House of Representatives

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 1993 will amend various Acts (unless otherwise indicated all amendments refer to the Income Tax Assessment Act 1936 ) by making the following changes:

Fringe Benefits Tax Assessment Act 1986 ("FBTAA")

•

Reflects a change of name for the Commonwealth Savings Bank of Australia to the Commonwealth Bank of Australia in subsection 136(1) of the FBTAA.

Date of effect: 1 January 1993.

Proposal announced: Not previously announced.

Financial Impact: Nil

•

Changes the word "subsection" to "section" in paragraph 37(b) of the FBTAA.

Date of effect: The amendment will commence from the day the Bill receives Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Nil

Gifts - Shrine of Remembrance Restoration and Development Trust

•

Allows, for a limited period, income tax deductions for gifts made to the Shrine of Remembrance Restoration and Development Trust.

Date of effect: On or after 25 November 1992 and on or before 30 June 1995.

Proposal announced: Treasurer's Press Release No. 183 of 1992.

Financial impact: The impact of the amendment on revenue is not expected to be significant.

Capital Gains Tax - Depreciable Property Installed on Crown Leases

•

Amends the capital gains tax provisions to ensure that they treat disposals of interests in plant installed on Crown leases of land consistently with their treatment under the depreciation Crown lease provisions.

The amendment will prevent capital gains and losses from accruing in respect of plant installed on a Crown lease where a lease is terminated but the lessee retains an interest in the plant. It will also prevent capital losses from accruing in respect of plant installed on a Crown lease where the lease is terminated but an associate of the lessee obtains an interest in the plant.

Date of effect: Applies to relevant disposals occurring after 26 February 1992.

Proposal announced: The amendments were foreshadowed in the Explanatory Memorandum to the depreciation Crown lease amendments contained in Taxation Laws Amendment Bill (No.3) 1992 [paragraphs 6.46 to 6.49].

Financial impact: Not capable of accurate estimation. The amendments are to prevent anomalous results.

Dividend Streaming Amendments

•

Ensures the dividend streaming provisions apply to a dividend streaming arrangement that involves the use of an interposed entity between a shareholder and the company or companies carrying out or party to the arrangement.

Date of effect: The amendments will apply to dividends paid by resident companies on or after the date the Bill receives Royal Assent.

Proposal announced: Not announced.

Financial impact: This change will prevent the loss of revenue amounts which cannot be quantified.

Amendments Relating to Accrued Leave Transfer Payments

•

Provides for the assessability and deductibility of payments made between employers in industries where employees regularly transfer from one employer to another.

Where such payments are made in respect of leave entitlements accrued by employees during the course of their employment with a number of employers, and they are made to facilitate the transfer of employees between employers pursuant to, or to accommodate the implementation of, an industrial award, the payments will be assessable to the employer who receives them and deductible to the employer who pays them.

Date of effect: The amendments will come into effect from the date upon which the Bill receives Royal Assent, and will apply retrospectively as if the amendments had been made at the time subsection 51(3) of the Act was enacted in its original form.

Proposal announced: Not previously announced.

Financial impact: The amendments are not likely to have any significant effect on the revenue. In the year in which an accrued leave transfer payment is made, it will be assessable to the employer who receives it and will be an allowable deduction to the employer who makes the payment.

Technical Amendments to Capital Allowances

Depreciation - Broadbanding

•

Amends the depreciation broadbanding measures to make it clear that rates of depreciation determined on an effective life basis that correspond with a broadbanded rate cannot be increased to the next highest broadbanded rate.

Date of effect: The amendment is to apply from the same time as the depreciation broadbanding; that is, in relation to the 1991/92 and later years of income.

Proposal announced: Not previously announced.

Financial impact: The amendment will prevent revenue losses that cannot be quantified.

Depreciation - Crown Leases

•

Amends the plant depreciation Crown lease provisions in relation to disposals of pre-27 February 1992 plant for which the prime cost method of calculating deductions has been used. The amendment will prevent balancing loss deductions being allowed for that portion of the cost of such plant which was only notionally depreciated before 27 February 1992 and ensure tax is imposed on recoupments of previously allowed deductions.

Date of effect: The amendment is to apply in relation to disposals occurring after 26 February 1992.

Proposal announced: Not previously announced.

Financial impact: The amendment will prevent unintended losses to the revenue that cannot be quantified.

Depreciation - Option to Specify Lower Rate

•

Replaces an option whereby taxpayers each year may adopt lesser rates of depreciation for individual items of plant with a once-only option to adopt, at the time an asset first becomes depreciable, a lesser rate of depreciation that is not less than the rate based on the asset's effective life.

Date of effect: The change is to apply in relation to taxpayers' current and subsequent years of income.

Proposal announced: Not previously announced.

Financial impact: The amendment eliminates scope for abuse of the law. It is not possible to estimate the effect on the revenue.

Petroleum Mining Rollover Relief

•

Extends the petroleum mining rollover relief provisions to pre-18 September 1974 expenditure in relation to property used in petroleum mining activities.

Date of effect: The amendment applies from the same time as petroleum mining rollover relief applies to other expenditure; that is, to relevant disposals of mining property occurring after 6 December 1990.

Proposal announced: Not previously announced.

Financial impact: None. The amendment gives effect to announced Government policy.

Arrangements Relating to Property

•

Ensures that section 51AD and Division 16D can apply to property used in relevant arrangements where the taxpayer's entitlement to taxation deductions in relation to the property is not based on ownership.

Date of effect: The amendment is to apply to arrangements entered into after 16 December 1992.

Proposal announced: Not previously announced.

Financial impact: The amendment is a technical correction, the revenue effect of which cannot be quantified.

Pay-As-You-Earn (PAYE) Provisions - Definition of 'Salary or Wages', Variations of Deductions

•

Modifies the current arrangements for variations of tax instalment deductions so that an employee with more than one employer may obtain a single variation in the amount of PAYE deductions to be made from his or her salary or wages.

•

Includes in the definition of salary or wages in the PAYE provisions:

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training allowances paid to participants in the Landcare and Environment Action Program; and

-

remuneration and allowances paid to members of certain local governing bodies.

Date of effect: The amendments will apply on or after the date on which the amending Bill receives the Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Nil.

Amendments to the Depreciation Cost Price Limit Rules

•

Indexed annual limits are to apply in relation to financial years rather than years of income.

Date of effect: Applies to vehicles acquired after 16 December 1992.

Proposal announced: Not previously announced.

Financial impact: The amendment is expected to be revenue neutral.

•

Exempts motor cars specially fitted out for the carriage of disabled persons seated in wheel chairs from the depreciation cost price limit rules so that the cost of such vehicles will be fully depreciable when used in earning assessable income.

Proposal announced: Not previously announced.

Date of effect: Applies to vehicles acquired after 16 December 1992.

Financial impact: The cost of the concession is expected to peak at around $1 million a year in 7 years time.

Capital Gains Tax - Concessional Taxing Provisions

•

Ensures that the capital gains provisions do not apply inappropriately to tax an amount, or part of an amount, which is concessionally taxed under another provision of the Act. An amount is concessionally taxed where:

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the whole or part of an otherwise assessable amount is specifically not included in assessable income; and

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part of an otherwise non-assessable amount is specifically included in assessable income.

Date of effect: The amendment applies to amounts received as a result of the disposal of an asset which was created after 25 June 1992.

Proposal announced: Not previously announced.

Financial impact: The amendment is not expected to have any significant impact on revenue.

Capital Gains Tax - Cancellation of Statutory Licences

•

Prevents a statutory licensee from being deemed to receive the market value of his/her statutory licence when it is disposed of by way of cancellation for no consideration.

Proposal announced: Not previously announced.

Date of effect: 16 August 1989

Financial impact: The nature of the measure is such that a reliable estimate can not be provided.

Capital Gains Tax - Transfer of Capital Losses

•

Specifies that the amount of the cost base of shares and loans held by group companies in a company seeking to transfer a capital loss is to be determined as at the end of the year of income of the transferee company in which the loss is transferred, rather than when the agreement to transfer the loss is made.

Date of effect: The amendment proposed by Clause 50 will apply to agreements entered into after16 December 1992 .

Proposal announced: Not previously announced.

Financial impact: This amendment will have no impact on revenue.

Capital Gains Tax - Roll-over for the Transfer of Assets Between Group Companies

•

Proposes new anti-avoidance provisions in connection with the CGT roll-over available for assets transferred between group companies.

Date of effect: The proposed amendment will apply to disposals of assets occurring after 16 December 1992.

Proposal announced: Not previously announced.

Financial impact: These amendments do not have any significant impact on revenue.

Capital Gains Tax - Principal Residence Exemption

•

Amends the CGT principal residence exemption provisions to specify that where a dwelling is acquired under a contract which is executed at a particular time, and under the contract or a collateral contract the purchaser is entitled to occupy the dwelling prior to the passing of legal ownership, the period of ownership will be taken to commence at the time when the right of occupation first arises.

Date of effect: The amendment proposed by Clause 57 will apply to the disposal of assets after 19 September 1985.

Proposal announced: Not previously announced.

Financial impact: This amendment will have no impact on revenue.

Sales Tax Amendment (Transitional) Act 1992

•

Makes a number of minor technical corrections to the amendments contained in the Schedule to the Act which will amend the Australian Maritime Museum Act 1990 and the Crimes (Taxation Offences) Act 1980 .

Date of effect: 28 October 1992.

Proposal announced: No announcement made.

Financial impact: Nil

Amendment of the Taxation Administration Act 1953

•

Includes the Queensland Criminal Justice Commission within the definition of law enforcement agency for the purpose of obtaining access to taxation information.

Date of effect: Date of Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Nil.

Clauses Involved in the Proposed Amendments

Clause 1: Stipulates the short title of the Act as being Taxation Laws Amendment Act 1993.

Clause 2: Stipulates the commencement dates of the provisions of the Bill.

Fringe Benefits Tax Assessment Act 1986 ("FBTAA")

[See pages 25-26 for further details]

Clause 3: Defines "Principal Act" as meaning the Fringe Benefits Tax Assessment Act 1986 for the amendments proposed in Part 2 of the Bill.

Clause 4: Substitutes the words "Commonwealth Savings Bank of Australia" with the words "Commonwealth Bank of Australia" in subsection 136(1) of the FBTAA.

Clause 5: Commencement date for the amendment in Clause 4.

Clause 6: Substitutes the word "subsection" with the word "section" in paragraph 37(b) of the FBTAA.

Income Tax Assessment Act 1936

Clause 7: Defines "Principal Act" as meaning the Income Tax Assessment Act 1936 for the amendments proposed in Part 3 of the Bill.

Shrine of Remembrance Restoration and Development Trust

[See page 27 for further details]

Subclause 8(a): Proposes to insert new subparagraph 78(1)(a)(cx) into the Act, to ensure that gifts made to the Shrine of Remembrance Restoration and Development Trust are tax deductible.

Subclause 8(b): Proposes to insert new subsection 78(6AM) into the Act, to limit the deductibility of gifts made under subparagraph 78(1)(a)(cx) to those gifts that are made on or after 25 November 1992 and on or before 30 June 1995.

Capital Gains Tax - Depreciable Property Installed on Crown Leases

[See pages 29-37 for further details]

Clause 9: Is a technical amendment to insert a reference to new Division 5B of Part IIIA [see Clause 11 ] in the section 110 definition of "notional Part IIIA disposal", relevant for the provisions dealing with the taxation of certain income of life assurance companies.

Clause 10: Is also a technical amendment to insert a reference to new Division 5B of Part IIIA [see Clause 11 ] in the section 116E definition of "notional Part IIIA disposal", relevant for the provisions dealing with the taxation of the annuity and insurance business of certain registered organisations.

Clause 11: Inserts new Division 5B [sections 160ZWB to 160ZWD] in Part IIIA [capital gains and capital losses]. This Division contains measures to ensure that the capital gains tax provisions will treat certain disposals of assets comprising plant installed on Crown leases in a manner consistent with their treatment under the depreciation Crown lease provisions.

Clause 12: Is a technical amendment to insert a reference to new Division 5B of Part IIIA [see Clause 11 ] in section 304, which, broadly, stipulates that the capital gains tax rules constitute the primary taxation code for gains and losses on the disposal of assets by superannuation funds.

Clause 13: Is a technical amendment to insert a reference to new Division 5B of Part IIIA [see Clause 11 ] in the section 317 definition of "CGT roll-over provisions", relevant for the provisions dealing with the attribution of income of controlled foreign companies.

Clause 14 : Specifies that the above amendments apply to relevant disposals of assets that occur after 26 February 1992.

Dividend Streaming Amendments

[See pages 39-46 for further details]

Clause 15: Inserts three additional types of arrangement into the definition of 'dividend streaming arrangement' in section 160APA.

Clause 16: Amends section 160AQCB to ensure the provision operates as intended when an interposed entity is used in a dividend streaming arrangement.

Clause 17: Proposes that the amendments will apply to dividends paid on or after the date of commencement of the new provisions. The provisions commence on the date the Bill receives Royal Assent.

Amendments Relating to Accrued Leave Transfer Payments

[See pages 47-52 for further details]

Clause 18: Inserts in section 6 of the Income Tax Assessment Act a definition of the term 'accrued leave transfer payment'. It is defined as having the meaning given by section 6G.

Clause 19: Inserts after section 6F of the Act new section 6G which defines what is meant by 'accrued leave transfer payments' and also defines the meaning of the word 'employee' for the purposes of the definition of 'accrued leave transfer payments'.

Clause 20: Inserts new paragraph 26(ec) into the Act.

Clause 21: Omits subsection 51(3) from the Act and replaces it with a new subsection 51(3).

Clause 22: Provides that the amendments made by Division 5 of the Bill will apply as if they had been made by subsection 3(1) of the Income Tax Assessment Amendment Act (No. 3) 1978 .

Depreciation - Option to Specify Lower Rate

[See pages 58-60 for further details]

Clause 23: Inserts new subsections 55(8) & (8A) which replace the present option, whereby taxpayers may adopt lesser rates of depreciation each year for individual plant items [subsection 55(8)], with a once-only option to adopt, at the time an asset first becomes depreciable, a lesser rate of depreciation that is not less than the rate based on the asset's effective life.

Clause 24: Specifies that the new option arrangement is to apply in relation to a taxpayer's current and subsequent years of income.

Arrangements Relating to Property

[See pages 63-65 for further details]

Clauses 25 to 31: The following new sections will make it clear that section 51AD and Division 16D apply to property where the taxpayer's entitlement to deductions in relation to the property is not based on ownership:

•

Section 122U - Division 10A [Mining and Quarrying]

•

Section 123G - Division 10AAA [Mineral and Quarry Materials Transport]

•

Section 124AR - Division 10AA [Petroleum Mining]

•

Section 124JF - Division 10A [Access roads and buildings in timber operations]

•

Section 124ZEA - Division 10C [Short-Term Traveller Accommodation]

•

Section 124ZLA - Division 10D [ Income-Producing Buildings & Structural Improvements]

Clause 32 : Specifies that these amendments apply to arrangements entered into after 16 December 1992.

Petroleum Mining Rollover Relief

[See pages 60-62 for further details]

Clause 33: Amends section 124AMAA to ensure that pre-18 September 1974 expenditure in relation to petroleum mining activities is covered by existing petroleum mining rollover relief provisions.

Clause 34: Specifies that the amendment applies to disposals occurring after 19 December 1991, the date from which the existing rollover relief provisions apply.

Clause 35: Ensures that the amendment applies to elections that have been made in relation to disposals of relevant property within wholly-owned company groups that occurred after 6 December 1990 and before 20 December 1991.

Pay-As-You-Earn (PAYE) Provisions - Definition of 'Salary or Wages', Variations of Deductions

[See pages 67-74 for further details]

Clause 36: Includes in the definition of 'salary or wages' in subsection 221A(1):

•

training allowances paid to participants in the Landcare and Environment Action Program [subclause 36(1)] ; and

•

payments of remuneration or allowances to members of an eligible local government body [subclause 36(2)] .

Clause 37: Inserts a new section 221B to enable a local governing body to resolve that it be treated as an eligible local governing body for PAYE purposes.

Clause 38: Amends section 221D to:

•

increase the penalty, for employers not making the correct PAYE deductions under subsection 221D(2), from $500 to $1000; and

•

enable the Commissioner to issue a single variation to an employee with more than one employer.

Clause 39: Increases the penalty contained in subsection 221F(13) from $50 to $100 where an employer fails to register with the Commissioner as a group employer.

Depreciation - Broadbanding

[See pages 53-54 for further details]

Clause 40: Amends repealed section 55 to make it clear that rates of depreciation determined on an effective life basis that correspond with a broadbanded rate cannot be increased to the next highest broadbanded rate.

Amendments to the Depreciation Cost Price Limit Rules

[See pages 75-79 for further details]

Change in basis of annual indexation of limits

Clause 41: Inserts new subsections 57AF(2) to (9), in place of existing subsections (2) to (12), specifying that annually indexed limits are to apply in relation to financial years rather than years of income.

Clause 42: Makes some technical amendments to subsection 59(6) - which deals with the apportionment of consideration received for the sale, loss or destruction of motor vehicles to which the depreciation cost price limit rules have applied - to reflect the re-numbering of the provisions of section 57AF as the result of the amendments contained in Clause 41 .

Clause 43: Specifies that the amendment applies to relevant motor vehicles acquired under contracts entered into after 16 December 1992 or, if constructed by a taxpayer, where construction commenced after that date.

It also specifies the transition from the former publishing requirement in relation to years of income to the new publishing requirement in relation to financial years.

Exemption of certain motor cars from the depreciation cost price limit rules

Clause 44: Inserts new paragraph 57AF(15)(d) which exempts motor vehicles specially fitted out for transporting disabled persons seated in wheelchairs from the depreciation cost price limit rules.

Clause 45: Specifies that the exemption applies to vehicles acquired under a contract entered in to after16 December 1992, or if constructed by a taxpayer, where construction commenced after that date.

It also contains safeguarding measures to prevent taxpayers obtaining access to the exemption in relation to motor cars acquired, commenced to be constructed or ordered by associates, end-users or lessors on or before16 December 1992.

Capital Gains Tax - Concessional Taxing Provisions

[See pages 81-84 for further details]

Clause 46: Amends the capital gains provisions to ensure that they do not apply inappropriately to tax an amount, or part of an amount, which is concessionally taxed under another provision of the Act.

Clause 47: States the date of effect of the amendment.

Capital Gains Tax - Cancellation of Statutory Licences

[See pages 85-86 for further details]

Clause 48: Amends section 160ZD of the Act so that the deemed market value rules contained in that section do not apply on the cancellation of a statutory licence where no consideration is received.

Clause 49: Provides for the amendment to apply from 16 August 1989.

Transfer of Capital Losses

[See pages 87-88 for further details]

Clause 50: Proposes an amendment to subsection 160ZP(7A) which will require that the cost base of shares and loans held in a loss company is to be determined at the end of the year of income of the transferee company in which the agreement to transfer the capital loss was made.

Clause 51: Provides that the amendment will apply from 16 December 1992.

Capital Gains Tax Roll - over for the Transfer of Assets Between Group Companies

[See pages 89-97 for further details]

Clause 52: Makes amendments to section 160Z consequential on the amendments made by Clauses 53 and 54.

Clause 53 : Repeals paragraphs 160ZZO(1)(g) and 160ZZO(1)(h).

Clause 54: Inserts new section 160ZZOA which provides that an asset will be deemed to be disposed of and reacquired for its market value when a group company to which the asset was transferred ceases to be a member of the company group.

Clause 55: Contains consequential amendments to the record keeping requirements contained in section 160ZZU.

Clause 56: Provides that the amendments relating to group company asset roll-overs apply to disposals of assets after 16 December 1992.

Capital Gains Tax - Principal Residence Exemption

[See pages 99-100 for further details]

Clause 57: Proposes new subsection 160ZZQ(1AB) which will specify that a purchaser acquiring a dwelling under a contract will be taken to have owned the dwelling at the time, prior to the acquisition of legal ownership, when she or he is first entitled to occupy the dwelling either under the purchase contract, or under a collateral contract.

Clause 58: Provides that new subsection 160ZZQ(1AB) will apply to disposals of assets after 19 September 1985.

Clause 59 : Amendment of assessments.

Sales Tax Amendment (Transitional) Act 1992

[See page 101 for further details]

Clause 60: Defines Principal Act' as meaning the Sales Tax Amendment (Transitional) Act 1992 for the amendments proposed in Part 4 of the Bill.

Clause 61: Makes minor technical amendments to the Schedule to the Principal Act in relation to the Australian National Maritime Museum Act 1990 and the Crimes (Taxation Offences) Act 1980 .

Amendment of the Taxation Administration Act 1953

[See page 103 for further details]

Clause 62: Defines 'Principal Act' as meaning the Taxation Administration Act 1953 for the amendments proposed in Part 5of the Bill.

Subclause 63(a): Amends the definition of "head" in section 2 of the Principal Act by inserting the Chairman of the Queensland Criminal Justice Commission in new paragraph (dad) of the definition.

Subclause 63(b): Amends the definition of "law enforcement agency" in section 2 of the Principal Act by inserting the Queensland Criminal Justice Commission in new paragraph (dad) of the definition.

Depreciation - Crown Leases

[See pages 55-58 for the details]

Clauses 64 & 65: Amend the transitional rules for the plant depreciation Crown lease provisions [section 54AA] in relation to disposals of pre-27 February 1992 plant for which the prime cost method of calculating deductions has been used. The amendment will prevent balancing loss deductions being allowed for that portion of the cost of plant notionally depreciated before 27 February 1992 and require tax to be imposed on recoupments of previously allowed deductions.

The amendment is to apply in relation to disposals occurring after 26 February 1992.

Fringe Benefits Tax

Summary of proposed amendments

•

Purpose of amendment: To reflect a change in the name of the Commonwealth Savings Bank of Australia to the Commonwealth Bank of Australia in subsection 136(1) of the FBTAA.

Date of effect: 1 January 1993

•

Purpose of amendment: To change the word "subsection" to "section" at paragraph 37(b) of the FBTAA to correct a technical error.

Date of effect: Royal Assent

Background to the legislation

The words "Commonwealth Savings Bank of Australia" are used in the definition of "Commonwealth Bank housing loan" in subsection 136(1) of the FBTAA. On 1 January 1993, in accordance with the Bank Integration Act 1991 , the business of the Commonwealth Savings Bank of Australia is to be vested in the Commonwealth Bank of Australia.

Section 37 of the FBTAA deals with the provisions relating to the reduction of taxable value of board fringe benefits. At paragraph 37(b) the word "section" is incorrectly stated as "subsection".

Explanation of proposed amendments

The Bill will amend subsection 136(1) of the FBTAA to omit the words "Commonwealth Savings Bank of Australia" from the definition of "Commonwealth Bank housing loan" and substitute them with the words "Commonwealth Bank of Australia". [Clause 4]

The amendment will apply to loans made on or after 1 January 1993.

The Bill will also amend paragraph 37(b) of the FBTAA to omit the word "subsection" and substitute it with the word "section". [Clause 5]

Gifts - Shrine of Remembrance Restoration and Development Trust

Summary of proposed amendments

•

Purpose of amendment: To allow, for a limited period, income tax deductions for gifts of $2 or more made to the Shrine of Remembrance Restoration and Development Trust, Melbourne.

Date of effect: Gifts made between 25 November 1992 and 30 June 1995 inclusive.

Background to the legislation:

On the 25 November 1992 the Treasurer announced that gifts made to the Shrine of Remembrance Restoration and Development Trust would be tax deductible, for a limited period, under the gift provisions of the income tax laws.

This tax deductible status of gifts will assist with the restoration of the Melbourne Shrine of Remembrance which is in a serious state of disrepair.

Explanation of proposed amendments

Gifts of $2 or more made to the Shrine of Remembrance Restoration and Development Trust will be eligible for tax deductions now under subparagraph 78(1)(a)(cx). [Subclause 8(1)]

However, under new subsection 78(6AM) the tax deductibility of gifts made to the Shrine under subparagraph 78(1)(a) (cx) will be limited to those gifts that are made on or after 25 November 1992 and on or before 30 June 1995. [Subclause 8(b)]

Capital Gains Tax - Depreciable Property Installed on Crown leases

Summary of proposed amendments

•

Purpose of amendment: To amend the capital gains tax provisions to ensure that they treat disposals of interests in plant installed on Crown leases of land consistently with their treatment under the depreciation Crown lease provisions.

The amendment will prevent capital gains and losses from accruing in respect of plant installed on a Crown lease where a lease is terminated but the lessee retains an interest in the plant. It will also prevent capital losses from accruing in respect of plant installed on a Crown lease where the lease is terminated but an associate of the lessee obtains an interest in the plant.

Date of effect: The amendment applies to disposals occurring after 26 February 1992.

Background to the legislation

Depreciation Crown lease provisions

The purpose of section 54AA of the Income Tax Assessment Act 1936 is to enable taxpayers to obtain depreciation deductions for plant they install on land over which they hold a Crown lease.

Taxpayers must own property [subsection 54(1)] if they are to obtain depreciation deductions for that property. In some instances, taxpayers are not 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.

Section 54AA treats taxpayers, including partnerships, installing plant on land over which they hold a Crown lease, and subsequent holders of the lease, as owners for depreciation purposes if the law would otherwise treat them as not being the owners.

Broadly, a Crown lease for depreciation purposes (after amendments contained in Taxation Laws Amendment Bill (No.5) 1992), means a lease, easement or right, power or privilege over or in connection with land, that was granted by a government or by a tax-exempt authority of a government.

Explanation of how leases are treated under capital gains tax (CGT)

[For convenience, references to leases includes a reference to other interests in land such as easements, licences etc. unless otherwise indicated.]

Leases constitute assets for CGT purposes, so capital gains or losses can accrue on their disposal if acquired after 19 September 1985. A capital gain accrues where the consideration for the disposal of an asset exceeds its indexed cost base at the time of the disposal.

A capital loss accrues where the consideration for the disposal of an asset is less than its reduced cost base at the time of the disposal. Broadly, the reduced cost base of an asset means the cost base of the asset less the amount of that cost that has been allowed as income tax deductions; for instance, that part of the cost of plant that has been allowed as depreciation deductions.

Expenditure on plant installed on leased land.

The cost base of a lease would comprise any consideration given for its acquisition; ie. any premium given for the acquisition of a lease either by grant or assignment. It would also include the cost of any capital improvements made by the lessee to the lease; for example, any plant installed on the land by the lessee which the law treats as becoming part of the land. That could happen in one of two ways.

The first would be where the lessee acquires property and affixes it to the land; for example, the lessee acquires materials and constructs a building or other structural improvement on the land. The affixing of the materials comprising the constructed asset would constitute a disposal of those materials to the owner of the land, usually for no gain or loss. The cost of the materials would be treated as expenditure incurred by the lessee in enhancing the value of the lease, and so form part of the cost base of the lease [paragraph 160ZH(1)(c)].

The second would be where a lessee contracts with another person for that person to construct a building or other structural improvement for the lessee on the land. The constructed asset (or its component parts) would never constitute an asset of the lessee. However, the capital expenditure of the lessee in having the asset installed would be treated as expenditure incurred in enhancing the value of the lease.

Lessee's interest in plant as a separate asset

Subsection 160P(4) specifies that a building or other improvement made to land is to be treated as an asset separate from the land if another, non-CGT, provision of the Act treats the building or improvement as "an asset separate from the land".

This principle would apply, for example, where income tax deductions are allowable for a building (eg, under Division 10D) or plant improvement (eg. under section 54), affixed to land. The fact that income tax deductions are allowable in relation to the building or plant improvement is tantamount to those provisions treating the building or improvement as "an asset separate from the land".

The principle would apply not only to an owner of the land but also to a lessee of the land; that is, a lessee's interest in those separate assets would comprise two assets: one comprising a leasehold interest in land and the other comprising a leasehold interest in the improvement. This would be so irrespective of who was entitled to the deductions in relation to the improvement.

Under CGT, any consideration for the acquisition or disposal of the lease (including any depreciable improvements) would be apportioned between the asset comprising the interest in the improvement and the asset comprising the interest in the land. Expenditure on the installation of an improvement on the land would be attributed to the asset comprising the interest in that improvement.

The reduced cost base of the interest in the improvement would be calculated by reference to the amounts allowed as deductions [section 160ZK].

Partnerships

The general income tax law treats partnerships as if a taxpayer and so the owner of partnership assets eligible for depreciation deductions under the plant depreciation rules.

Under CGT, partnerships are not treated as if a taxpayer and therefore not the owner of partnership assets. Instead, each partner's interest in partnership property is treated as an asset [paragraph 160A(d)]. Thus, on the disposal of property by a partnership, each partner would be treated as disposing of the asset comprising their interest in the property.

In the case of partnership plant affixed to land, the CGT provisions would treat each partner's interest in the plant as an asset separate from the partner's interest in the land itself. Each partner's share of expenditure incurred in acquiring or improving the lease would be apportioned between/attributed to the relevant separate asset.

For reduced cost base purposes, a partner's share of depreciation deductions allowed to the partnership would be deducted from the cost of the partner's interest in the plant [Paragraph 160ZK(3)(a)].

Explanation of proposed amendments

Following the enactment of section 54AA, the plant depreciation and CGT provisions do not apply "symmetrically" in relation to terminations of Crown leases in some circumstances so that taxpayers could inappropriately incur capital losses in respect of the depreciated value of plant affixed to the leased land, or derive capital gains. The CGT provisions are to be amended to prevent such inappropriate outcomes.

Termination of lease followed by grant of either fresh lease or freehold title to lessee.

Ordinarily, a termination of a lease would constitute a disposal of the lease by the lessee for CGT purposes (and, therefore, of the separate asset comprising the lessee's interest in any plant on the land).

However, if the lease is a "Crown lease" or a "mining asset", section 160ZWA or 160ZZF would provide "automatic" CGT rollover relief for a disposal of the lease that is followed by the grant to the lessee of a relevant replacement interest in the land. The effect of rollover relief is to treat a disposal as if it had not occurred so that no gain or loss accrues under CGT.

Where such CGT rollover relief applies to a disposal of a lease of land it would also apply to the contemporaneous disposal of any separate asset that comprises a lessee's interest in plant affixed to the leased land as that too would constitute either a Crown lease or a mining asset.

However, the meaning of "Crown lease" for depreciation purposes is broader than its meaning under CGT and is different from the meaning of "mining asset".

As mentioned earlier, "Crown lease" for depreciation purposes broadly means a lease, easement or right, power or privilege over or in connection with land, that was granted by a government or by a tax-exempt authority of a government. By comparison, "Crown lease" under CGT means a statutory lease (ordinary meaning) of land granted by the Crown and "mining asset" broadly means a mining right or a prospecting right.

Thus, there could be instances where CGT rollover relief would not apply to a termination of a lease that constituted a disposal of that lease, including leasehold improvements (because the lease is neither a CGT Crown lease nor a mining asset) but the lessee would be treated as continuing to own any plant on the leased land for depreciation purposes (because the lease is a Crown lease for depreciation purposes).

If the termination was due to the expiry of the lease, the lessee would be treated under CGT as disposing of the lease for no consideration. If the plant had not been fully depreciated at the time of expiry, the lessee would incur a capital loss equal to the reduced cost base of the asset comprising the leasehold interest in plant even though entitled to continue to depreciate the plant [in most circumstances, the reduced cost base of an asset comprising an item of plant would correspond with its depreciated value for depreciation purposes].

In the case of a partnership, each partner would incur a capital loss equal to the reduced cost base of their respective interests in the plant even though the partnership could continue to obtain depreciation deductions.

Such outcomes are not appropriate. Correspondingly, it would not be appropriate if a capital gain was to accrue in the same circumstances. That could occur if, for example, a lease was terminated early in return for the grant of a new lease of the same property and the market value of attached plant had increased.

Accordingly, CGT rollover relief is to automatically apply to a disposal of a lessee's, or, if the lessee is a partnership, of each partner's, interest in plant affixed to a Crown lease, if neither section 160ZWA nor section 160ZZF applies, where the depreciation Crown lease provisions treat the lessee as continuing to own the plant for depreciation purposes because the lessee has received a fresh interest - either as lessee or owner - in the plant. Rollover relief will only apply to the interest in plant and not to the disposal of the separate asset comprising the leasehold interest in the land itself. [New section 160ZWC]

Where rollover relief applies, the CGT provisions will not apply to the disposal so neither a capital gain nor a capital loss can accrue. Further, and consistent with other rollover provisions, the Commissioner of Taxation must ensure that rollover relief applies to the fresh interest in the plant.

In practice, that will mean that, if the interest in the plant that was disposed of was acquired by the taxpayer before 20 September 1985, the fresh interest will be treated as acquired before that date, thus preserving its "exempt status" under CGT.

In the case of a disposal of an interest in plant acquired by a taxpayer after 19 September 1985, the fresh interest will be treated as acquired for consideration equal to the cost base, the indexed cost base and reduced cost base of the terminated interest immediately before its disposal for the purposes of calculating a capital gain or loss on its disposal.

Termination of leases followed by grant of either fresh lease or freehold title to an associate of the lessee.

On the termination of a Crown lease that is followed by the grant of a fresh interest in the land to an associate of the lessee, the depreciation provisions [paragraphs 54AA(2)(d) and (2)(f)] treat the lessee as disposing of any plant on the leased land for consideration equal to what would be its market value if the lessee owned the land. [The purpose of this rule is to deny balancing losses on the disposal of plant where an associate obtains use of the property and prevent avoidance of assessable balancing adjustments.]

The CGT rules would treat such terminations as a disposal of the assets comprising the leasehold interest in the land and in the plant, usually for no consideration, and a capital loss would be available equal to the reduced cost base, if any, of the lessee's interest (or, as the case requires, each partner's interest) in the plant. That would be inappropriate because an associate has obtained an interest in the property.

To prevent that result, the reduced cost base rules, relevant for calculating capital losses, are to be modified in those circumstances so that the depreciated value of the plant at the time of the termination is deducted from the reduced cost base of the taxpayer's interest in the plant. In the case of plant of a partnership, the portion of the depreciated value of the plant that is attributable to the partner's interest in the plant is to be excluded from the reduced cost base of the partner's interest in the plant. [New section 160ZWD]

Consequential amendments

Life assurance companies and registered organisations

As a technical measure, a reference to the rollover relief rules in new Division 5B of Part IIIA is to be inserted in the definition of "notional Part IIIA disposal" in section 110 and 116E . That definition is relevant for the apportionment of gains and losses on disposals of assets, or disposals that would have occurred but for a CGT rollover provision, which are attributable to the various classes of income of life assurance companies and registered organisations. [Reference to Division 5B inserted in sections 110 and 116E definition of "Notional Part IIIA disposal"]

Superannuation funds

With certain limited exceptions, profits or losses on the disposal of assets by superannuation funds and similar entities are assessed under the CGT provisions rather than the ordinary income provisions. That is achieved by specifying that the relevant revenue provisions do not apply to disposals of assets to which CGT applies or would apply but for the application of a CGT rollover provision [section 304].

As a technical measure, a reference to the rollover rules in new Division 5B of Part IIIA is to be inserted in section 304. [Reference to Division 5B inserted in section 304]

Controlled foreign companies

In certain circumstances, the income of a non-resident company can be attributed to its Australian resident controllers.

The CGT provisions are modified for the purposes of calculating whether income is to be attributed and the amount to be attributed. The various CGT rollover provisions are relevant for those purposes. Accordingly, a reference to the rollover rules in new Division 5B of Part IIIA needs to be inserted in the definition of "CGT roll-over provisions" in section 317. [Reference to Division 5B inserted in section 317 definition of "CGT roll-over provisions"]

Application

These amendments were foreshadowed in the Explanatory Memorandum to Taxation Laws Amendment Bill (No.3) 1992, which inserted section 54AA, and apply from the same time as the depreciation Crown lease provisions; that is, to disposals of assets, constituting an interest in plant to which section 54AA has applied, that occur after 26 February 1992. [Clause 14]

Dividend Streaming Amendments

Summary of proposed amendments

•

Purpose of amendment: The dividend streaming provisions will be amended so as to include dividend streaming arrangements that would otherwise be included but for the interposing of an entity between a shareholder and a company paying a substitute dividend.

Date of effect: The amendments will apply to dividends paid by resident companies on or after the date the Bill receives Royal Assent.

Background to the legislation

The dividend streaming provisions were introduced with effect from 1 July 1990 and are designed to remove Australian tax benefits associated with dividend selection schemes.

The basic concept of a dividend selection scheme is to allow shareholders a choice as to the manner in which their dividend entitlements are to be satisfied. The schemes can offer a shareholder a number of options. For example, a shareholder can elect to forego the right to receive a cash dividend that would otherwise be paid and, instead, receive tax-exempt bonus shares.

Other schemes involve the use of 'stapled stock'. Broadly, stapled stock are shares held in two associated companies that cannot be traded separately, one of the shares being an income rights only share. Holders of stapled stock may choose to receive either a franked or unfranked dividend as determined by the company paying the dividend. Stapled stock arrangements can be used to stream franked dividends to Australian resident shareholders and unfranked dividends to non-residents.

Allowing shareholders the choice provides the means by which a company can stream franked dividends to those shareholders able to benefit most from the imputation credits attached to those dividends (generally resident taxpayers paying tax at the top marginal rate).

A general rule of the imputation system is that companies should frank to the same extent, all dividends paid under a single distribution, on a particular class of shares. Therefore, the dividend streaming provisions treat an Australian resident company as having franked to the same extent all dividends paid on a single class of shares under a dividend streaming arrangement. This includes dividends paid by another company.

The provisions do this by, first, defining what is a 'dividend streaming arrangement'. The definition is contained in section 160APA. Central to the definition is that a company carries out or is a party to the dividend streaming arrangement. Further, a shareholder in the company must be empowered to exercise a choice or selection in relation to his or her dividend entitlements. The definition contemplates four outcomes on the exercise of that choice or selection:

•

the company pays dividends franked at different levels on the same class of share;

•

the company issues tax-exempt bonus shares to a shareholder instead of paying a franked dividend;

•

another company pays an unfranked dividend to a shareholder who receives that dividend instead of a franked dividend from the company; or

•

the company pays a franked dividend to a shareholder who receives that dividend instead of an unfranked dividend from an another company.

Secondly, section 160AQCB operates so that franking debits arise to the company in respect of the dividends substituted by, or for, the franked dividends under the arrangement. This includes the dividends satisfied by the issue of tax-exempt bonus shares and dividends paid by another company. In section 160AQCB there is a matching operative provision for each of the four types of arrangement contemplated by the definition in section 160APA.

Explanation of proposed amendments

The amendments proposed by this Bill will insert into the definition three additional types of dividend streaming arrangement. These new types are almost exactly the same as three of the four types already contemplated by the definition.

However, the difference - and this difference is common in all three new types of streaming arrangement - is the use of an interposed entity. The entity is interposed between the shareholder and the company that is paying the dividend (including a dividend satisfied by the issue of tax-exempt bonus shares) that is being substituted by, or for, the payment of the franked dividend.

It should be noted that the entity is interposed only for the purpose of paying the substitute dividend. A shareholder would still hold his or her original shares.

How is an interposed entity defined?

An interposed entity is referred to as an 'upstream entity' in the new types of dividend streaming arrangement and is defined in relation to a shareholder who is empowered to exercise the choice or selection under the arrangement.

First, an upstream entity can be a trustee of a trust estate in which the shareholder holds or is capable of holding a beneficial interest. Secondly, it can be a partnership in which the shareholder is a partner. [Paragraph 15(f), subparagraphs (a)(i) and (b)(i) of new definition 'upstream entity' in section 160 APA]

Where there is a chain of trusts and/or partnerships between the shareholder and the abovementioned trust or partnership, that trust or partnership will still be an upstream entity in relation to the shareholder. For example, a shareholder may be a partner in X Partnership which has a beneficial interest in the A Trust which in turn has a beneficial interest in the B Trust. In this case the B Trust is an upstream entity in relation to the shareholder. [Paragraph 15(f), subparagraphs (a)(ii) and (b)(ii) of new definition 'upstream entity' in section 160APA]

The use of an upstream entity and the three new types of dividend streaming arrangement are set out below.

Stapled stock enabling the payment of franked dividends in substitution for unfranked dividends

An example of this type of arrangement is where an Australian subsidiary of a foreign company pays a franked dividend to an Australian resident shareholder of the foreign parent. The shareholder would have elected to receive the franked dividend instead of receiving an unfranked dividend from the foreign parent. This type of arrangement is covered by existing sub-subparagraph (b)(ii)(D) of the definition of dividend streaming arrangement.

A variation of this arrangement is where the Australian subsidiary pays a franked dividend to a trustee of a trust estate and the trust then makes a distribution to the shareholder in the foreign parent. The trustee holds shares in the company and the shareholder holds a beneficial interest in the trust.

In effect, what is stapled together and held by the shareholder under this arrangement is the share in the foreign company and the beneficial interest in the trust.

Under the imputation system a taxpayer who receives franked dividends via a trust (or partnership) is treated in the same way as if the taxpayer had received the dividend directly.

This type of arrangement will now fall within the definition of dividend streaming arrangement.

It is described like this: the Australian subsidiary (the 'first company') carries out part of the arrangement and under the arrangement two things happen. First, the Australian resident shareholder in the foreign parent (the 'target shareholder') exercises some form of choice. Secondly, as a result of exercising that choice the Australian subsidiary pays a franked dividend to the trust (the upstream entity) instead of the foreign parent paying an unfranked dividend to the Australian resident shareholder. [Paragraphs 15(a) and (b), inserting new paragraph (a) into definition of 'dividend streaming arrangement' in section 160APA]

The amended definition is not limited to the foreign parent/Australian subsidiary situation. Any arrangement where the payment by one company to a shareholder of an unfranked dividend was substituted by the payment to an upstream entity of a franked dividend would fall within the definition.

It follows that, under subsection 160AQCB(4) - the matching operative provision - a franking debit arises to the company paying the franked dividend to the upstream entity. Broadly, the franking debit is the total amount of dividends paid by the company that would otherwise pay the unfranked dividends. In the example above, the debit arises to the Australian subsidiary calculated by reference to the total dividends paid by the foreign subsidiary.

This change applies to franked dividends paid on or after the date the Bill receives Royal Assent [Subclause 17(3)].

Unfranked Dividends paid in lieu of franked dividends

Dividend selection schemes will often allow shareholders to elect to receive a franked or an unfranked (or partly franked) dividend. Sub-subparagraph (b)(ii)(A) of the definition of dividend streaming arrangement covers this type of arrangement. What is contemplated by the sub-subparagraph is the payment by the company directly to the shareholder of either the franked or unfranked dividend.

The proposed amendments will insert a second additional type of arrangement into the definition of dividend streaming arrangement. This will cover the situation where, rather than paying the unfranked or partly franked dividend directly to the shareholder, the dividend is first paid to an interposed entity (an upstream entity). The interposed entity is a shareholder in the company.

In practice the interposed entity, be it a trust or a partnership, distributes the dividend income to the shareholder. This additional type of arrangement is otherwise described in the same terms as sub-subparagraph (b)(ii)(A) of the definition. [Paragraph 15(d), inserting sub-subparagraph (b)(ii)(AA) into the definition of 'dividend streaming arrangement' in section 160APA]

A minor amendment to subsection 160AQCB(1), the matching operative provision, will ensure the provision operates as intended when the unfranked or partly franked dividend is paid to the interposed entity. The provision will now refer to the payment of the unfranked or partly franked dividend to the relevant shareholder or to another shareholder. [Clause 16]

Broadly, under 160AQCB(1) a franking debit arises to the company paying the unfranked or partly franked dividend to the upstream entity. The debit is the amount of the franking debit that would have arisen if the company had franked those dividends at the same rate as the franked dividends that otherwise would have been paid to the shareholder.

This change will apply to substitute unfranked or partly franked shares paid on or after the date the Bill receives Royal Assent. [Subclause 17(1)]

Tax-exempt bonus shares issued instead of paying franked dividend

A third additional type of arrangement will be inserted into the definition of dividend streaming arrangement. It is proposed to insert a provision that mirrors sub-subparagraph (b)(ii)(B) of the definition but with the necessary modification to reflect the use of an interposed entity.

Thus, an arrangement where a shareholder exercises a choice resulting in tax-exempt bonus shares being issued to an upstream entity in relation to the shareholder in substitution for the payment of franked dividends to that shareholder will be a dividend streaming arrangement. [Paragraph 15(e), inserting sub-subparagraph (b)(ii)(BA) into the definition of 'dividend streaming arrangement' in section 160APA]

Again, the matching operative provision, in this case subsection 160AQCB(2), will be amended to cover the situation of the tax-exempt bonus shares being issued to another shareholder - the upstream entity - rather than directly to the shareholder making the choice. [Clause 16]

Broadly a franking debit arises under subsection 160AQCB(2) where the company issues tax-exempt bonus shares to the upstream entity. The debit that arises is the amount that would have arisen if the company had paid the franked dividends to the shareholder instead of issuing the bonus shares to the upstream entity.

This change will apply to tax-exempt bonus shares issued on or after the date the Bill receives Royal Assent. [Sub clause 17(2)]

Interposed entities and the fourth type of dividend streaming arrangement

Under the current definition, a fourth type of dividend streaming arrangement is contemplated. This is set out in sub-subparagraph (b)(ii)(C).

An example of this type of arrangement is one that allows non-resident shareholders in an Australian company to receive unfranked dividends paid by a foreign subsidiary of the Australian company.

The definition already covers the situation where the unfranked dividend is paid to an interposed entity. The definition refers to the a company paying an unfranked dividend or partly franked dividend to a shareholder in that other company. This can be any shareholder, including the interposed entity, and not only the shareholder making the choice.

Amendments Relating to Accrued Leave Transfer Payments

Summary of proposed amendments

•

Purpose of amendments: To provide that leave transfer payments made between employers

(a)

in respect of accrued leave entitlements of an employee when that employee transfers from one employer to another; and

(b)

pursuant to an industry practice to accommodate the transfer of employees pursuant to, or to accommodate the implementation of, an industrial award

will be deductible to the transferring employer (the payer) and assessable to the receiving employer (the payee).

Date of effect: The amendments will come into effect from the date upon which the Bill receives Royal Assent, and will apply retrospectively as if the amendments had been made at the time subsection 51(3) of the Income Tax Assessment Act 1936 was enacted in its original form.

Background to the legislation

Under the existing law, subsection 51(3) of the Act denies a deduction for a payment made in respect of long service leave, annual leave, sick leave or other leave, except in respect of an amount paid to the person to whom the leave relates, or, if that person is deceased, to their dependant or personal representative.

Following the enactment of subsection 51(3), the Commissioner of Taxation initially adopted the view that any payment in respect of accrued leave entitlements made between employers engaged in an industry, such as the waterfront industry, where employees are transferred regularly between employers, is deductible on the basis that it was a constructive payment by the transferring employer to the employee to whom the leave relates.

The Commissioner also adopted the view that such payments are on revenue account and must be included in the assessable income of the receiving employer, either under subsection 25(1) or paragraph 26(j) of the Act.

Following the decision of the Federal Court of Australia in TNT Skypak International (Aust) v. FC of T 88 ATC 4279, the Commissioner took the view that a deduction was not allowable for any payment in respect of long service or other form of leave that was not paid to the person to whom the leave relates, or to a dependant or personal representative of that person.

It is clear that subsection 51(3) was not designed to apply to payments made between employers in circumstances that exist in the waterfront industry or other industries which have similar working conditions.

It was meant to ensure that employers could not claim a deduction for a mere provision on account of leave which accrues to an employee during a year of income, for which no obligation to pay will arise until the employee actually takes that leave.

In general, employees accrue leave entitlements based only on the period of employment with their current employer. However, in some industries such as the waterfront industry, employees are likely to change employers so often that they could never take leave, but rather would be paid out the value of leave entitlements each time they transfer to a different employer.

In those industries, leave entitlements under the terms of an industrial agreement or award may be based on total service with a number of employers. So employers may be required, or may as a matter of commercial reality decide, to pay one another on account of a transferring employee's accrued leave entitlements.

Consequently, it is necessary to make specific amendments to the Act to ensure that a deduction for such payments is allowable to the transferring employer and is assessable in the hands of the receiving employer.

These amendments will ensure that, where there is an industrial practice for employees to regularly transfer between employers and for payments to be made by the transferring employer to facilitate the transfer of employees pursuant to, or to accommodate the implementation of, an industrial award, any payment made by one employer to another in respect of accrued leave entitlements of a transferring employee will be deductible to the employer who makes the payment and assessable to the employer who receives the payment.

Explanation of proposed amendments

Division 5 of the Bill will amend section 6 [Clause 18] , section 26 [Clause 20] and section 51 [Clause 21] of the Principal Act and will introduce new section 6G [Clause 19] into the Principal Act.

The object of the amendments is to ensure, firstly, that accrued leave transfer payments are included in the assessable income of the employer who receives the payment (the 'payee') [New paragraph 26(ec)] and, secondly, that such payments are an allowable deduction to the employer who makes the payment (the 'payer'). [Substituted subsection 51(3)]

Interpretation

Clause 18 amends section 6 of the Act by inserting the definition of 'accrued leave transfer payment' in subsection (1). That term is defined as having the meaning given by new section 6G of the Act. The term is used in the amended sections 26 and 51 of the Act, which ensure the assessability and deductibility of such payments.

What is an 'accrued leave transfer payment'?

For the purposes of the Income Tax Assessment Act , a payment made by a taxpayer (the 'payer') to another taxpayer (the 'payee') is an accrued leave transfer payment if the payment satisfies certain criteria. [New subsection 6G(1)]

Firstly, the payment must be in respect of long service leave, annual leave, sick leave or other leave entitlements which have accrued to the employee who is to be transferred.

Secondly, the whole or part of the leave accrued when the person to whom the leave relates was an employee of the payer. This covers both the situation where the person commenced employment with the payer and also the situation where the person transferred from a previous employer to the payer.

Thirdly, at the time the payment is made, the person to whom the leave relates has ceased, or is about to cease, to be an employee of the payer, and has become, or is about to become, an employee of the payee, and the payment is made under, or for the purposes of facilitating the provisions of a law of the Commonwealth, a State or a Territory, or an award, order, determination or industrial agreement in force under any such law.

Who is an employee and whose employee are they?

For the purposes of these provisions, 'employee' is defined to include a person who holds an office, appointment or position, or who performs functions or duties, or who engages in any work, or who does any other act or things, and the person is entitled to long service leave, annual leave, sick leave or other leave because of the holding of that office, appointment or position, or because of the performance of those functions or duties, or because of the engaging in of that work, or because of the doing of those other acts or things, as the case requires. [New subsection 6G(2)]

This provision is intended to extend the common law definition of employee to cover any person who is entitled to any form of leave by reason of the office or position they hold, or by reason of the functions, duties or work they perform.

The employee is an employee of anyone from whom they hold an office or position, or for whom they carry out functions, duties, or work.

Accrued leave transfer payments to be included in assessable income

Clause 20 amends section 26 of the Act so that any amount received by way of an accrued leave transfer payment is included in the assessable income of the employer who receives the payment. [New paragraph 26(ec)]

This will put it beyond any doubt that such payments are on revenue account and must be included in the assessable income of the employer who receives the payment.

The Commissioner of Taxation has always been of the view that such payments are assessable income of the employer who receives the payment. No change in the Commissioner's administration is required by this aspect of the amendments.

Deductibility of accrued leave transfer payments

Clause 21 amends section 51 of the Act by replacing subsection 51(3) to provide that a deduction is not allowable under subsection 51(1) in respect of long service leave, annual leave, sick leave or other leave except in respect of an accrued leave transfer payment or an amount paid to the person to whom the leave relates or, if that person is dead, to a dependant or personal representative of that person.

This will ensure that any payment in respect of accrued leave entitlements of a transferring employee will be a deduction from the total assessable income of the transferring employer.

Application

Clause 22 provides that subsections 3(2) and (3) of the Income Tax Assessment Amendment Act (No. 3) 1978 have, and are taken to have had, effect as if the amendments made by this Division had been made by subsection 3(1) of that Act.

This provision means that the amendments will have effect as if they had been enacted at the time subsection 51(3) was enacted originally and will have effect from the date upon which subsection 51(3) commenced operation.

The retrospective application of these amendments will not disadvantage any taxpayers, because the amendments give effect to the interpretation of the law which the Commissioner of Taxation has applied from the commencement of subsection 51(3) until 24 August 1989 when, as a result of the decision of the Federal Court of Australia in the TNT Skypak case, the Commissioner changed his earlier interpretation. Since then, affected taxpayers have sought to return to this treatment.

Technical Amendments To Capital Allowances

Depreciation - Broadbanding

Summary of proposed amendment

Purpose of amendment:

*

the depreciation broadbanding measures are to be amended to make it clear the rates of depreciation determined on an effective life basis that match a broadbanded rate cannot be increased to the next highest broadbanded rate.

Date of effect: The amendment is to apply from the same time as the broadbanding measures; that is, in relation to the 1991/92 and later years of income.

Background to the legislation

One of the changes arising from the March 1991 Industry Statement reduced ("broadbanded") the number of basic depreciation rate classes from eighteen to seven - 33 1/3%, 20%. 15%, 10%, 7 1/2%, 5% and 2 1/2%.

If the basic rate of depreciation for an asset was not one of those broadbanded rates, the asset could be depreciated at the next highest rate. For example, if the basic rate for an asset was 8%, the rate could be increased to 10%.

A rate was to remain unchanged if it was one of the broadbanded rates. For instance, if a basic rate for an asset was 15%, one of the broadbanded rates, it was to remain unchanged.

Explanation of proposed amendment

A literal interpretation of the relevant amending legislation [contained in Taxation Laws Amendment Act 1992] would suggest that, contrary to the principle stated in the previous paragraph, a basic rate that is one of the broadbanded rates can be increased to the next highest rate.

The relevant provision, the former subsection 55(5) [repealed by Taxation Laws Amendments Act (No.3) 1992] is expressed so that if "the raw percentage (ie. basic rate) is below one of the following (percentages)......the raw percentage is re-calculated as the next highest of those percentages".

On a literal reading of that subsection, if a basic rate for a particular asset was, say, 10% (a broadbanded rate), it could be increased to 15% (the next highest broadbanded rate) because it is not below 10%.

The application of repealed subsection 55(5) is being changed to make it clear that a raw percentage that is one of the broadbanded rates is to remain unchanged and cannot be increased to the next highest broadbanded percentage. That is achieved by having the former paragraph 55(5)(b) apply as if it read: "(b) the raw percentage is not one of the following: ..." [Clause 40]

Date of effect

The amendment is to apply from the same time as the original measure; that is, in calculating depreciation deductions in the 1991/92, and subsequent, years of income. [Clause 40]

Depreciation - Crown Leases

Summary of proposed amendments

Purpose of amendment:

•

to amend the plant depreciation Crown lease provisions in relation to disposals of pre-27 February 1992 plant for which the prime cost method of calculating depreciation deductions has applied in order to prevent balancing loss deductions being allowed for that portion of the cost of such plant which was only notionally depreciated before 27 February 1992 and ensure tax is imposed, as appropriate, on recoupments of previously allowed deductions.

Date of effect: the amendment is to apply to disposals occurring after 26 February 1992.

Background to the legislation

Under the plant depreciation Crown lease provisions, taxpayers who hold Crown leases of land are treated as owners and so entitled to depreciation deductions for income-producing plant they install on the land if the law would otherwise treat them as not being the owners.

This measure applies to plant installed after 26 February 1992. It also applies to plant installed on Crown leases on or before that date, based on notional depreciated values on that date [section 38 of Act No.98 of 1992].

Explanation of proposed amendment

A technical deficiency exists in these Crown lease provisions in relation to plant installed before 27 February 1992 where the prime cost method of calculating depreciation is used. As things stand, taxpayers in those circumstances could either inappropriately obtain balancing loss deductions for that portion of the cost of plant which was only notionally depreciated before 27 February 1992, or escape tax on the recoupment of previously allowed deductions.

Taxpayers may adopt one of two methods of calculating depreciation deductions - the prime cost method or the diminishing value method - for all assets first becoming depreciable in a particular year.

Deductions under the prime cost method are calculated as a percentage of original cost so that the cost of plant is evenly written-off. Under the diminishing value method, deductions are calculated as a percentage of depreciated value at the beginning of each year so that the size of deductions reduces over time.

Because the prime cost and diminishing value methods operate in a different manner, the Crown lease provisions contain separate rules for each method in relation to plant installed before 27 February 1992.

Under the diminishing value method, taxpayers are treated as acquiring the plant on 27 February 1992 for an amount equal to its notional depreciated value at that date. The notional depreciated value of an asset is the amount that would have been its depreciated value if depreciation deductions had been available from the time it was installed [paragraph 38(3)(d) of Taxation Laws Amendment Act (No.3) 1992].

Under the prime cost method, deductions are based on the original cost of the asset but depreciation deductions are not available for that portion of the cost that would have been allowed as deductions before 27 February 1992 if the plant had been eligible for depreciation deductions from the time it was installed [paragraph 38(3)(e)].

In effect, both methods limit aggregate post-26 February 1992 depreciation deductions for plant installed before 27 February 1992 to an amount equal to notional depreciated value on that date.

Although depreciated value is not relevant for calculating depreciation deductions under the prime cost method, it is relevant for calculating balancing losses and gains on the disposal, loss or destruction of plant.

A deductible balancing loss accrues where the consideration for a disposal, loss or destruction of an asset is less than its depreciated value. An assessable balancing gain accrues if the relevant consideration exceeds an asset's depreciated value, but the assessable amount is limited to the amount of depreciation deductions allowed in relation to the asset.

Balancing adjustments are calculated in this way irrespective of which of the two methods was used to calculate depreciation deductions [subsection 59(1) and (2)].

This is where a problem occurs. The transitional rules for pre-27 February 1992 plant to which the diminishing value method has applied [paragraph 38(3)(d)] specify a modified meaning of depreciated value for balancing adjustment purposes whereas the corresponding prime cost method rules do not contain a modified meaning of depreciated value for those purposes.

Without such a specification, depreciated value would have to be calculated without reducing the cost of an asset by the notional depreciation deductions for the period prior to 27 February 1992. This means that depreciated values would be higher than is appropriate and, on the disposal, loss or destruction of an asset, deductions would be available for that portion of the cost of an asset which had notionally depreciated before 27 February 1992 or the amount of assessable recoupments of previously allowed deductions would be understated, depending on the amount of consideration received.

This defect is to be remedied by inserting, in the transitional rules for pre-27 February 1992 prime cost plant, the requirement that depreciated value be calculated by reference to depreciation deductions notionally allowed before 27 February 1992. [Clause 65]

Date of effect

The amendment is, in effect, to apply to disposals occurring after 26 February 1992. [Clause 2(3) specifies that the above amendments are to have effect immediately after the commencement of section 38 of Taxation Laws Amendment Act (No.3)1992]

Depreciation - Option to Specify Lower Rate

Summary of proposed amendments

Purpose of amendment:

•

to replace an existing option whereby taxpayers each year may adopt lesser rates of depreciation for individual plant items with a once-only option to adopt, at the time an asset first becomes depreciable, a lesser rate of depreciation that is not less than the rate based on the asset's effective life.

Date of effect: the change is to apply to the current and subsequent years of income.

Background to the legislation

The current depreciation rates regime [section 55] applies, broadly speaking, to plant acquired after 26 February 1992. It specifies the rates of depreciation applicable to assets according to their estimated effective life.

Taxpayers are able to adopt rates of depreciation that are less than the applicable rates [subsection 55(8)]. That option, which is similar to an option under the former "5/3" measures, is available in the event that some taxpayers might be disadvantaged by the higher rates available under the existing measures.

This option is flexible enough to allow taxpayers to adopt any rate each year as long as that rate does not exceed the highest rate allowable. By comparison, taxpayers who elected out of the former "5/3" measures would adopt standard rates which, at that time, broadly reflected effective life.

Explanation of the amendment

The existing option to specify a rate each year that does not exceed the allowable maximum is to be withdrawn because it allows excessive manipulation of taxable incomes. Instead, taxpayers are to have a once-only option to adopt a lower rate of depreciation for an asset, exercisable only in the year of income in which the asset first becomes depreciable under income tax law. Once a lesser rate has been selected, it is not to be changed.

Further, the minimum rate a taxpayer can select for an asset is to be the rate determined by reference to the asset's effective life. So, if the estimated effective life of an asset was 10 years, the minimum allowable diminishing value rate would be 15% and the corresponding prime cost rate would be 10%. [New subsections 55(8) & (8A)]

Date of effect

The amendment is to apply to plant first becoming depreciable to a taxpayer for income tax purposes in the year of income in which 16 December 1992occurs ("current year of income") and subsequent years of income. [Clause 24(1)]

Taxpayers who have exercised a subsection 55(8) choice in relation to plant which was first depreciable in a year of income preceding the current year of income can make an irrevocable choice in relation to such plant for the current and later years [Clause 24(2)]. If no choice is made in those circumstances, the asset will be depreciable at the maximum allowable rate.

For example, if a taxpayer's current year of income is the 1992/93 year of income and the taxpayer had specified a rate for an asset in the 1991/92 year of income that was less than the maximum rate allowable for that asset, the taxpayer may specify a rate for the asset in relation to 1992/93 and succeeding years of income that is not less than the minimum effective life rate (and, of course, not greater than the maximum allowable rate).

Petroleum Mining Rollover Relief

Summary of proposed amendments

Purpose of amendment:

•

to ensure that pre-18 September 1974 expenditure in relation to property used in petroleum mining activities is covered by the existing petroleum mining rollover relief provisions.

Date of effect: the amendment applies to disposals of mining property occurring after 6 December 1990.

Background to the legislation

Under petroleum mining rollover relief [section 124AMAA], a taxpayer acquiring relevant property "inherits" the deduction entitlements in relation to the property, and their characteristics, in the hands of the taxpayer disposing of the property. For example, if the amount of unclaimed expenditure in relation to the property at the time of the disposal was deductible over a particular period, that amount will remain deductible over the same period event though the deduction period for current expenditure may be different.

Explanation of proposed amendment

Relevant expenditure on mining activities is described in the legislation as "allowable capital expenditure". The rollover provisions focus on both the amount of unclaimed allowable capital expenditure in relation to property to ascertain the amount to be rolled-over [paragraph 124AMAA(4)(a)] and on the threshold conditions satisfied in relation to that expenditure by the person transferring the property so that it continues to be treated in the same manner in the hands of the person acquiring the property [subsections 124AMAA(8) and (9)].

The existing provisions in relation to petroleum mining activities apply, broadly speaking, to expenditure incurred after 17 September 1974. Expenditure incurred before 18 September 1974 was covered by provisions which have been repealed.

Under those former provisions, relevant expenditure was immediately deductible to the extent that it was absorbed by net assessable income from petroleum (broadly, income from the sale of petroleum less all other allowable deductions). Unabsorbed expenditure was carried forward for immediate deduction in subsequent years, subject to the same limitations, until fully absorbed.

The current provisions preserve pre-18 September 1974 expenditure so that it remains immediately deductible to the extent of net income from petroleum [sections 124AE and 124AF]. However, such expenditure is defined as "unrecouped previous capital expenditure" and not as "allowable capital expenditure". Because pre-18 September 1974 expenditure is not allowable capital expenditure, the rollover provisions do not apply to it.

The requirement that pre-18 September 1974 expenditure be deductible only to the extent of net income from petroleum is restrictive compared to the treatment of current expenditure which is deductible against assessable income from any source. This explains why such "vintage" expenditure still remains undeducted. Such undeducted expenditure ought to qualify for rollover relief in the same way as more recent expenditure.

Section 124AMAA is being amended so that such expenditure is eligible for rollover relief. The effect of the amendment is that the amount of any unrecouped previous capital expenditure in relation to property, at the end of the year of income preceding the year in which a rollover disposal occurs, is to be treated as unrecouped previous capital expenditure in the hands of the person acquiring the property so that it remains immediately deductible to the extent of net income from petroleum.

The person disposing of the property will not be entitled to any deduction in relation to such expenditure in the disposal year. Instead, the person acquiring the property will be entitled to any deduction that is available in the year of disposal. [New paragraph 124AMAA(4)(aa) and related technical amendments to existing provisions]

Date of effect

The amendment is to apply:

•

to disposals within wholly-owned company groups occurring after 6 December 1990 and before 20 December 1991 where an election for rollover relief has been made [Clause 35]; and

•

to disposals occurring after 19 December 1991 where a relevant capital gains tax rollover relief provision applies to the disposal [Clause 34] .

Arrangements Relating to Property

Summary of proposed amendments

Purpose of amendment:

•

to ensure that section 51AD and Division 16D can apply to property used in relevant arrangements where the taxpayer's entitlement to deductions is not based on ownership.

Date of effect: the amendment is to apply to arrangements entered into after 16 December 1992.

Background to the legislation

Income tax law contains several measures to deal with arrangements relating to the use of property by tax-exempt bodies whereby taxable entities, usually financiers, would obtain deductions as owners of property [section 51AD and Division 16D].

The financier is the nominal owner of the property and so entitled to relevant income tax deductions, such as plant depreciation or the capital allowance for buildings, even though, under the arrangement, beneficial ownership, or long term use, of the property rests with the non-taxable entity.

These arrangements can cause a significant loss of revenue because the tax deductions obtained by the financiers enable them to defer income tax.

In cases to which section 51AD applies (i.e. where the property has been financed predominately by non-recourse borrowings), the legal owner is denied the relevant property deductions. Where Division 16D applies (in other than non-recourse financing cases), the arrangement is treated as if it were a loan.

Explanation of proposed amendments

The application of section 51AD and Division 16D both turn on the ownership of property by one person and the use or effective control of that property by another person in specified circumstances [subsections 51AD(4) and 159GG(1) respectively].

However, taxpayers need not necessarily be owners of property to obtain deductions under the capital allowances for property. For instance, deductions for the cost of income-producing buildings [Divisions 10C and 10D] are available to "eligible lessees". Broadly, eligible lessee means a person who either holds a lease or a Crown lease over a building.

Similarly, deductions under the capital allowances for general mining, quarrying and petroleum mining are available to persons who hold mining leases, permits and so on.

An argument has been put that section 51AD and Division 16D cannot apply to arrangements involving taxpayers who are entitled to capital allowances for property but who do not own the relevant property. The argument is that, as the term "owner" is not defined for purposes of section 51AD and Division 16D, it therefore takes its ordinary meaning and thus excludes persons who are not owners at law.

While such reasoning is open to dispute, it is nevertheless desirable that the issue be free from doubt. Accordingly, the following capital allowance provisions are to be amended so that taxpayers, entitled to deductions under those allowances for property which they do not own, are to be treated as if the owners of that property for the purposes of section 51AD and Division 16D:

•

Division 10A - Mining and Quarrying [New section 122U]

•

Division 10AAA - Mineral and Quarry Materials Transport [New section 123G]

•

Division 10AA - Petroleum Mining [New section 124AR]

•

Division 10A - Access roads and buildings in timber operations [New section 124JF]

•

Division 10C - Short-Term Traveller Accommodation [New section 124ZEA]

•

Division 10D - Income-Producing Buildings & Structural Improvements [New section 124ZLA]

Date of effect

The amendment is to apply to arrangements entered into after 16 December 1992 . [Clause 32]

Pay-As-You-Earn (PAYE) Provisions - Definition of 'Salary or Wages', Variations of Deductions

This Chapter is divided into two parts. Part A explains the amendments to the definition of 'salary or wages'. Part B explains the amendments relating to variations of tax instalment deductions.

Part A: Amendments to the definition of 'salary or wages'

Summary of proposed amendments

•

Purpose of amendment: to include in the definition of salary or wages in the PAYE provisions:

•

payments of training allowances made to participants in the Landcare and Environment Action Program; and

•

remuneration and allowances of members of certain local governing bodies.

Date of effect: The amendments will apply on or after the date the amending Bill receives the Royal Assent.

Background to the legislation

The Landcare and Environment Action Program

In July 1992, as part of its National Employment and Training Plan for Young Australians, the Government announced a new training program called the Landcare and Environment Action Program (LEAP). LEAP commenced on 19 October 1992 and provides young people aged 15-20 with practical training and vocational experience in landcare, conservation, environmental protection and cultural heritage activities.

Participants in LEAP receive a fortnightly training allowance of between $250 and $300, depending on age. The training allowance is taxable. However, the allowance does not fall within the present definition of 'salary or wages' in subsection 221A(1) of the Act. Consequently, tax instalments are not being deducted from participants' training allowances.

The PAYE provisions currently extend to certain training allowances such as those paid under the National Employment and Training System scheme (paragraph (g) of the salary or wages definition).

Local Governing Bodies

The definition of salary or wages in subsection 221A(1) of the Act was amended in 1991 to exclude from its scope 'payments by way of remuneration or allowances to a member of a local governing body established by or under a law of a State or Territory'.

As a result of the 1991 amendment, payments to members of local governing bodies are excluded from the PAYE provisions of the Act. Additionally, local government bodies are not subject to fringe benefits tax in relation to any benefits provided to councillors.

These arrangements do not suit the circumstances of every local governing body. For example, members of a local governing body who are remunerated for full time service are more akin to members of Parliament and may wish to be subject to the PAYE provisions of the Act.

Explanation of proposed amendments

The Landcare and Environment Action Program

The proposed amendment will include payments of training allowances made to participants in LEAP in new

paragraph (ha) of the definition of 'salary or wages' in subsection 221A(1) of the Act [Subclause 36(1)] .

As a consequence of the proposed amendment, program sponsors will be required to deduct tax instalments from training allowances paid to participants. This will ensure that participants are not subjected to a large income tax bill on assessment at the end of the income year.

Local Governing Bodies

The proposed amendments will enable members of a local governing body, provided that all of those members agree, to bring themselves within the PAYE provisions of the Act.

How will members of a local governing body be able to come within the PAYE provisions of the Act?

The definition of 'salary or wages', while continuing to exclude payments made to a member of a local governing body, will not exclude payments made to a member of an eligible local governing body [Paragraph (b) of subclause 36(2)] .

A local governing body will be able to resolve that it will be treated as an eligible local governing body, for the purposes of Division 2 of Part VI of the Act, by passing a unanimous resolution [paragraph (c) of subclause 36(2)] . If a local governing body passes such a resolution, it will be required to specify in that resolution a date on which the resolution is to take effect. To ensure timely action, the date of effect must be within 28 days after making the resolution [new subsection 221B(2)] . Having made a resolution, the local governing body must provide the Commissioner with written notice of the resolution within 7 days of the resolution being made [new subsection 221B(11)] . The Commissioner must, in turn, publish a notice in the Gazette , setting out:

•

the name of the local governing body; and

•

the day on which the resolution takes effect

[New subsection 221B(12)] .

To ensure that members of eligible local governing bodies fall within the PAYE provisions of the Act, the definition of 'eligible person' in subsection 221A(1) will be amended to include a member of an eligible local governing body [Paragraph (a) of subclause 36(2)] .

When will a resolution passed by a local governing body apply for taxation purposes?

The definition of 'employer', 'employee' and 'salary or wages' in the PAYE provisions are relied upon in other taxation laws. A unanimous resolution by a local governing body that it be treated as an eligible local governing body will therefore affect councillors through the application of other laws administered by the Commissioner such as:

•

the Income Tax Rates Act 1986 ;

•

the fringe benefits tax laws; and

•

the laws relating to child support,

after the day on which the resolution takes effect [New subsections 221B(3) to 221B(9)] .

Can a resolution be cancelled?

Yes. A local governing body will be able, by a unanimous resolution, to cancel an earlier unanimous resolution that it be treated as an eligible local governing body for the purposes of Division 2 of Part VI of the Act [Subclause 36(2), definition of 'eligible local governing body'] .

If a local governing body resolves to cancel an earlier resolution, it will be required to specify in that resolution a date on which the resolution to cancel the earlier resolution will take effect [new subsection 221B(2)]. The same arrangements which applied to the resolution being cancelled (i.e., the date of effect [28 days] and notifying the Commissioner [7 days]) will apply to the new resolution [New subsections 221B(2),(11) and (12)] .

Will future members of a local governing body be bound by a unanimous resolution?

Yes. If a local governing body passes a unanimous resolution that it be treated as an eligible local governing body for the purposes of Division 2 of Part VI of the Act, that resolution will be binding on any new members of the body [new subsection 221B(10)] . However, the differently constituted body will still be able, by a unanimous resolution, to cancel the resolution of the members who formerly made up the body.

Part B: Amendments relating to variations of tax instalment deductions

Summary of proposed amendments

Purpose of amendment: to allow an employee with more than one employer to obtain from the Commissioner a single variation in PAYE tax instalment deductions which will apply to more than one employer.

Date of effect: The amendments will apply on or after the date the amending Bill receives the Royal Assent.

Background to the legislation

Section 221D of the Act gives the Commissioner a discretion to vary the amount of tax that is to be deducted from salary or wages paid to an employee or class of employees. The rates of tax to be deducted are prescribed in the Income Tax Regulations (the prescribed rates). The Commissioner exercises this discretion if an employee states in an application to the Commissioner that the prescribed rates are not appropriate to his or her circumstances. For example, the prescribed rates could be inappropriate if an employee incurs abnormal deductible expenses or has more than one employer during an income year.

If the Commissioner exercises this discretion and varies the amount of tax to be deducted from an employee's salary or wages, he must notify the employer paying the salary or wages, in writing, of the variation, and the employer must make future deductions at the varied rate.

If an employee has more than one employer, that employee must apply for a variation in respect of each one of his or her employers. The Commissioner must then notify each employer in writing of any variation made. This places additional administrative burdens on employees as well as the Australian Taxation Office. The proposed amendments will reduce these administrative burdens.

Explanation of proposed amendments

Under the proposed amendments, the Commissioner will be able, in response to a request from an employee, to give that employee a notice of variation, called a 'PAYE variation certificate', which authorises a variation in the amounts to be deducted from the employee's salary or wages [New subsection 221D(3)] .

An employee will be able to give that certificate to any one or more of his or her employers. Those employers will then be required to make tax instalment deductions in accordance with the certificate. The amendments proposed will also increase the penalty from $500 to $1,000 where an employer does not deduct tax in accordance with the certificate. [New subsections 221D(5), 221D(6)] .

The increased penalty in new subsection 221D(6) will then be the same as the penalty imposed under subsection 221C(1A) where an employer fails to make tax instalment deductions at the prescribed rates.

In what circumstances will the Commissioner issue a PAYE variation certificate?

The Commissioner will issue a PAYE variation certificate if he is satisfied that:

•

an employee is likely to be successively employed by two or more employers [New paragraph 221D(3)(a)] ; and

•

an employee requires a variation because of the special circumstances of the employee [New paragraph 221D(3)(b)] .

Example

Rachel works as a fashion model and undertakes modelling assignments for many different employers.

Under the proposed amendments, the Commissioner would issue a PAYE variation certificate to Rachel because:

•

she is likely to be employed by two or more employers; and

•

a variation is required to meet Rachel's special circumstances. The fact that Rachel works, on average, less than a normal working week and that she can only claim the tax-free threshold for one employer, means that Rachel would pay too much tax if tax instalment deductions were made at the prescribed rates.

What information will a PAYE variation certificate contain?

A PAYE variation certificate will always contain the following information:

•

the name of the employee;

•

the method by which the amounts to be deducted from the salary or wages payable to the employee by any of his or her employers is to be worked out;

•

a statement to the effect that an employee who holds a PAYE variation certificate may give the certificate to a current employer or a person who is about to become an employer of the employee; and

•

a statement of the obligations of an employer who is given a certificate by an employee or a person who is about to become an employee

[New subsection 221D(4)] .

What are the obligations of an employer who is given a PAYE variation certificate?

If an employer is given a PAYE variation certificate by a person who is an employee or is about to become an employee, the employer must:

•

make a copy of the certificate (the original copy);

•

sign and date the original copy;

•

make a copy of the signed and dated original copy;

•

give the signed and dated original copy to the person;

•

return the certificate to the person; and

•

make deductions from the salary or wages payable to the person in accordance with the certificate

[New subsection 221D(6)] .

In this way the employer will have a record of the certificate and the employee will be able to repeat the process with the certificate for second and subsequent employers.

Technical amendments

In addition to the amendments explained in this chapter, the Bill proposes to increase the penalty in subsection 221F(13) from $50 to $100 where an employer fails to apply for registration as a group employer. This increase is in line with current penalty reforms in the Crimes Legislation (Amendment) Bill 1992 [Clause 39].

Amendments to the Depreciation Cost Price Limit Rules

Summary of proposed amendments

Purpose of amendment:

•

to change the current basis of annually indexing limits in relation to years of income to a financial year basis; and.

•

to exempt motor cars specially fitted out for the carriage of disabled persons seated in wheel chairs from the limit.

Date of effect: Both measures apply to motor cars acquired after 16 December 1992.

Background to the legislation

Section 57AF imposes a limit on the depreciable cost of motor cars and station wagons, including 4 wheel drive versions, unless they are an excluded unit of property [broadly, motor cars acquired before 22 August 1979].

If the cost of a motor car exceeds the limit for the year of income in which the car is first used for any purpose, its depreciable cost for that and subsequent years is equal to that limit and depreciation deductions are not available in respect of the excess.

The limit is indexed annually in line with the Consumer Price Index for motor vehicles. The initial limit was $18000, applicable to the 1979/80 year of income. The indexed limit for the 1992/93 year of income is $47280.

Annual Limits to Apply in Respect of Financial Years

Under the existing rules, an indexed cost price limit applies in respect of a year of income [subsections 57AF(2), (3) etc.]. That is, at the time a taxpayer first uses a motor car of the taxpayer for any purpose, the taxpayer needs to have regard to the cost price limit applicable for the year of income in which that first use occurs.

For most taxpayers, a year of income corresponds with a financial year [subsection 6(1) definition]; that is, the period commencing 1 July and ending the following 30 June.

However, taxpayers with approved substituted accounting periods adopt those periods as their years of income instead of a financial year [subsection 6(1) definition and subsection 6(2)]. For instance, a taxpayer may be allowed to balance on 31 May each year instead of the following 30 June meaning that the period 1 June 1992 to 31 May 1993 would be the 1992/93 year of income for that taxpayer. Similarly, a taxpayer may be allowed to balance on the 30 September instead of the preceding 30 June and the period 1 October 1992 to 30 September 1993 would be the taxpayer's 1992/93 year of income.

This means that taxpayers whose taxation accounting periods commence earlier than others can adopt an indexed cost price limit for a particular year of income before those other taxpayers.

For example, if one taxpayer's 1992/93 year of income commenced 1 July 1992 but another's commenced 1 August 1992, 1 July 1992 would occur in the first taxpayer's 1992/93 year of income whereas it would occur in the second's 1991/92 year of income. If each acquired and first used a motor vehicle on 1 July 1992 costing $50,000, the first taxpayer would be able to adopt the limit for the 1992/93 year of income [$47280] but the other taxpayer would have to adopt the previous year's limit [$45462].

It is inappropriate that taxpayers who balance earlier than others obtain earlier access to an indexed cost price limit. If the taxpayers in the example in the previous paragraph were in the business of leasing motor vehicles, the additional depreciation deductions allowable to the first taxpayer would give that taxpayer an advantage over the other taxpayer; for instance, the first taxpayer could pass the benefit of the additional tax deductions on to its customers by way of cheaper finance and so attract customers from the other.

Explanation of the amendment

Accordingly, annually indexed cost price limits are to apply in relation to financial years rather than years of income. So, if the cost of a motor car of a taxpayer exceeded the limit for the financial year in which the taxpayer first used the vehicle for any purpose, the depreciable cost of the car to the taxpayer, in relation to any year of income, is to be deemed to be an amount equal to that limit. [New subsection 57AF(2)]

The limit for the 1992/93 financial year, the current financial year, will correspond with the limit of $47280 for the 1992/93 year of income. Annual indexation of the limit for each subsequent financial will continue on the same basis as before as will the annual publication of relevant indexation factors and limits. [New subsections 57AF(3) to (9)]

Application

This change from a "year of income" basis to a "financial year" basis will apply to relevant motor cars acquired under a contract entered into after 16 December 1992 or, if constructed by the taxpayer, where construction commenced after that date. [Clause 43(1)]

The existing rules will continue to apply to vehicles acquired under contracts entered into, or that taxpayers commenced to construct, on or before that date and their depreciable cost will be ascertained by reference to the limit applicable for the year of income in which they are first used for any purpose.

For instance, taxpayers' whose 1993/94 year of income commenced on or before 16 December 1992 will be eligible to adopt the 1993/94 limit for vehicles acquired etc. on or before that date that are first used after that date and before 1 July 1993, even though vehicles they acquire after that date and first used before 1 July 1993 would be subject to the 1992/93 financial year limit.

Although indexed limits for the 1993/94 and later years of income will not be published - [Clause 43(2)] - the limits for those years of income will be the same as those that will be published by the Commissioner of Taxation [as required by new subsection 57AF(8)] for the corresponding financial years [Clause 43(3)].

Exemption of Certain Motor Cars from the Limit

Under sales tax law, motor cars or station wagons with a wholesale cost of more than 67.1% of the section 57AF cost price limit, are taxed at 30% of their wholesale value instead of 15% or 20% [subitem 1(1) of Schedule 5 of the Sales Tax (Exemption and Classifications) Act 1992 ].

This sales tax cost price limit does not apply to vehicles specially fitted out for transporting disabled persons seated in wheel chairs unless, broadly speaking, a vehicle for the personal transportation of certain disabled persons [subitem 1(2) of Schedule 5 of the Sales Tax (Exemption and Classifications) Act 1992 ]. Rather, such vehicles are taxed at either 15% or 20%, depending of the type of vehicle, irrespective of their cost.

Explanation of the amendment

An exclusion similar to that for sales tax purposes is to apply for depreciation purposes; that is, the section 57AF limit will not apply to a motor vehicle, whether new or second-hand, of a taxpayer that, immediately it is used by the taxpayer for any purpose, was specially fitted out for transporting disabled persons seated in wheel chairs. [New paragraph 57AF(15)(d) inserted in definition of "excluded property"]

However, the exclusion will not apply if the motor vehicle is for use in the circumstances mentioned in subitem(1) of exemption Item 96 or 97 of Schedule 5 of the Sales Tax (Exemption and Classifications) Act 1992 . Broadly, those exemption items apply to motor vehicles for the personal transportation of disabled veterans and certain other disabled persons.

So, this concession is directed to motor cars used for the carriage of persons other than the driver; for instance, specially modified cars used as taxis for hire or by private hospitals. The concession does not need extend to buses and the like as such motor vehicles are not motor cars and so the limit has never applied to them.

Application date

The amendment will apply to vehicles acquired by taxpayers under a contract entered in to after 16 December 1992, or, if constructed by taxpayers, where construction commenced after that date. [Clause 45(5)]

Taxpayers are to be prevented from obtaining exemption from the limit for motor cars they acquired or ordered before 16 December 1992by arranging sale-leasebacks or transfers to associates of the taxpayer. The limit will also apply to motor cars acquired by taxpayers after that date if the taxpayer or an associate of the taxpayer was leasing the car on or before that date. [Clauses 45(1) to (4)]

Capital Gains Tax - Concessional Taxing Provisions

Summary of proposed amendments

•

Purpose of amendment: The amendment will ensure that the capital gains provisions do not apply to tax an amount:

•

where the amount would otherwise be included in assessable income, the whole or part of that amount is specifically not included in assessable income; and

•

where the amount would not otherwise be included in the taxpayer's assessable income, part of that amount is specifically included in assessable income.

Date of effect: The amendment applies to amounts received as a result of the disposal of an asset which was created after 25 June 1992. [Clause 47]

Background to the legislation

The capital gains provisions contained in Part IIIA of the Income Tax Assessment Act 1936 (the Act) provide a method for calculating capital gains and capital losses and for determining the amount of a net capital gain to be included in a taxpayer's assessable income. However, those provisions do not operate in isolation from the rest of the Act. Broadly speaking, Part IIIA contains provisions designed to ensure that the same amount of "profit" is not taxed more than once [subsection 160ZA(4)], that most deductible expenditure is not included in the cost base of an asset [section 160ZH], and that the amount of a capital loss does not include losses which are allowable for income tax purposes [section 160ZK]. The proposed amendment is concerned with the operation of subsection 160ZA(4).

Subsection 160ZA(4) applies where a taxpayer has a capital gain as a result of disposing of an asset, and an amount is also included in the taxpayer's assessable income under another provision of the Act - for example, where the proceeds of the disposal of the asset are included in assessable income under section 25. Where the amount of the capital gain is equal to or less than the amount included as assessable income, the amount of the capital gain is taken to be nil. If the amount of the capital gain exceeds the amount included as assessable income, the amount of the capital gain is taken to be the amount of the excess. In this way, the same amount of "profit" is not taxed more than once.

The Taxation Laws Amendment Bill (No 4) 1992 proposes to amend the definition of asset for capital gains tax purposes. The amendment will make it clear that an asset includes legal or equitable rights, whether or not those rights are a form of property - that is, whether or not those rights are capable of assignment or transmission. Examples of the type of rights that come within the definition is a right to redundancy payments contained in an employment contract or industrial award, and a right under a statute to a payment. Where a payment is received in satisfaction of the right, the right is taken to be disposed of for the purposes of the capital gains provisions. The amount of the payment will generally be a capital gain to the taxpayer, as the asset (the right) is likely to have little or no cost base.

Where that amount is also included in assessable income, subsection 160ZA(4) will operate to prevent the amount being taxed twice. However, the amount of the payment may be concessionally taxed under the other provisions of the Act. This could be because:

•

the whole or part of an otherwise assessable amount is specifically not included in assessable income; or

•

part of an otherwise non-assessable amount is specifically included in assessable income.

In either case, subsection 160ZA(4) does not take account of the amount (or part of the amount) that is not included in assessable income. The result is that the amount which is excluded from assessable income may be taxed as a capital gain.

Explanation of proposed amendments

The proposed amendment will apply in respect of amounts that are taxed concessionally in either of two ways:

•

where an amount would otherwise be included in assessable income, but the whole or part of the amount is specifically not included in assessable income [for example, where a person has a right under an employment contract to receive income in the form of a fringe benefit, income derived in that way is exempt - section 23L]; and

•

where an amount would otherwise NOT be included in assessable income, but only part of the amount is specified to be included in assessable income [for example, only 5% of the concessional component, such as a bona fide redundancy payment, of an eligible termination payment that has not been rolled-over is included in assessable income - subsection 27C(2)].

New subsection 160ZA(7) will apply in the first situation. It will provide that, in applying subsection 160ZA(4), the provisions which excludes the whole or part of an amount from assessable income is to be disregarded. That is, subsection 160ZA(4) will apply as though the whole of the amount was included in assessable income. [Clause 46]

In the example above, the right to receive the fringe benefit is an asset. If the benefit is the provision of property, the right is satisfied when the property is received, thereby constituting a disposal of the right - paragraph 160M(3)(b). A capital gain equal to the value of the property would accrue, as the right is likely to have little or no cost base. However, the effect of the amendment is that subsection 160ZA(4) will apply as though the value of the property was included in the taxpayer's assessable income. Accordingly, no capital gain will accrue to the taxpayer as a result of the receipt of the benefit. [Tax may be paid in respect of the benefit in terms of the Fringe Benefits Tax Assessment Act 1986 .]

New subsection 160ZA(8) will apply in the second of the situations mentioned above where an amount is taxed concessionally. It will provide that, in applying subsection 160ZA(4), the whole of the amount (only part of which is included in assessable income) is to be treated as though it was included in assessable income. [Clause 46]

For example, where a taxpayer receives a bona fide redundancy payment of $1,000 which is not rolled-over, $50 (5% of $1,000) is included in the taxpayer's assessable income. The $1,000 would also be a capital gain, being the amount received for the disposal of an asset (the right to the payment) with a nil cost base (in most cases). Subsection 160ZA(4) would presently apply to reduce that capital gain to $950. New subsection 160ZA(8), by requiring subsection 160ZA(4) to apply as though the $1,000 was included in the taxpayer's assessable income, will ensure that the capital gain is reduced to nil in these circumstances.

Subsection 160ZA(8) will not apply where section 25 assesses part of an amount; effectively, where section 25 assesses the net profit arising from the disposal of an asset. This is consistent with the present operation of subsection 160ZA(4) in such cases. However, the ability to include non-capital costs in the cost base of assets acquired on or after 21 August 1991 should limit the number of circumstances in which the amount of a capital gain arising from the disposal of an asset will exceed the amount of net profit assessed under section 25.

New subsections 160ZA(7) and (8) will also apply to amounts which are included in the assessable income of a partnership, but are concessionally taxed (in the manner described above).

Capital Gains Tax - Cancellation of Statutory Licences

Summary of proposed amendments

•

Purpose of amendment: To prevent a statutory licensee from being deemed to receive the market value of his/her statutory licence when it is disposed of by way of cancellation for no consideration.

Date of effect: 16 August 1989. [Clause 49]

Background to the legislation

The amount of a capital gain or capital loss is determined by comparing the amount of consideration received for the disposal of an asset that was acquired after 19 September 1985 with its cost base (indexed or reduced as appropriate).

For the purposes of Part IIIA, section 160ZD generally defines what constitutes consideration for the disposal of an asset. In circumstances where there is no consideration, it provides that the person disposing of the asset is deemed to receive the market value of that asset. This deeming provision does not apply where an asset is lost, destroyed or expires.

Where an asset is disposed of without being acquired by another person (eg where it is cancelled, forfeited or released, such as where a debt is forgiven), subsection 160ZD(2A) requires the market value to be determined as though that disposal did not occur and was never proposed to occur.

Statutory licences (within the meaning of section 160ZZPE) are assets for the purposes of Part IIIA. In some circumstances, those licences will be cancelled (a disposal for capital gains purposes) by the issuing authority or others and the licensee will not receive any consideration for the disposal. The current provisions [subsections 160ZD(2) and 160ZD(2A)] will operate to deem the licensee to receive the market value of the licence. This tax treatment is inappropriate where the licence is cancelled as the result of an exercise of statutory power and the owner of the licence receives no consideration for the cancellation.

Explanation of proposed amendments

The Bill will amend section 160ZD to ensure that when a statutory licence is cancelled, unless the taxpayer receives some consideration for the disposal, the licence will be taken to have been disposed of for nil consideration. [Clause 48]

Capital Gains Tax - Transfer of Capital Losses

Summary of proposed amendments

Purpose of amendment: The Bill proposes a technical amendment to subsection 160ZP(7A) which will require that in determining the amount of a capital loss which can be transferred to a group company, the cost base of shares and loans held in the loss company is to be determined as at the end of the year of income of the transferee company, rather than at the time when the agreement to transfer the loss is made.

Date of effect: The amendment to subsection 160ZP(7A) applies to agreements made between group companies after 16 December 1992. [Clause 51]

Background to the legislation

Section 160ZP provides a mechanism whereby a company which realises a capital loss in a year of income may transfer the loss to another group company [as defined in subsection 160ZP(1)] in order for the transferee company to offset the loss against realised capital gains.

By paragraph 160ZP(7)(c), the "loss company" and the "gain company" agree to the transfer to the gain company of any part of a capital loss realised by the loss company which is not utilised by the loss company to offset its own realised gains. Subsection 160ZP(7AA) sets out the form and time of the agreement.

The amount of the capital loss that can be transferred is limited by subsection 160ZP(7A) to an amount equal to the cost base of shares or loans held by other group companies in the loss company.

A technical deficiency has been identified in the operation of this provision. By subsection 160ZP(7AA) the agreement must be made "before the date of lodgment of the return of income of the gain company for the gain year or within such further time as the Commissioner allows".

However, in examining the cost base of the equity held by group companies in the loss company, subsection 160ZP(7A) requires the amount of equity to be determined "at the time the agreement was made". This requirement is not appropriate because the agreement may be made later than the year of income in which the loss was transferred, and the underlying interests in the loss company may have changed in the intervening period.

Explanation of proposed amendments

An amendment to subsection 160ZP(7A) will specify that the cost base of shares or loans held by group companies in a loss company is to be determined at the end of the year of income of the transferee company, rather than at the time when the agreement to transfer the loss is made. [Clause 50]

Capital Gains Tax - Roll-over for the Transfer of Assets Between Group Companies

Summary of proposed amendments

Purpose of amendment: The proposed amendment will operate as a general anti-avoidance measure relating to the effective disposal of rolled-over assets outside a company group. A company holding an asset which has been the subject of a CGT roll-over under section 160ZZO, or a number of such roll-overs, will be deemed to have disposed of and re-acquired the asset for its market value if the company subsequently leaves the control of the company which was the ultimate holding company of the group at the time of the first roll-over.

The amendment seeks to deem the disposal of assets by reference to the beneficial ownership of the transferee company rather than the relationship between the transferee company and the immediate transferor.

Consequential amendments to the record keeping provisions require a transferee company to be able to substantiate its status as a group company in relation to the ultimate holding company at all times that a rolled-over asset is held by the transferee.

Date of effect: The amendment will apply to disposals of assets occurring after 16 December 1992. Where a disposal of an asset occurred on or before 16 December 1992, transitional provisions will apply in respect of the continuing operation of paragraphs 160ZZO(1)(g) and (h).

Background to the legislation

Section 160ZZO provides, at the election of the transferor and transferee companies concerned, a roll-over relating to assets transferred between companies belonging to a 100% wholly owned company group. The effect of the roll-over is to maintain the pre-CGT status of assets acquired by the transferor before 20 September 1985, and to delay the realisation of an accrued gain or loss on assets acquired by the transferor on or after 20 September 1985.

In respect of assets transferred after 6 December 1990, paragraph 160ZZO(1)(g) deems (for CGT purposes) the asset to have been disposed of and re-acquired by the transferee if the transferee subsequently ceases to be a group company in relation to the transferor for any reason other than the dissolution of the transferor.

Where the asset is transferred after 13 February 1991 and the group company relationship between the transferee and transferor companies ceases due to the dissolution of the transferor, paragraph 160ZZO(1)(h) deems (for CGT purposes) a disposal and re-acquisition of a rolled-over asset on the occurrence of a specified event, where either:

•

a company that was a group company at the time of the roll-over disposal in relation to the transferee disposes of a share in the transferee; or

•

the transferee company issues a share to a person who was not, at the time of the disposal, a group company in relation to the transferee.

It has become apparent that these provisions are deficient in a number of respects.

Firstly, the deemed disposal mechanism under paragraph 160ZZO(1)(g) is potentially open to abuse. The mechanism examines the relationship between the transferee company and the company which was the immediate transferor of the asset. It does not examine the relationship between the "ultimate" transferee and any company which may have previously transferred the asset and obtained a roll-over under section 160ZZO. Therefore, if an asset is subject to multiple roll-overs under section 160ZZO, provided that the transferee company remains a group company in relation to the last in the series of transferor companies, there may be no CGT consequences even though there may effectively be a change in the underlying ownership of the asset. Although the general anti-avoidance provisions of Part IVA may apply in cases involving multiple roll-overs, it is proposed to include a specific anti-avoidance measure relating to the operation of section 160ZZO.

Secondly, paragraph 160ZZO(1)(g) can operate in inappropriate circumstances. In general, the paragraph applies where the transferee company ceases to be a group company - the asset has effectively been disposed of outside the group. However, if the transferor ceases to be a group company, paragraph 160ZZO(1)(g) operates to deem the transferee to have disposed of and re-acquired the asset. This occurs even though there has ben no change in the underlying ownership of the asset, which remains within the company group.

Thirdly, paragraph 160ZZO(1)(h) can also apply in inappropriate circumstances, where the transferee company is the ultimate holding company in a group structure and the transferor company has been liquidated. As described above, if the transferee issues shares to a person who was not a group company at the time of the roll-over, a disposal and re-acquisition of rolled-over assets will be triggered.

This limitation causes problems in some circumstances for transferee companies who may wish to issue shares to persons who were not group companies at the time of the roll-over. The motive for issuing shares may be quite unrelated to the mischief contemplated by paragraph 160ZZO(1)(h). For example, the issue of bonus shares to existing shareholders, the participation of employees in employee share acquisition schemes, or the issue of shares for the purposes of raising new equity would trigger the deemed disposal and re-acquisition under paragraph 160ZZO(1)(h).

A further anomalous result arises under paragraph 160ZZO(1)(h) where the transferor company has been liquidated and, at a later time, a group company disposes of a share in the transferee company to another group company. Although there has been no change in the underlying ownership of the asset, a deemed disposal and re-acquisition of the asset will be triggered.

Explanation of proposed amendments

The Bill proposes the repeal of paragraphs 160ZZO(1)(g) and (h) [Clause 53] , and the introduction of new section 160ZZOA.

New section 160ZZOA [Clause 54] is a general anti-avoidance provision which will apply where there has been a "group roll-over disposal" of an asset. A group roll-over disposal is a disposal of an asset between wholly owned group companies to which a roll-over under section 160ZZO applies. A group roll-over disposal may form part of a "series of group roll-over disposals" . A series of group roll-over disposals will arise where there is two or more group roll-over disposals occurring without the intervention of an actual disposal of the asset outside the group or a deemed disposal under new section 160ZZOA. There is no requirement that the group roll-over disposals in a series occur in quick succession or as part of the same transaction. For the purposes of new section 160ZZOA, a series of group roll-over disposals will commence with the first roll-over disposal after 16 December.

It is a requirement under new section 160ZZOA that the transferred asset remain under the direct or indirect control of the company which was the ultimate holding company of the group at the time of the first in the series of group roll-over disposals. At the time when an asset held by a transferee company leaves the control of its ultimate holding company (at the "break-up time" - see notes below) a disposal and re-acquisition of the asset is deemed to occur. The new section is therefore concerned to examine the beneficial ownership of the asset rather than the relationship between the transferor and transferee companies, as is the case with paragraphs 160ZZO(1)(g) and (h).

The "ultimate holding company" for the purposes of new section 160ZZOA is a company which at a particular time is part of a wholly owned company group but which is not itself a wholly owned subsidiary of another company. It will hold the other companies in the group as its subsidiaries. "Subsidiary" has the same meaning as that given in section 160ZZO. The ultimate holding company may therefore control an asset either through direct ownership or via the direct or indirect ownership (through another group company) of shares in a subsidiary company which holds the asset.

It is possible that the actual holding company of a group may change, for example where the ultimate holding company is taken over by another company and therefore becomes a subsidiary of a new ultimate holding company. However, the relevant holding company in relation to which the underlying ownership of a particular asset is determined will continue to be the company which was the ultimate holding company for new section 160ZZOA purposes at the time of the roll-over of the asset or the first in a series of roll-overs. Provided that an asset remains within the beneficial control of its ultimate holding company, no disposal and re-acquisition of the asset will be deemed under new section 160ZZOA.

Similarly, different rolled-over assets held by group companies may relate to different ultimate holding companies where there has been a change in the actual holding company of the group prior to the first roll-over of a particular asset.

The ultimate holding company may itself be a transferor or transferee company for the purposes of sections 160ZZO and 160ZZOA. A transfer of an asset to and from the ultimate holding company, as with any transfer to which section 160ZZO has applied, may form part of a series of transfers for the purpose of new section 160ZZOA. A deemed disposal and re-acquisition of the asset can not occur while it is owned by the ultimate holding company. However, in applying new section 160ZZOA, the break-up time (see below) is determined having regard to the first of the disposals in the series (where the series includes the intervening disposals to and from the ultimate holding company).

The time at which an asset leaves the control of its ultimate holding company is referred to as the "break-up time" . An asset will leave the control of the ultimate holding company if any shares in a subsidiary company holding the rolled-over asset are issued or disposed of outside the company group in which the ultimate holding company remains. An asset will also leave the control of the ultimate holding company if any shares of a company of which the transferee is a subsidiary are issued or disposed of outside the company group in which the ultimate holding company remains. Where this occurs, the company which holds the asset is deemed for the purposes of the capital gains tax provisions to have disposed of and immediately re-acquired the asset for its market value at the break-up time.

However, there are no restrictions on the issue or transfer of shares in the ultimate holding company itself for the purposes of new section 160ZZOA. Similarly, there is no restriction on the transfer of shares between group companies. This addresses the concerns discussed above in relation to former paragraph 160ZZO(1)(h).

Control of the asset by the ultimate holding company may also be lost where a rolled-over asset is held by a subsidiary and the ultimate holding company is dissolved. In this case a deemed disposal and re-acquisition of the asset will occur. The liquidation of the ultimate holding company itself cannot occur whilst the company holds assets. Therefore the liquidation of the ultimate holding company will only occur where the asset has been transferred to another group company, or following a disposal of the asset to which the general provisions of Part IIIA will apply.

Once new section 160ZZOA has applied at a break-up time to deem the disposal and re-acquisition of a rolled-over asset, any roll-overs prior to the break-up time will not form part of a subsequent series of roll-overs for new section 160ZZOA purposes. For example, if the disposal of shares in the transferee results in the creation of a new company group and also triggers a disposal and re-acquisition of rolled-over assets held by the company under new section 160ZZOA, any roll-overs of the asset occurring after the break-up time will form a new series and hence require the determination of a "new" ultimate holding company in relation to the asset. The same consequences will apply if the ultimate holding company disposes of a subsidiary and thus triggers a deemed disposal and re-acquisition of a rolled-over asset under new section 160ZZOA. If the subsidiary is later re-acquired by the group, not having disposed of the assets, a new series of group roll-overs may commence.

Provided that an asset remains within the control of the company which was the ultimate holding company at the time that the asset was first rolled-over, there is no restriction on the disposal of group companies other than the one holding the rolled-over asset, or the acquisition of new group companies.

Record keeping provisions

Consequential amendments to the record keeping provisions contained in section 160ZZU will require a transferee company to substantiate its status as a group company in relation to the ultimate holding company at all times that the rolled-over asset is held by it [Clause 55].

Application date

The amendments proposed by clauses 52-55 will apply to disposals of assets occurring after 16 December 1992. [Clause 56]

Transitional provisions

The effect of the above amendments applying to disposals of assets after 16 December 1992 is that paragraphs 160ZZO(1)(g) and (h) will have a continuing operation in respect of a roll-over disposal which occurred on or before that date. Those paragraphs do not deem the disposal and re-acquisition to take place until the occurrence of the cessation time [for the purposes of paragraph 160ZZO(1)(g)] or the trigger time [for the purposes of paragraph 160ZZO(1)(h)]. Where the roll-over disposal occurred on or before 16 December 1992 but the cessation time or trigger time occur after that date, special transitional provisions will apply.

Where:

*

there is a roll-over disposal of an asset after 6 December 1990 [the operative date for paragraph 160ZZO(1)(g)] or after 13 February 1991 [the operative date for paragraph 160ZZO(1)(h)], and on or before 16 December 1992; and

*

paragraph 160ZZO(1)(g) or (h) would otherwise have applied in particular circumstances to deem a disposal and re-acquisition of the asset after 16 December 1992; and

*

had new section 160ZZOA applied to the roll-over disposal, there would be no deemed disposal and re-acquisition of the asset in those circumstances

then paragraphs 160ZZO(1)(g) and (h) will not apply to deem a disposal and re-acquisition of the asset.

The effect of these provisions is that a deemed disposal and re-acquisition of the asset will not occur after 16 December 1992 in the inappropriate circumstances addressed by these amendments - broadly if new section 160ZZOA would apply in the circumstances.

This means that company groups which refrained from taking certain actions so as not to attract the operation of paragraphs 160ZZO(1)(g) or (h) can now do so. For example, where an asset was rolled-over between group companies on or before 16 December 1992, the transferor company can be sold outside the group after that date without a deemed disposal and re-acquisition of the asset under paragraph 160ZZO(1)(g).

Similarly, a transferor company may not have been dissolved to avoid any potential operation of paragraph 160ZZO(1)(h). If the transferor company is dissolved after 16 December 1992, shares in the transferee can be sold within the group, the transferee (if it is the ultimate holding company) can issue bonus shares etc without there being a deemed disposal and re-acquisition of the asset.

However, where paragraphs 160ZZO(1)(g) or (h) have applied to deem a disposal and re-acquisition of an asset on or before 16 December 1992, the operation of those provisions will not be affected.

Capital Gains Tax - Principal Residence Exemption

Summary of proposed amendments

Purpose of amendment: New subsection 160ZZQ(1AB) will apply in circumstances where a legal interest in a dwelling is to pass under an executed contract. Where the contract or a collateral contract confers on the purchaser a right or licence to occupy the dwelling prior to the passing of legal ownership, the period of ownership of the dwelling by the purchaser for the purposes of section 160ZZQ shall be taken to have commenced at the time when the purchaser first occupies the dwelling following the execution of the contract for sale.

Date of effect: The amendment proposed by Clause 57 will apply to the disposal of assets after 19 September 1985.

Background to the legislation

Subsection 160ZZQ(1AA) makes it clear that the period of ownership of a dwelling for the purposes of the CGT principal residence exemption will commence at the time that legal ownership commences; that is, at the time when the contract for the purchase of the dwelling is settled, rather than the time at which it is executed. This provision therefore excludes the period prior to the settlement of the contract from consideration in determining the period of ownership for the purposes of the application of the principal residence exemption. This was considered appropriate because a purchaser is generally not entitled to occupy a dwelling during this period, and where this is the case the principal residence exemption would otherwise be lost in respect of gains attributable to this period.

It has become apparent that there are limited circumstances in which this provision may not operate appropriately. Certain home ownership schemes may require the acquisition by a purchaser of a legal interest in land to be delayed. For example, a contract for sale may be executed at a particular time, however no registrable interest will pass to the purchaser until an agreed principal amount is paid to the vendor.

A common feature of this sort of arrangement is that the purchaser is entitled under the purchase contract or a collateral contract to occupy the dwelling prior to the acquisition of the legal interest in it. This may be for a period of many years.

Explanation of proposed amendments

New subsection 160ZZQ(1AB) [Clause 57] proposes that where a dwelling is acquired under a contract entered into at a particular time, and legal ownership does not pass until a later time, the period of ownership of the dwelling for the purposes of the CGT principal residence exemption will be taken to commence at the time that the purchaser is first entitled to occupy the dwelling, where that entitlement arises under the contract itself or under a collateral contract.

Sales Tax Amendment (Transitional) Act 1992

Summary of proposed amendments

Australian National Maritime Museum Act 1990

The purpose of this amendment is to make a minor technical correction which will not alter the effect of the provision. [Subclause 61(1)]

Crimes (Taxation Offences) Act 1980

The purpose of this amendment is to make a minor technical amendment which will not alter the effect of the provision. [Subclause 61(2)]

Amendment of the Taxation Administration Act 1953

Summary of proposed amendments

Purpose of amendment: This Bill proposes to amend the Taxation Administration Act 1953 (the Act) to include the Queensland Criminal Justice Commission in the definition of law enforcement agency.

Date of Effect: The amendment will apply from the date of Royal Assent.

Background to the legislation

Section 3E of the Act provides the Commissioner with the discretion to disclose information acquired under a tax law to an authorised law enforcement agency officer.

Law enforcement agencies to which the Commissioner may provide information are specified in the definition of "law enforcement agency" in section 2 of the Act. The Queensland Criminal Justice Commission is not specified in the definition.

Explanation of proposed amendments

The Bill proposes to amend section 2 of the Act to include:

•

the Chairman of the Queensland Criminal Justice Commission in new paragraph (dad) of the definition of "head" [Subclause 63(a)] ; and

•

the Queensland Criminal Justice Commission in new paragraph (dad) of the definition of "law enforcement agency" [Subclause 63(b)] .

The amendment will enable the Commissioner to disclose information acquired under a tax law to the Queensland Criminal Justice Commission from the date of Royal Assent.