Clause 114].

Under Part 6 of the Schedule, a group company which has unused exploration expenditure incurred after 1 July 1990 on a project (a "loss" company) must transfer as much as possible of that expenditure to other companies in the group with projects that have taxable profits (a "profit" company). The common interest rule in clause 31 requires that the "loss" company must hold an interest in the transferring entity and the "profit" company hold an interest in the receiving project from the beginning of the financial year in which the unused expenditure was incurred to the end of the transfer year.

Clause 31 will be amended so that the "loss" company will not be required to hold an interest in the transferring entity at a time after the finishing day in relation to that entity [New subclause 31(2A) of the Schedule to the Act; Clause 115].

Example

In July 1990, a person has interests in two petroleum projects and incurs expenditure on both of them. The person does not pursue one project as it is not economically viable. That production licence is allowed to lapse at the end of the 1991 income year. The person does proceed with the other project, and in the 1993 income year this project has become profitable and is PRRT-liable. Under the existing law, the person cannot transfer expenditure from the lapsed project to the profitable project.

The amendment will enable the person to transfer this expenditure. The finishing day in relation to the transferring project may be earlier than the transfer year. In this example, the finishing day was the last day of the 1991 income year, two years before the transfer of expenditure.

The same applies to group companies. Suppose a group of companies initiates a number of exploration ventures in an area after 1 July 1990. Subsidiary A incurs expenditure on an exploration permit but finds insufficient petroleum to proceed and does not renew the permit when it expires on 1 January 1993. However, Subsidiary B finds petroleum in its exploration permit area and takes out a production licence. In the 1995 income year, it has net taxable profits.

Under the existing law, the unused transferable exploration expenditure of Subsidiary A cannot be transferred to Subsidiary B. The amendment will enable this expenditure to be transferred although the transfer occurs after the finishing day (1 January 1993) in relation to Subsidiary A's project.

Consequential amendments

Parts 2, 3 and 4 of the Schedule to the Act deal with the calculation of class 2 ABR exploration expenditure, class 2 GDP factor expenditure and all amounts of transferable expenditure in relation to a project, a person and a financial year. The matters dealt with in each of these parts are outlined in clause 6 (Part 2), clause 10 (Part 3) and clause 13 (Part 4). In each of these parts, the financial year is called the assessable year .

The amendments will make it clear that the assessable year may be a financial year which starts after the finishing day in relation to a petroleum project or exploration right. That is, transferable expenditure may be calculated and transferred in a financial year after any project licence, exploration lease or retention permit associated with the transferring entity has ceased to be in force [Clauses 6, 10, and 13 of the Schedule to the Act; Clauses 111, 112 and 113].

B. Transfer of expenditure associated with the transfer of an entire entitlement to derive receipts from a petroleum project.

Background to the Legislation

A taxpayer (the vendor) can transfer their entire entitlement to derive receipts from a petroleum project to another person (the purchaser) under section 48 of the PRRT Act.

Under paragraph 48(a), at the time of transfer of the entire entitlement, the purchaser of the entitlement is taken to have derived any assessable receipts and to have incurred any deductible expenditure in relation to the project, which were actually derived or incurred by the vendor in the financial year up to the transfer time.

Under the existing law, not all exploration expenditure incurred on or after 1 July 1990 is able to be transferred to the purchaser under section 48. Calculation of deductible expenditure of the vendor in relation to a project must be done in accordance with the Schedule to the PRRT Act. As a result of this calculation, some exploration expenditure incurred on or after 1 July 1990 may be transferable to another project held by the vendor. Therefore it will not be deductible for the project on which it was incurred.

In particular, class 2 augmented bond rate (ABR) exploration expenditure and class 2 GDP factor expenditure, calculated under Parts 2 and 3 of the Schedule, are transferable to other projects of the vendor. The calculation of these expenditures of the vendor may have the result that some amounts of expenditure in relation to a project are taken not to have been incurred by the vendor.

For example, take the calculation of class 2 ABR exploration expenditure. If it is found that the vendor has no notional taxable profit , as defined in clause 5 of the Schedule, in relation to the project and the financial year, then under clause 7 any class 2 ABR exploration expenditure in relation to the project is taken not to have been incurred by the vendor. Instead, this amount is transferable to any other project held by the vendor.

Where an amount of expenditure is taken not to have been incurred by the vendor in this way, it cannot be "deductible expenditure" of the vendor under Section 48. In effect, it is rendered "invisible" to section 48. Therefore it cannot be transferred to the purchaser.

Explanation of proposed amendments

Section 48 will be amended to enable all expenditure incurred or taken to be incurred by the vendor of an entire interest in a project to be transferred to the purchaser of the entire interest.

This is done in two stages in the amendments. First, class 2 ABR expenditure and class 2 GDP factor expenditure will be separated out from other deductible expenditure. All other kinds of deductible expenditure will continue to be dealt with in the same way as they are at present. That is, the following categories of expenditure will be augmented up to the transfer time in the hands of the vendor, and the augmented amounts transferred to the purchaser:

·
class 1 ABR general expenditure;
·
class 1 ABR exploration expenditure;
·
class 1 GDP factor expenditure;
·
class 2 ABR general expenditure.

None of these amounts are able to be transferred to other projects of the vendor. The problem of calculation under the Schedule therefore does not arise [Subparagraph 48(1)(a)(i)], Clause 109].

The purchaser will then be taken to have incurred, in addition to the above amounts, any expenditure which would have been included in the incurred exploration expenditure amount in relation to the vendor and the project, as if the financial year in which the transfer of the interest occurs had ended immediately before the transfer time [New subparagraph 48(1)(a)(ia)].

Transfer of incurred exploration expenditure amount

The incurred exploration expenditure amount in relation to the vendor is defined in clause 1 of the Schedule. It includes:

·
the amounts of exploration expenditure actually incurred by the person in the financial year in relation to the project; and
·
any expenditure which was transferred previously to the vendor under section 48.

In effect, this includes all expenditure which was actually incurred and has neither been absorbed against receipts from the project nor transferred to be absorbed against receipts from another project.

The definition operates in the same way for a single project and a combined project in which the person has an interest. For a combined project, the definition also includes actual exploration expenditure and section 48 expenditure of the person incurred before the combination certificate came into force.

The purchaser will be taken to have incurred all exploration expenditure actually incurred by the vendor plus all previous section 48 expenditure of the vendor. These amounts, which make up the incurred exploration expenditure amount , form the basis for the calculation of class 2 ABR exploration expenditure and class 2 GDP factor expenditure of the vendor under the Schedule. In contrast to other deductible expenditure transferred under section 48, these amounts are not augmented [Note to new subparagraph 48(1)(a)(ia)].

Under the amendment, the vendor of an entire interest under section 48 bypasses entirely the calculation of class 2 ABR exploration expenditure, class 2 GDP factor expenditure and transferable expenditure associated with the project which is the subject of the section 48 transaction [New subparagraph 48(1)(a)(ia)].

Because the incurred exploration expenditure amount has not been compounded up to the transfer time, the purchaser will be treated as if they had incurred the expenditure at the time when it was actually incurred, or taken to be incurred, by the vendor. The purchaser will be placed in the shoes of the vendor. The expenditure is compounded in the purchaser's hands as from the date on which it was actually incurred (or taken to be incurred) by the vendor. Under the Schedule, compounding is calculated to the extent that expenditure is to be absorbed in a particular year [New subsection 48(2)].

Previous section 48 expenditure of the vendor

Included in the incurred exploration expenditure amount as defined in clause 1 of the Schedule is any amount of exploration expenditure that a person is taken by section 48 to have incurred in a financial year in relation to the project.

Under the amendments, expenditure which the vendor was taken to have incurred under a previous section 48 transfer of the entire entitlement to receipts of the project will be transferred to the purchaser without being compounded. So the expenditure will be compounded in the purchaser's hands as from the date when it was taken to be incurred by the vendor. Under the Schedule, compounding is calculated to the extent the expenditure is to be absorbed in a particular year [New subparagraph 48(1)(a)(ia)].

That part of the definition of incurred exploration expenditure amount (for both single and combined projects) which deals with previous section 48 expenditure will be amended to refer specifically to expenditure that the person is taken by new subparagraph 48(1)(a)(ia) to have incurred, in relation to the financial year in relation to the project. This will ensure that expenditure transferred under section 48 will be transferred uncompounded under any successive section 48 transaction [Clause 1 of the Schedule to the Act; definition (a)(ii) and (b)(ii)].

Expenditure not transferable

The purchaser is not able to transfer expenditure which he or she is taken to have incurred under section 48 to another PRRT-liable project held by the purchaser. This is prevented by the common interest rule in clauses 22 and 31 of the Schedule. Expenditure related to the project in which the interest is transferred under section 48 can only be offset against receipts of that project.

Example V Co. holds the whole interest in a project and has no other project interests. In the 1992-93 financial year, V Co. decides to get out of the petroleum exploration business and transfers its entire interest in the project to P Co. with this intention. At the transfer time, V Co. had derived total assessable receipts from the project of $350 million. It had incurred total expenditure before 1 July 1990 of $400 million (as augmented), exploration expenditure of $50 million in the year ending 30 June 1991 and exploration expenditure of $20 million in the year ending 30 June 1992.Under section 48(1)(a)(i), P Co. is taken to have derived all assessable receipts which would have been receipts of V Co. had the financial year ended just before the transfer time. Therefore P Co. is taken to have derived $350m in assessable receipts on the project. By 48(1)(b), V Co. is taken not to have derived this amount.Under the existing law, the full deductible expenditure of V Co. must be established. This involves the calculation of any class 2 ABR exploration expenditure of V Co. (there is no GDP factor expenditure in this example), as well as its other deductible expenditure. Under the amendments, it is only necessary to determine deductible expenditure of V Co. other than class 2 ABR exploration expenditure for transfer under 48(1)(a)(i).Treatment of deductible expenditure other than class 2 ABR exploration expenditure will be the same under the amendments as under the existing law. Therefore P Co. is taken to have incurred $400m class 1 expenditure under section 48(1)(a)(i) [New subparagraph 48(1)(a)(i)]. By paragraph 48(1)(b), V Co. is taken not to have incurred this amount.

Treatment of 1991 and 1992 exploration expenditure under the existing law

Class 2 ABR exploration expenditure of V Co. is calculated under Part 2 of the Schedule as follows:

Assessable receipts = $350m
Deductible expenditure (other than class 2 expenditure) = $400m
Notional taxable profit under clause 5 = 350 - 400
= - $50m

There is no notional taxable profit. Therefore V Co. is taken by clause 7 not to have incurred any class 2 ABR exploration expenditure. This means that the $70m total exploration expenditure actually incurred by V Co. in the 1991 and 1992 financial years is not transferred to P Co. under section 48(a)(i).

Instead, that expenditure is deemed to be transferable to another project in V Co.'s hands. However, V Co. has no other projects eligible to receive this expenditure and has no intention of investing in further projects. Even if it had, it fails the common interest rule because it has sold its entitlement to receipts from the project. Therefore the expenditure cannot be used by either company.

Treatment of 1991 and 1992 exploration expenditure under the amendment

P Co. is taken to have incurred amounts that would have been included in the incurred exploration expenditure amount of V Co. for the financial year [New subparagraph 48(1)(a)(ia)].

This is not a combined project, so paragraph (a) of the definition of incurred exploration expenditure amount applies. In addition, there is no previous section 48 expenditure to be transferred because V Co. initiated the project and did not buy into it. Therefore the incurred exploration expenditure amount in this example is the amount of exploration expenditure actually incurred by V Co. in the financial year in relation to the project.

The exploration expenditure actually incurred under the definition is the exploration expenditure incurred by V Co. in 1991 and 1992. Therefore, P Co. is taken to have actually incurred $50m exploration expenditure in the 1991 financial year and $20m exploration expenditure in the 1992 financial year. These amounts are not augmented before the transfer [New subsection 48(2)].

Under the amendments, all expenditure associated with the project will be transferred to P Co. By paragraph 48(1)(b), V Co. is taken not to have incurred this expenditure. Therefore, V Co. has no longer any association with expenditures or receipts in relation to the project interest it has transferred to P Co.

Expenditure received by P Co. as a result of this section 48 transaction must be offset against receipts of the project on which it was incurred or was taken to be incurred. It will be compounded when it is offset, wholly or partly, in this way.

Clause 22 of the Schedule prevents the transfer to another project held by P Co. of expenditure related to a project entitlement which has been purchased under section 48. The purchaser (P Co.) must have held an interest with respect to the transferring entity (the project P Co. purchased from V Co.) at all times from the beginning of the financial year in which the expenditure was incurred to the end of the transfer year in order to transfer expenditure.

Glossary of Terms

Term Definition
Base amount the lesser of either the original cost price of the horse, or its depreciated value.
Controlled foreign company ( CFC) a non-resident company in which resident individuals, partnerships, companies or trusts hold specified interests. The meaning of the term is set out in section 340 of the Act.
Current year of income The current year of income for provisional tax purposes, is the year of income in respect of which provisional tax is being calculated. This calculation is based on the preceeding year's taxable income and various rebate and credit entitlements contained in the taxpayer's preceeding years notice of assessment.
Dependant in relation to a person is a spouse or de facto spouse and any child, including an adopted child, a step child or an ex-nuptial child of the person.
Eligible employee in relation to a taxpayer is basically an employee of the taxpayer - whether that person is employed directly or indirectly by the taxpayer. An employee is indirectly employed by the taxpayer if that employee works for a company which is associated with the taxpayer.
Environment all aspects of the surroundings of humans, both the physical and social environment.
Environment protection activity activity undertaken to prevent, combat or rectify pollution or treat, clean up or remove waste.
Finance scheme guidelines guidelines made under section 39EA of the Industry Research and Development Act 1986.
Financing cost this term is defined in subsection 67AAA(3) to include expenditure incurred in obtaining finance to pay personal superannuation contributions or life insurance premiums such as interest or a payment in the nature of interest and borrowing expenses.
Government bodies authorities of the Commonwealth, a State or Territory and will include universities, other educational institutions and research institutions owned by the public sector.
Holding days the number of days the horse is actually held for breeding purposes unless the horse was not held for breeding purposes continuously. If this is the case, the holding days for the purposes of the formulae is the number of days from the last occasion the horse began to be held for breeding purposes.
Horse breeding stock a horse acquired by taxpayer under a contract entered into on or after 19 August 1992, that is three years old at the end of the year of income, and is held for breeding purposes.
Income-producing activity any business or investment activity which produces income.
Ineligible finance scheme a finance scheme that the Industry Research and Development Act 1986 Board determines to be ineligible.
Listed country is a country that is treated afor the purposes of the CFC and transferor trust measures as having a tax system that is generally comparable to that of Australia. A list of these comparable taxing countries is contained in Part 8A of the Income Tax Regulations.
Live stock animals that are not used as beasts of burden or working beasts in a business other than primary production
Margin for error In relation to a variation of provisional tax, the percentage of error allowed in estimating taxable income or PAYE tax instalment deductions before additional tax is imposed.
Nominated percentage (male horses only), is the percentage of the cost of a horse which the taxpayer nominates to write down for a particular year of income. It cannot be greater than 25%.
Opening value the value at the end of the previous year of income or,if the horse became breeding stock during the year of income, the lessor of the original cost of the horse; or its depreciated value.
Pilot plant plant which is used for experimental purposes and not in commercial production.
Pollution emissions which damage the environment or may be potentially dangerous; includes noise pollution.
Preceding year of income The preceeding year of income for provisional tax purposes, is the year of income prior to the current year of income. For example, the actual taxable income and the rebate and credit entitlements contained in the taxpayer's 1991-92 (preceeding year) notice of assessment are used to estimate provisional tax payable for the 1992-93 (current year) year of income.
Provisional Tax Uplift Factor The percentage that is applied to the preceding years taxable income and to certain rebate and credits in determining the provisional tax payable for the current year.
Reducing factor (female horses only) is the greater of three or 12 less the age of the horse (in whole years) on the day it began to be held for breeding purposes.
Risk component The whole premium will consist of a risk component where it is received in respect of a:

-
term insurance policy; or
-
a rider or supplementary benefit attached to another policy where the sum insured is payable on death within a specified term.

Special closing value is the " opening value" less "reduction amount", or $1 where a female horse is 12 years of age or older or a horse (male or female) has been written down to the point where the "reduction amount" exceeds the "opening value".
Split dollar arrangement an arrangement whereby one party, usually the employee, pays the part of the premium of a life insurance policy which is an investment component. The other party, usually the employer, pays the part of the premium which is the risk component.
TFN tax The amount of tax that has been deducted from investment income by virtue of the taxpayer's failure to quote his or her Tax File Number (TFN) to an investment body.
Unlisted country is a foreign country which is not a listed country.

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