REPLACEMENT Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon John Dawkins, M.P.)THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE House of Representatives TO THE BILL AS INTRODUCEDGeneral Outline and Financial Impact
The Taxation Laws Amendment Bill (No.2) 1993 will amend the Income Tax Assessment Act 1936 and the Fringe Benefits Tax Assessment Act 1986(FBTAA) by making the following changes:
Fringe Benefits Tax - Extension of Child Care Exemptions
- •
- Extends the exemption which is currently available to priority of access payments to eligible child care centres to priority of access payments (made for similar purposes) to Family Day Care, Outside School Hours Care and Vacation Care; and
- •
- Includes a transitional provision which reflects the change of name of the program known as Services for Families with Children to the Children's Services Program.
Date of effect: On or after 1 July 1993
Proposal announced: Announced by the Prime Minister in the "Investing in the Nation Statement" of 9 February 1993.
Financial impact: The estimated cost to revenue in 1993-94 will be $0.5m, $1.5m in 1994-95, $2.2m in 1995-96 and $3.0m in 1996-97.
Amendments to improve the readability of section 78
- •
- Restructures the gift provisions to improve accessability and readability.
- •
- Transitional arrangements will also be in place to ensure that funds, authorities or institutions that have already been approved will continue to hold that approval under the new legislation.
Date of Effect: 1 July 1993.
Proposal announced: Not previously announced.
Financial impact: None
Amendments relating to migration information
- •
- Amends section 16 to permit the Commissioner of Taxation to furnish information to the Secretary to the Department of Immigration and Ethnic Affairs for the purpose of locating persons who are unlawfully in Australia.
Date of effect: Date of Royal Assent.
Proposal announced: Minister of Immigration, Local Government and Ethnic Affairs Media Release 79/92 of 17 December 1992.
Financial impact: None.
Income tax exemption for Defence Force and Federal Police personnel serving in certain areas
- •
- Exempts from income tax the pay and allowances of members of the:
- -
- Australian Defence Force allotted for duty with Operation Restore Hope and the United Nations Operation in Somalia;
- -
- Australian Defence Force allotted for duty with the United Nations peacekeeping force in the area formerly known as Yugoslavia; and
- -
- Australian Federal Police serving with the United Nations Transitional Authority in Cambodia.
Date of effect: - Former Yugoslavia area from 1991-92 year of income
- -
- Somalia from 1992-93 year of income
- -
- Cambodia from 1991-92 year of income
Proposal announced: Not previously announced.
Financial impact: Approximately $13m and $1m for the 1992-93 and 1993-94 income years respectively.
General Investment Allowance
- •
- Provides an incentive for investment in new plant used wholly and exclusively in Australia in producing assessable income. The incentive (the "general investment allowance") consists of a deduction equal to 10% of the capital cost of qualifying plant. This allowance may be additional to both depreciation and the development allowance.
Date of effect: The amendment applies to qualifying plant acquired under a contract entered into after 8 February 1993 and before 1 July 1994, or if constructed by the taxpayer, where construction commenced during that period. The plant must be first used to produce assessable, or installed ready for such use, before 1 July 1995.
Proposal announced: Announced in the Prime Minister's "Investing in the Nation Statement" of 9 February 1993.
Financial impact: The following is the estimated cost to the revenue of this measure:
| 1993-94 | 1994-95 | 1995-96 | 1996-97 |
| $m | $m | $m | $m |
| 130 | 330 | 270 | - |
The Taxation of Foreign Investment Funds
The proposed amendments to the taxation of foreign investment funds (FIFs) will:
- •
- make changes to the controlled foreign company (CFC) measures to:
- •
- exclude from the FIF income of a CFC certain dividends paid by a FIF out of comparably taxed profits;
- •
- provide ordering rules to deal with the interaction of attribution accounts under the CFC measures and attribution accounts under the FIF measures; and
- •
- clarify that the income of a CFC that is attributed to resident taxpayers who hold interests in the CFC is not to include a distribution paid by a FIF out of profits which have been taxed under the FIF measures;
- •
- modify the operation of the market value method for determining FIF income to:
- •
- provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method;
- •
- ensure that double taxation of income will not occur in relation to interests in a FIF which are disposed of by a taxpayer during an accounting period of the FIF;
- •
- enable taxpayers to determine the market value of an interest in a company FIF by reference to the redemption price of the interest; and
- •
- allow taxpayers to elect irrevocably to compute FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually;
- •
- modify the rules which govern when the calculation method for determining FIF income may apply by:
- •
- preventing taxpayers who cease to use the calculation method for calculating FIF income for interests in a FIF from using the calculation method again in relation to interests in that FIF (including where interests are acquired in the FIF at a future time);
- •
- enabling taxpayers to use the calculation method for the notional accounting period of a FIF which is in progress at the time the election was made; and
- •
- allow Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii);
- •
- ensure that amounts which are exempt from tax because they are paid out of profits which have been taxed under the FIF measures are not treated as exempt income for the purposes of calculating capital gains and losses under the capital gains tax provisions;
- •
- ensure that amounts upon which a beneficiary of a foreign trust estate is taxed under the FIF measures are not taxed again in the hands of a transferor of property to the foreign trust estate or the trustee of the foreign trust estate;
- •
- ensure that the FIF measures will not apply for the purposes of calculating the taxpayer's share of the net income of a trust estate if the FIF measures do not apply to the beneficiary's interest in that trust estate because of the country fund exemption;
- •
- ensure that the FIF measures do not apply to a taxpayer who is both a resident of Australia and another country where a double taxation agreement (DTA) treats the taxpayer as a resident solely of that other country;
- •
- ensure that the exemption for certain FIF interests that are trading stock can apply in relation to all interests in FIFs which would normally be treated as trading stock for the purposes of the Act;
- •
- provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income;
- •
- provide that profits of a FIF computed under the calculation method will take into account amortisation of assets of a class prescribed in the regulations at the rates set out in those regulations; and
- •
- correct technical problems with the drafting of paragraphs 160AFCK(2)(b), 509(b) and section 523.
Proposal announced: A number of the amendments were announced by the Treasurer in a press release of 9 October 1992. The remainder have not been announced.
Financial impact: The amendments will have minimal effect on revenue.
Company Tax Instalment System
- •
- The Bill will amend the Income Tax Assessment Act 1936 to implement revised company tax collection arrangements.
Proposal announced: "Investing in the Nation Statement" by the Prime Minister on 9 February 1993.
Financial impact: The estimated gain to revenue is $0.6 billion in 1994-95, $1.6 billion in 1995-96 and $1.7 billion in 1996-97.
Company Tax Rates Reduction
- •
- Amends the Income Tax Rates Act 1986 to reduce the rate of company tax from 39 per cent to 33 per cent. It will also reduce the concessional tax rate applying to the income of Pooled Development Funds from 30 per cent to 25 per cent.
Date of effect: To apply in respect of assessments for 1993-94 and subsequent years of income.
Proposal announced: Prime Minister's statement of 9 February 1993 and Treasurer's Press Release No.21 of 25 March 1993.
Financial impact: The reduction in the company tax rate will cost the revenue $0.4 billion in 1993-94, $1.8 billion in 1994-95, $1.6 billion in 1995-96 and $1.7 billion in 1996-97. The Pooled Development Fund rate cut will cost an additional $3.0 million in 1994-95.
Clauses involved in the proposed amendments
General
Clause 1: stipulates the short title of the Act as being Taxation Laws Amendment Act (No.2) 1993.
Clause 2: stipulates the commencement date of the provisions of the Bill.
Fringe Benefits Tax - Extension of Child Care Exemptions
[see pages 19-21 for further details]
Clause 3: defines "Principal Act" as being the Fringe Benefits Tax Assessment Act 1936
Clause 4: amends subsection 47(8) to extend the exemption available to priority of access payments to eligible child care centres to priority of access payments (made for similar purposes) to Family Day Care, Outside School Hours Care and Vacation Care.
Clause 5: sets out the date on or after which these amendments will apply.
Clause 6: is a transitional provision which provides for the change of name of the program known as Services for Families with Children to Children's Services Program.
Amendments of the Income Tax Assessment Act 1936
Clause 7: defines "Principal Act" as being the Income tax Assessment Act 1936.
Amendments to improve the readability of section 78
[see pages 23-25 for further details]
Clause 8: proposes to omit existing section 78 and replace it with new section 78 which restructures the gift provisions to improve their readability.
Clause 9: proposes a consequential amendment to the definition of 'apportionable deductions' in subsection 6(1) as a result of the restructuring of the gift provisions (by clause 8).
Clause 10: proposes a consequential amendment to section 78A as a result of the restructuring of the gift provisions.
Clause 11: proposes a consequential amendment to section 102AAH dealing with non- resident family trusts as a result of the restructuring of the gift provisions.
Clause 12: proposes a consequential amendment to section 328 dealing with non-resident family trusts as a result of the restructuring of the gift provisions.
Clause 13: proposes that the amendments made by this Division apply in relation to:
- (a)
- gifts and contributions made on or after 1 July 1993; and
- (b)
- pensions, gratuities and retiring allowances paid on or after 1 July 1993.
The amendments made by clauses 11 and 12 apply in relation to the characterisation of a trust as at a time on or after 1 July 1993.
Clause 14: proposes a transitional arrangement ensuring that those funds, authorities or institutions approved under the existing legislation will continue to hold that approval under the new legislation.
Amendments relating to migration information
[see pages 27-28 for further details]
Clause 15: amends section 16 by inserting new paragraph 4(hd). This new paragraph lists the Secretary to the Department of Immigration and Ethnic Affairs with the persons and entities to whom the Commissioner of Taxation or his delegate may furnish information.
Income tax exemption for Defence Force and Federal Police personnel serving in certain areas
[see pages 29-36 for further details]
Clause 16: is a technical amendment to section 23AB of the Income Tax Assessment Act 1936 (ITAA) to ensure that a member of the Australian Federal Police (AFP) does not become entitled to both a tax exemption and a tax rebate in respect of the same pay and allowances received in connection with United Nations service overseas.
Clause 17: extends the scope of section 23AC, which provides an income tax exemption for service in certain operational areas, to include Somalia and the area formerly known as Yugoslavia.
Clause 18: are new provisions which will provide:
- •
- any future income tax exemptions to members of the Defence Force through the Regulations; and
- •
- exemption of pay and allowances of AFP members serving with the United Nations Transitional Authority in Cambodia.
Clause 19: is a technical amendment to section 79B of the ITAA to ensure that a member of the ADF does not become entitled to both a tax exemption and a tax rebate in respect of the same pay and allowances received in connection with United Nations service overseas.
General Investment Allowance
[see pages 37-51 for further details]
Clause 20: inserts new Subdivision BA, containing the general investment allowance provisions [new sections 82AR to 82AW], in Division 3 of Part III of the Income Tax Assessment Act 1936.
New section 82AR specifies the purpose and nature of the general investment allowance.
New section 82AS explains that entitlement to the general investment allowance is to be worked out using the existing development allowance provisions with some changes inserted by the following clauses.
New section 82AT is the main deduction provision. It provides a deduction equal to 10% of the capital cost of eligible plant used wholly and exclusively in Australia in producing assessable income ordered or commenced to be constructed between 8 February 1993 and before 1 July 1994 and first so used or installed ready for such use before 1 July 1995.
New section 82AU substitutes dates relevant for the general investment allowance for dates contained in the development allowance.
New section 82AV modifies the application of existing section 82AC for the purposes of the general investment allowance. Section 82AC limits the amount that leasing companies can claim as a deduction for the development allowance from their leasing business to the amount of net income. New section 82AV ensures that the limit is to apply in relation to the sum of deductions allowable under either the general investment allowance or the development allowance.
New section 82AW allows a leasing company to transfer some or all of its entitlement to the general investment allowance from a lease transaction to the lessee by giving a declaration and statement to the lessee in a set time. Under the development allowance, the declaration and statement must be given to the Commissioner of Taxation.
New section 82AX removes the reference to the objects provision in the development allowance [section 82AAAA] for the purposes of this new allowance.
Clauses 21 & 22: are technical amendments to insert a reference to the general investment allowance in subparagraph 50C(3)(d)(ii) and in paragraph 50F(1)(b), relevant for working out the taxable income of a company for which there has been a disqualifying change in the degree of ownership or control of the company during a year of income.
Clause 23: is a technical amendment inserting a reference to new subdivision BA in subsection 56(3) so as to ensure that the general investment allowance is available in addition to plant depreciation.
Clause 24: is a technical amendment to insert a reference to the general investment allowance in existing section 82AC relevant for working out the maximum amount that leasing companies can claim for both the development allowance and the general investment allowance from their leasing business.
Clause 25: is a technical amendment to insert a reference to the general investment allowance in subparagraph 159GJ(1)(a)(i) and paragraph 159GJ(1)(a), contained in measures which deny property related deductions in certain circumstances for property used, or the use of which is controlled, by tax-exempt or non-taxable entities.
Clause 26: is a technical amendment to insert a reference to the general investment allowance in subsection 170(10) which deals with the time limits within which assessments may be amended.
The Taxation of Foreign Investment Funds
[see pages 53-94 for further details]
Subclause 2(2): provides that the amendments to the FIF measures apply from the commencement of the Income Tax Assessment Amendment (Foreign Investment) Act 1992, i.e., 1 January 1993.
Clause 27: inserts new subsection 96A(1A) to prevent double taxation of trust income.
Clause 28: amends the definition of "eligible exempt income" in subsection 160Z(10) to exclude amounts exempt under section 23AK.
Clause 29: inserts into section 317, definitions of certain terms used in relation to FIF attribution accounts which are to be used in Part X.
Clause 30: inserts new subsection 402(4) to provide an exemption from notional assessable income for amounts received by a CFC which are paid out of profits which have been taxed under the FIF measures.
Clause 31: inserts new subsection 607A which specifies how to determine the "grossed-up amount" in relation to a FIF attribution debit.
Clause 32: omits from section 470, the definition of "trading stock" thereby giving the term "trading stock" its normal meaning where it is used in Part XI unless a contrary intention is expressed.
Clause 33: modifies the meaning "trading stock" for the purposes of section 568 to exclude securities within the meaning of the Corporations Law that would normally be treated as "trading stock" for the purposes of the Act.
Clause 34: amends section 485 to clarify that the FIF measures do not apply to a taxpayer who is a resident of both Australia and another country where a double taxation agreement treats the taxpayer as a resident solely of the other country.
Clause 35: amends subsection 485(1) so that new section 485A will be taken into account when determining whether the FIF measures apply to a taxpayer.
Clause 36: inserts new section 485A to clarify, following the amendment made by clause 34, that the FIF measures are to apply when calculating the net income of a partnership or a trust estate (other than a trust which is exempt from the FIF measures because of the country fund exemption).
Clause 37: replaces existing paragraph 530(1)(d) with new paragraph 530(1)(d) to expand the types of exempt income received from a FIF which will reduce FIF income.
Clause 38: omits subsection 535(4) so that the calculation method may be used to determine FIF income for any notional accounting period of a FIF which ends during the taxpayer's year of income. It also inserts new subsection 535(4) to limit, prospectively, the circumstances where a taxpayer can elect to use the calculation method to determine FIF income.
Clause 39: inserts new subsection 580(4A) to apportion a company FIF's calculated profit where a taxpayer elects to use the calculation method to determine FIF income for a notional accounting period of the company FIF which does not correspond to the period for which the company FIF makes out its accounts.
Clause 40: inserts new subsection 582(7A) to apportion a trust FIF's calculated profit where a taxpayer elects to use the calculation method to determine FIF income for a notional accounting period of the trust FIF which does not correspond to the period for which the trust FIF makes out its accounts.
Clause 41: simplifies subsection 538(2) by replacing paragraphs 538(2)(b) to (e) with new paragraphs (b) to (e).
Clause 42: amends subsection 538(2) to provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method. It also amends subsection 596(2) to provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income in relation to a FLP to the cash surrender value method.
Clause 43: amends subsection 538(3) and inserts new subsection 538(4) to allow a taxpayer to elect irrevocably to calculate FIF income under the market value method using Australian currency.
Clause 44: amends subsection 542(3) to ensure that it does not apply where a taxpayer has elected to calculate FIF income under the market value method using Australian currency.
Clause 45: amends subsections 539(3) and (4) to enable taxpayers to determine the market value of an interest in a company FIF by reference to the redemption price of the interest. It also allows a purchase price offered by an associate of a FIF for an interest in the FIF to be used to determine the FIF's market value.
Clause 46: allows Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii);
Clause 47: replaces paragraph 606(2)(b) with new paragraph 606(2)(b) to ensure that a FIF attribution debit does not arise to the extent that a FIF attribution account payment gives rise to an attribution debit under the CFC measures thereby preventing double counting of the same amount under both the CFC and FIF attribution account systems.
Clause 48: makes a minor technical amendment to paragraph 160AFCK(2)(b).
Clause 49: makes a minor technical amendment to section 509.
Clause 50: makes a minor technical amendment to section 523.
Clauses 57&58: insert subsection 14(2) into the Income Tax Assessment Amendment (Foreign Investment) Act 1992 to provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income.
Company Tax Instalment System
[see pages 95-102 for further details]
Clause 51: inserts the new Division 1C of Part VI of the Income Tax Assessment Act 1936 which deals with the payment of tax by companies and certain trustees.
Clause 52: inserts an interpretation clause required for the application and transitional provisions.
Clause 53: inserts the application provisions for the new Division 1C of Part VI of the Income Tax Assessment Act 1936, including the transitional provisions for large instalment taxpayers.
Clause 54: inserts a transitional penalty provision for excessive estimates made in the 1994-95 year of income.
Clause 55: inserts various consequential amendments.
Clause 56: amendment of assessments.
Income Tax Rates Act 1986
Clause 59: defines "Principal Act" as being the Income Tax Rates Act 1986
Company Tax Rates Reduction
[see pages 103-107 for further details]
Clause 60: amends section 23 of the Principal Act to reduce the rate of company tax from 39 per cent to 33 per cent and to reduce the concessional rate of tax applying to the income of Pooled Development Funds (PDFs) from 30 per cent to 25 per cent.
Paragraph (a) provides that the rate of tax for companies generally will be reduced from 39 per cent to 33 per cent.
Paragraph (b) provides that the rate of tax on the non-fund component of taxable income of a non-mutual life assurance company will be reduced from 39 per cent to 33 per cent
Paragraph (c) provides for the reduction in the concessional rate of tax applied to companies that are PDFs.
Paragraph (d) amends the shading in threshold that applies in respect of non-profit companies, other than registered organisations.
Clause 61: amends section 24 of the Principal Act to reduce the rate of tax on trustees of corporate unit trusts from 39 per cent to 33 per cent.
Clause 62: amends section 25 of the Principal Act to reduce the rate of tax on trustees of public trading trusts from 39 per cent to 33 per cent.
Clause 63: amends section 28 of the Principal Act to reduce from 39 per cent to 33 per cent the rate of tax on trustees to whom subsection 98(3) of the Income Tax Assessment Act 1936 applies (non-resident companies as presently entitled beneficiaries).
Clause 64: indicates that these amendments apply in respect of the 1993-94 and subsequent years of income.
Chapter 1 Fringe Benefits Tax - Extension of Child Care Exemptions
Summary of proposed amendments
Purpose of amendment: Subsection 47(8) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) will be amended to extend the exemption which is currently available to priority of access payments made to eligible child care centres to priority of access payments (made for similar purposes) to Family Day Care, Outside School Hours Care and Vacation Care.
The amendment also contains a transitional provision which reflects the change of the name of the program known as Services for Families with Children to the Children's Services Program.
Date of Effect: The amendment applies to benefits provided on or after 1 July 1993. The transitional provision will apply to benefits provided on or after 1 July 1992 and before 1 July 1993.
Background to the legislation
Subsection 47(8) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) currently exempts from fringe benefits tax the benefit to an employee of a priority of access payment to an eligible child care centre in respect of the employee's children made by the employer.
Two broad conditions must be satisfied before an employer qualifies for the exemption.
First, the benefit provided (the contribution by the employer or associate of the employer) must relate to the obtaining of priority of access for a child or children of an employee at a child care centre that is an "eligible child care centre" for the purposes of the Child Care Act 1972 .
The second requirement which must be satisfied to qualify for the exemption is that the priority of access contribution must be made under the program administered by the Commonwealth (currently the Commonwealth Department of Health, Housing, Local Government and Community Services) known as Services for Families with Children. Specifically, the contribution must be made to the eligible child care centre under guidelines called the "Employer Contribution Guidelines" which are issued under the auspices of that program.
Explanation of proposed amendments
Subsection 47(8) of the FBTAA will be amended to extend the exemption to priority of access payments to Family Day Care, Outside School Hours Care and Vacation Care. [Clause 4]
Which priority of access payments will be exempt?
A contribution by an employer to obtain priority of access for a child or children of an employee will be an exempt benefit where the employer makes the contribution under a program administered by the Department of Health, Housing, Local Government and Community Services [new subparagraph 47(8)(b)] and where the benefit provided is in relation to:
- (i)
- a place that is an eligible child care centre for the purposes of any provision of the Child Care Act 1972: or
- (ii)
- family day care; or
- (iii)
- care outside school hours; or
- (iv)
- care in school vacation. [new subparagraph 47(8)(a)]
More detail on what constitutes an eligible child care centre, family day care, care outside school hours or care in school vacation will be set out in the "Employer Contribution Guidelines" to be issued under the Children's Services Program administered by the Department of Health, Housing, Local Government and Community Services, copies of which will be available from that Department.
A transitional provision will be inserted which will reflect the change of name of the program known as Services for Families with Children to Children's Services Program. The name of the program changed to Children's Services Program from and including 1 July 1992. The transitional provision will ensure that the FBT exemption will apply to benefits provided on or after 1 July 1992 under the Children's Services Program as if the program were named the Services for Families with Children. [Clause 6]
Chapter 2 Amendments to improve the readability of section 78
Summary of proposed amendments
Purpose of amendment: This Bill proposes to restructure the gift provisions of the Income Tax Assessment Act 1936 (the Act) to improve the overall readability of the provisions.
Date of Effect: The amendment will apply from 1 July 1993.
Background to the legislation
Donations of money or property of $2 or more are tax deductible where the fund, authority, or institution receiving the gift is either specifically listed in or approved under section 78. Over the past 50 years there have been a number of amendments to this section which have resulted in the legislation being hard to understand and difficult to follow.
As an ongoing process of review and evaluation of various provisions of the Act, the Australian Taxation Office in conjunction with the Office of Parliamentary Counsel has undertaken the restructuring of section 78. This will improve the readability of the provisions and make relevant information easier to access.
Reasons for the proposed changes
There are several reasons for the proposed changes to the gift provisions:
First, to make the provision easier to understand. Under the existing law which commenced in 1936, various entities have been added to the list on an ad hoc basis, which has produced a rather cluttered result. This has made it difficult and time consuming to determine whether a donation to a particular fund, authority or institution is deductible for tax purposes.
Second, to improve the readability and make the section easier to follow.
Third, to remove a number of redundant provisions relating to:
- •
- funds with specific time limits attached to them which have now expired; and
- •
- funds which have withdrawn from the gift provisions for other various reasons.
Explanation of proposed amendments
What is the aim of the amendments?
There are three main objectives underlying the restructuring process;
- (i)
- To rearrange the existing provisions of section 78 into a more logical order and in particular, to restructure the random list of funds, authorities and institutions in paragraph 78(1)(a) into a series of categorized tables.
- (ii)
- To include a comprehensive index to the tables and other provisions of the section and to group similar provisions together; this will improve the readability of the section.
- (iii)
- To remove a number of redundant provisions.
Organisations which were previously covered by paragraph 78(1)(a) of the Act have now been listed alphabetically in a comprehensive index and included in a series of tables under appropriate subject headings. The tables emphasise the distinction between the general and specific listings to make it easier to find a particular fund, authority or institution. There is also the added feature of any special conditions attaching to the donation being clearly displayed next to the listing of the fund. This will assist taxpayers in complying with all the necessary requirements to make a gift deductible. [Clause 8, new subsection 78(4)]
The existing provision dealing with donations of trading stock at paragraph 78(1)(ad) has been included as part of the general deduction provisions of section 78 rather than as a separate subsection. For business taxpayers this will mean that all of the information that they need to determine the deductibility of their gift is easily accessible. [Clause 8, new subsections 78(4) and 78(5)]
The valuation rules which applied to gifts of property have been consolidated and clarified. This will aid donors of property to determine the correct value of their gift. [Clause 8, new subsection 78(12) and 78(17)]
Consequential Amendments to other provisions of the Act
References to the former provisions of section 78 in other provisions of the Act need to be changed to reflect the new subsections. The other provisions which will be amended are Section 102AAH and Section 328 which relate to non-resident family trusts. [Clauses 9,10,11 & 12]
The Bill contains clauses to ensure that any funds, authorities or institutions that have been approved under the former legislation will continue to hold that approval under the new legislation. [Clause 14]
Chapter 3 Amendment relating to migration information
Summary of proposed amendments
Purpose of amendment: To allow the Commissioner of Taxation to provide the Secretary to the Department of Immigration and Ethnic Affairs with employment and residential address information of persons identified to him by the Secretary as being unlawfully in Australia.
Date of Effect: Date of Royal Assent.
Background to the legislation
There are at present a significant number of visa overstayers in Australia of whom a large percentage are thought to be working. Most locations of these people are made through community 'tip-offs' and the strategic targeting of certain industries and workplaces in which illegal workers are likely to be concentrated. These methods are resource intensive and thought to provide a comparatively low yield to the information sharing plan facilitated by this amendment.
Explanation of proposed amendments
The proposed amendment to section 16 will insert new paragraph 4(hd). This includes the Secretary to the Department of Immigration and Ethnic Affairs with the persons and entities to whom the Commissioner of Taxation or his delegate may furnish information. [Clause 15.]
Under the proposed arrangements, the Secretary will provide the Commissioner with known information of persons identified as visa overstayers. This information will then be matched with information contained in the Employment Declaration System. This matching procedure will improve efforts to locate illegal entrants and persons working without authority.
Chapter 4 Income tax exemption for Defence Force and Federal Police personnel serving in certain areas
Summary of proposed amendments
Purpose of amendment: The proposed amendments will:
- •
- exempt from income tax the pay and allowances of the members of the Australian Defence Force (ADF) serving in the area formerly known as Yugoslavia as a part of the United Nations peacekeeping force
- •
- exempt from income tax the pay and allowances of ADF personnel serving with Operation Restore Hope and the United Nations Operation in Somalia (UNOSOM)
- •
- exempt from income tax the pay and allowances of Australian Federal Police (AFP) members serving with the United Nations Transitional Authority in Cambodia (UNTAC)
- •
- enable prescription by the Income Tax Regulations in the future where the Government decides to grant income tax exemption to personnel serving with a particular organisation in a particular area
Date of effect:
- •
- The amendments to section 23AC apply from the 1991-92 year of income in the case of former Yugoslavia and from the 1992-93 year of income for Somalia.
- •
- The new section 23ADA and the amendments to section 23AB apply from the 1991-92 year of income.
- •
- The new section 23AD will apply from the date of Royal Assent.
Background to the legislation
The existing legislation provides an income tax exemption to those ADF members serving with the United Nations Advance Mission in Cambodia and the United Nations Transitional Authority in Cambodia. The Bill will extend these concessions to ADF personnel serving in Somalia and former Yugoslavia and to AFP personnel serving in Cambodia.
To simplify administrative procedures in the future, a new provision will be added which will permit other areas, to which Australian defence forces may be posted, to be prescribed in the Regulations instead of amending the Income Tax Assessment Act.
The proposed change is to continue the policy of extending concessional income tax treatment to ADF personnel posted by the Government to certain overseas localities. A similar exemption is to be provided to AFP personnel serving in Cambodia.
As the law now stands, an amendment is required to the ITAA every time a country or locality is designated as an operational area. This process is cumbersome given the number of operational areas which have been designated over recent years.
When do the new exemptions apply?
The income tax exemptions apply to the areas from:
- •
- 12 January 1992 for the area formerly known as Yugoslavia;
- •
- 20 October 1992 for Somalia; and
- •
- 18 May 1992 for the AFP operations in Cambodia.
In the past, the exemption has applied from the date of departure of the personnel from Australia until their return. It is proposed that the exemption will now apply only during the period of time spent by the personnel in the operational area.
Explanation of proposed amendments
Income of certain persons serving with an armed force under the control of the United Nations
As it now stands, section 23AB provides an income tax rebate for pay and allowances received by persons serving with a United Nations armed force.
Because the new section 23ADA will provide an income tax exemption for the pay and allowances, it is necessary that section 23AB be amended to ensure that AFP personnel serving with UNTAC are not entitled to both a rebate and an income tax exemption.
AFP personnel serving with UNTAC will again be entitled to the rebate after the income tax exemption under new section 23ADA ceases to apply.
The AFP in Cambodia will, therefore, be given the same concessional tax treatment as the ADF presently enjoy (section 79B provides a similar rebate for the ADF [Clause 19]) . [Clause 16]
Exemption of pay and allowances of members with Defence Force serving in operational areas
A technical explanation of how section 23AC operates
Section 23AC exempts from income tax the pay and allowances of ADF personnel during a period of 'operational service' in an 'operational area'.
An area covered by the section 23AC exemption is defined as 'an operational area'.
The amendment will include the former Yugoslavia as an operational area with effect from 12 January 1992 and Somalia with effect from 20 October 1992.
To be eligible for the exemption, ADF personnel have to be on 'operational service' in an operational area. 'Operational service' requires the ADF members serving in the new operational area to have a certificate from the Chief of the Defence Force (CDF). This certificate shows the period of allotment and it must state that the allotment for duty is in the operational area.
The amendments will require new certificates to be in respect of service with:
- •
- a United Nations peacekeeping force in the case of former Yugoslavia; or
- •
- in the case of Somalia - either Operation Restore Hope or the United Nations Operation in Somalia (UNOSOM).
The issue of the certificate of allotment from the CDF is in addition to the standard procedures used by the ADF in posting personnel for duty. When members are sent to Somalia, for example, the normal procedures associated with any posting would occur as well as a certificate being issued by the CDF stating that they have been allotted for duty with either Operation Restore Hope or UNOSOM for a certain period. This certificate may be issued retrospectively depending on the date which the legislative amendments to the Act are proclaimed.
The allotment procedure is used in order to ensure that any ADF personnel who may be serving or visiting in either of the operational areas for reasons unconnected with the specified force or operation are excluded from the exemption.
In the past, the exemption has applied from the date of departure of the personnel from Australia until their return. The exemption will now apply only during the period of time spent by the personnel in the operational area.
The period will commence at the time of the member's arrival in the area or at the date of allotment shown in the certificate from the CDF, whichever is the later.
The period will end either when the person leaves the operational area, the allotment period ends as specified in the certificate or a termination date is prescribed, whichever is the earliest.
Under the existing provisions, section 23AC must be amended to specify the date an area ceases to be an operational area.
The amendment proposes to prescribe the termination date by the Regulations for the new operational areas of Somalia and the former Yugoslavia, and the existing area of Cambodia. [Clause 17]
Exemption of pay and allowances of Defence Force members performing certain duty
Use of the regulations in the future
Proposed new section 23AD will exempt from income tax the pay and allowances of ADF personnel who have a certificate from the Chief of Defence Force (CDF) stating that they are on eligible duty (duty as, or under, an attache at an Australian embassy or legation is not eligible for the exemption). The proposed section will serve the same function as existing section 23AC but will enable the Income Tax Regulations to prescribe the service eligible for the concession. As the law now stands, an amendment is required to section 23AC every time a country is designated as an operational area. This process is cumbersome given the number of operational areas which have been designated in recent years.
The term 'eligible duty' will replace the concept of operational service in section 23AC. It will relate to the period a person serves with a specified organisation in a specified area after a specified date.
These criteria will be prescribed by the Regulations and will restrict the exemption to those persons who satisfy all of the criteria.
'Specified organisation' is equivalent to the allotment for duty in section 23AC with a particular operation or force; for example, a United Nations peacekeeping force.
'Specified area' replaces the term 'operational area' and covers an area designated as eligible for the concession.
'Specified date' is the earliest date from which service in a specified area with a specified organisation can be eligible for the income tax exemption. This is equivalent to the date the area becomes an operational area under section 23AC. The specified date may be, for example, the date that hostilities begin in a region or the date on which Australian forces are committed by the Government to serve in the area.
Certificate from the Chief of Defence Force
The certificate from the CDF will reflect the new terms described above and will serve the same purpose as certificates issued under section 23AC.
Any hospital treatment as a result of illness contracted or injury sustained during the duty will also be treated as eligible duty. This is consistent with section 23AC. [Clause 18]
Exemption of pay and allowances of Australian Federal Police members serving with UNTAC
Proposed section 23ADA will operate along similar lines to new section 23AD. It will exempt from income tax the pay and allowances of AFP personnel serving in Cambodia on or after 18 May 1992 where there is a certificate from the Commissioner of Police of the Australian Federal Police stating that the service is with the United Nations Transitional Authority in Cambodia.
Certificate from the Commissioner of Police
The certificate from the Commissioner comes into force at the time the member arrived in Cambodia, the time specified in the certificate or 18 May 1992, whichever date is the latest; and will end on the earliest of the date of the member's departure from Cambodia, the time specified in the certificate or a date specified in the Regulations.
The AFP with UNTAC will receive the same treatment as their ADF counterparts and their period of service will include any period of hospital treatment as a result of illness contracted or injury sustained during their duty.
The certificate from the CDF or the Police Commissioner, as applicable, (or a delegate of the relevant person) verifying eligible duty is effective until a certificate of revocation is signed. The certificate of revocation is a disallowable instrument under the Acts Interpretation Act 1901, which means that it must be tabled in and may be disallowed by Parliament. [Clause 18]
Chapter 5 General Investment Allowance
Summary of proposed amendment
Purpose of amendment: To provide an incentive for investment in new plant used wholly and exclusively in Australia in producing assessable income. The incentive (the "general investment allowance") consists of a deduction equal to 10% of the capital cost of qualifying plant. This allowance may be additional to both depreciation and the development allowance.
Date of effect: The amendment applies to qualifying plant acquired under a contract entered into after 8 February 1993 and before 1 July 1994, or if constructed by the taxpayer, where construction commenced during that period. The plant must be first used or installed ready for use before 1 July 1995.
Background to the legislation
The general investment allowance is modelled on the existing development allowance, itself a reactivation of the former investment allowance. [The development allowance is contained Subdivision B of Division 3 of Part III of the Income Tax Assessment Act 1936 , as was the former investment allowance].
Broadly, the development allowance provides a deduction for 10% of the capital cost of the plant component of projects costing not less than $50M and which meet certain other criteria specified in the Development Allowance Authority Act 1992 .
The principal differences between the development allowance and this new allowance are that the new allowance will be available for new plant costing not less than $3000 and the criteria specified in the Development Allowance Authority Act do not apply. The allowance will operate identically to the Development Allowance apart from certain other minor changes.
Reflecting that similarity, entitlement to the general investment allowance is to be mainly worked out by reference to the existing development allowance provisions with the necessary modifications to be contained in proposed new Subdivision BA.
The operation of the former investment allowance has been considered on a number of occasions both judicially and by the Commissioner of Taxation in Taxation Rulings. Because of the similarity of this new investment allowance with that former allowance, many of those decisions and Rulings will be relevant to the interpretation of the general investment allowance provisions.
The following explains how the general investment allowance is to operate.
Explanation of proposed amendment
The general investment allowance provides a deduction equal to 10% of the capital cost of acquiring or constructing a new unit of "eligible property" if the cost is not less than $3000 and the property was acquired under a contract entered into after 8 February 1993 and before 1 July 1994 or commenced to be constructed between those dates and was first used in producing assessable income, or installed ready for such use, before 1 July 1995. The deduction is allowable in the year of income in which the property is first so used, or is installed ready for such use. [new section 82AT]
To qualify for the allowance, property must be a unit of eligible property (broadly, plant or articles) for use wholly and exclusively both in Australia and for producing assessable income otherwise than from leasing the property, letting it on hire under a hire-purchase agreement or granting rights to use it to other persons. [existing subsection paragraph 82AA(1)(a)]
Eligible property may qualify when used for certain environmental purposes, as those purposes are to be taken to be for the purpose of producing assessable income. Evaluating the impact or likely impact of one's income-producing project or proposed project on the environment is such a purpose [existing section 82BG] ; so is preventing, combating or rectifying pollution, or treating, cleaning up, removing or storing waste, where the pollution or waste relate in certain ways to the income-producing activity of the taxpayer [existing section 82BR] ; and so is the purpose of rehabilitation or restoration of the site of the taxpayer's mining, quarrying or certain ancillary activities. [existing section 124BF]
"Eligible property" means property that qualifies as plant or articles under the plant depreciation provisions. [existing subsection 82AQ(1)]
The meaning of plant for depreciation purposes is extended to certain types of property that do not otherwise constitute plant including certain non-plant structural improvements on land used in a business of primary production [existing paragraph 54(2)(b)] . Such non-plant structural improvements are, with exceptions, excluded from the allowance. [existing section 82AE]
The exceptions - items which can qualify for the allowance - relate to fences used for conserving soil, for fencing off naturally salt-affected land or to subdivide the land; certain water conservation and transport facilities; and buildings and other structures for the storage of grain, hay or fodder. [existing paragraph 82AE(b)]
The following are also excluded from the allowance:
- •
- household appliances, such as TVs and fridges, unless for use, broadly, in the entertainment or tourist accommodation industries [existing paragraph 82AF(1)(a)];
- •
- furniture, fixtures, furnishings and similar items, unless for use, broadly, in the entertainment or tourist accommodation industries or for use principally as employees amenities [existing paragraph 82AF(1)(b)];
- •
- motor cars, station wagons and other derivatives, motor cycles, and other vehicles designed to carry less than either 1 tonne or nine people; works of art and their reproductions; books; films, tapes, discs etc. for the storage of images, sound or information; musical instruments and associated equipment; non-protective clothes and accessories; aircraft; and ships other than certain Australian ships operating within Australia and certain offshore industry vessels and mobile units. [existing subsection 82AF(2)]
Exclusion of property entitled to concessional basis of deduction
Generally, this new allowance is to be available in addition to other income tax deductions in respect of the same unit of property. That includes depreciation and the development allowance, if it is available. The application of the relevant legislative provision of the development allowance does not require special modification as it is applied here to a different Subdivision. [existing subsections 82AM(2) to (4)]
However, the allowance will not be available for otherwise eligible property if the property qualifies for deduction under any one of the following provisions providing a concessional basis of deduction: [existing section 82AM]
- •
- section 70A - 10 year write-off for capital expenditure on mains electricity connection;
- •
- section 73B - three year write-off for up to 150% of the cost of plant used in research and development activities;
- •
- section 75B - three year write-off for expenditure of primary producers on conserving or conveying water;
- •
- section 75D - immediate deduction for certain expenditure on prevention of rural land degradation;
- •
- sections 122J, 122JF & 124AH - immediate deduction for expenditure on exploration and prospecting for minerals, quarry materials, gas or petroleum;
- •
- sections 123B & 123BE - 10/20 year write-off for expenditure on transport facilities for minerals, quarry materials, gas or petroleum;
- •
- subsection 55(2) - 100% depreciation rate available for plant with an effective life of less than 3 years; and
- •
- section 57AM - 5 year write-off for Australian trading ships.
What constitutes a unit of property is important because of the $3000 threshold per unit. It is an undefined term that is, or has been, used in a number of areas of tax law such as plant depreciation, the development allowance and former investment allowances. The tests developed for working out what constitutes a unit under those provisions will be also relevant in applying the general investment allowance.
With three exceptions, the allowance is, in effect, only available to owners of property. The first exception relates to an option for lessors to pass on entitlements to lessees [discussed below]. The next relates to property on hire under a hire-purchase agreement. In that circumstance, the hirer is treated as acquiring the property even though the hirer is not necessarily the owner yet. [existing subsection 82AQ(3)]
Finally, persons who are treated as the owners of property installed on Crown leases for the purposes of the plant depreciation Crown lease provisions are also treated as the owners of the property for the purposes of the allowance. [existing subsections 82AQ(3A) & (3B)]
There are several exceptions to the rule that property not be for use for deriving income from leasing the property or granting rights to its use to other persons. One, relating to leasing companies, is discussed under the next heading. The other relates to the entertainment and tourism industries. It is an essential feature of those industries for operators to allow their customers to use the operators' property. Accordingly, taxpayers leasing, or granting rights, in the capacity of an "eligible entertainment/tourism operator" will not be denied the allowance. [existing subsection 82AA(2) and section 82APA]
Leasing companies to be entitled to allowance under long-term agreements
Property for lease to another person generally does not qualify for the allowance. An exception relates to otherwise eligible property leased by leasing companies under a long-term (ie. not less than 4 years) arm's length agreement, in the course of carrying on business in Australia, to a person who will use the property wholly and exclusively both in Australia and for assessable income-producing purposes. [existing paragraph 82AA(1)(b) as modified by new paragraph 82AU(3)(a); definition of "leasing company", "long-term lease" , "taking property on lease" and "providing finance" in existing subsections 82AQ(1), (2) & (3)]
The requirement that property be used, or be installed ready for use, before 1 July 1995 is modified in the case of leased property to mean used, or installed ready for use, by the lessee. [existing subsection 82AB(6)]
The lease must be entered into after 8 February 1993 [existing subsection 82AB(8) as modified by new paragraph 82AU(3)(c)] and before 1 July 1995. That latter date follows from the requirement that the lessee must use or install the property ready for use before 1 July 1995 and that leased property must, apart from certain sale-leaseback property, not have been used by any person, including the lessee, before the lease is given. [existing subsection 82AF(3)]
Provision is made for the allowance to be available to lessors of property that was initially acquired or constructed by the person who is to lease the property. Such "sale-leasebacks" need to occur with 6 months of the lessee first using the property or holding it ready for use and be in relation to property for which the lessee would have been entitled to the allowance but for the sale-leaseback. [existing subsection 82AB(7) & (8) as modified by new paragraphs 82AU(3)(b) & (3)(c)]
Partnerships with leasing company as partner
Generally, entitlement to the allowance for partnership property will be taken into account in calculating partnership net income (that follows from the usual tax treatment of partnerships as if a taxpayer). However, where one or more partners is a leasing company, any entitlement to the allowance in respect of property leased by the partnership to another person will instead be deductible to each partner on the basis of an agreed apportionment, or if there is no agreement, in proportion to each's interest in partnership net income or loss for the year in which the expenditure on the property was incurred. [existing subsection 82AJ(4)]
Leasing company may transfer entitlement to lessee
A leasing company may transfer some, or all, of its entitlement to the allowance for leased property to the lessee. That can be done by giving both a declaration and a statement to the lessee, signed by the company's public officer, specifying the amount that is transferred and certain other relevant information. The declaration and statement need to be given within 8 days of the end of the month in which the lease agreement is made or, if the agreement was made before date of introduction, before 8 June 1993. [existing section 82AD as modified by new section 82AW]
Lessees will need to retain the declaration and statement for five years under the general record keeping provisions. [existing section 262A]
This procedure for transferring an entitlement to a lessee is different from the corresponding arrangements under the development allowance in that the latter requires the declaration and statement to be given to the Commissioner of Taxation.
Maximum deduction allowable to lessors
The aggregate of deductions that lessors can claim for the general investment allowance from leasing business is to be limited to their net income for the year before deducting entitlements to the allowance; any excess entitlement is not available for carry-forward as a loss [existing section 82AC]. Lessors can avoid that limit by transferring entitlements to the allowance to lessees in the manner described under preceding heading.
The same limit also applies under the development allowance. In the case of lessors with entitlements under both allowances, the limit will apply in relation to the sum of entitlements under both measures. [New subsection 82AV and consequential amendment to existing paragraph 82AC(a)]
Circumstances under which allowance will be withdrawn
The purpose of the general investment allowance is to encourage taxpayers to invest in new plant and equipment between the relevant dates for use in their businesses. The following summarises specific safeguarding measures against access to the allowance where that purpose is not satisfied appropriately. Those specific measures are in addition to the potential application of the general anti-avoidance provision, Part IVA.
Entitlement to the allowance will be withdrawn if the unit of property to which the allowance relates, is - within 12 months of it first being used or installed ready for use - disposed of in whole or in part, recovered by a party from whom it was hire-purchased, lost or destroyed, leased (other than under a long-term lease by a leasing company) or otherwise allowed to be used by other persons or used either outside Australia or for purposes other than producing assessable income. [existing subsections 82AG(1) & (2) & section 82AI]
In the entertainment and tourism industries, property might be used in such a way as to require it to be leased, or be the subject of a grant of rights to use. Yet that lease, or that grant of rights to use, might be no more than an incident of a taxpayer's business of providing tourist or traveller accommodation, or of entertainment. Such a lease or grant of rights to use does not deny the investment allowance. [existing subsection 82AG(1A) and section 82APA]
This 12 month rule does not apply to disposals of property within a wholly owned listed public company group where there is no change in the underlying ownership of the property during that period. [existing section 82AJA]
Corresponding safeguards [existing subsections 82AG(3) and 3A)] also apply in relation to property leased by leasing companies if, within 12 months of it first being used or installed for use by the lessee:
- •
- the property is disposed of to anyone other than the lessee, is lost or destroyed or is recovered by a party from whom it was hire-purchased;
- •
- the lessee used the property either outside Australia or for non-assessable income-producing purposes;
- •
- the lease is terminated without the lessee acquiring the property;
- •
- while the lease was in force, the lessee granted rights to use the property to another person other than in the lessee's capacity as an eligible entertainment/tourism operator; or
- •
- the lessee acquired and either disposed of the property or granted rights to use the property to another person other than in the lessee's capacity as an eligible entertainment/tourism operator.
Entitlement to the allowance will be withdrawn if property of a person, other than property of a leasing company leased to another person, is - after 12 months of it first being used or installed ready for use - disposed of in whole or in part, recovered by a party from whom it was hire-purchased, leased or otherwise allowed to be used by other persons (other than by customers of eligible entertainment/tourism operators) or used either outside Australia or for non-assessable income-producing purposes if the Commissioner of Taxation is satisfied that the person, acquired or constructed property with the intention of doing any of those things. [existing subsections 82AH(1), (1A) & (2) & section 82AI]
Corresponding safeguards apply in relation to lessors' and lessees' deductions for leased property in the circumstances mentioned above in relation to the 12 month rule if the requisite intentions are present. [existing subsections 82AH(3) to (5)]
Where entitlement to the allowance rests with the partnership, partners who dispose of all or part of an interest in partnership property within 12 months of the first use or installation of property will be required to include an appropriate share of the partnership deduction for the allowance in assessable income as will those who dispose of all or part of an interest after the elapse of the 12 month period if they had the intention of disposing of all or part of the interest at the time the partnership acquired or constructed the property. [existing subsections 82AJ(1) to (3)]
Similar rules apply on the disposal of an interest in partnership property where the individual partners are entitled to the allowance for their share of partnership expenditure on property leased to another person (because one or more partners is a leasing company) except that partners' individual entitlements will be withdrawn in whole or in part as appropriate. [existing subsections 82AJ(5) & (6)]
Also, a partner's individual entitlement can be withdrawn if, before 12 months of the property first being used or installed ready for use, the partnership disposes of the property or any of the other events mentioned above were to occur. A corresponding rule applies for events occurring after the elapse of the 12 month period if the requisite intentions are present. [existing subsections 82AJ(7) to (9)]
Control of property by tax-exempt end-user
The allowance will not be available for otherwise eligible plant if it used to provide goods or services for a tax-exempt, or non-taxable, end-user that effectively controls the use of the property [existing section 82AHA as modified by new subsection 82AU(2)] . This measure prevents circumvention of the rule that property must not be used by other persons and that it be used wholly and exclusively in the production of assessable income.
The allowance will also not be available for otherwise eligible property acquired, leased or commenced to be constructed, so as to benefit from the allowance, in substitution for similar or identical property that was ordered, leased or commenced to be constructed before the 9 February 1993. [existing section 82AL as modified by new paragraph 82AU(3)(e)]
The use of property for private purposes would constitute the use of property otherwise than wholly and exclusively for assessable income-producing purposes and so cause the allowance to be unavailable or withdrawn. The use of property of a company by its employees and the like for private purposes might not necessarily constitute the use of property for non-income producing purposes.
To prevent the use of company structures to circumvent the rule against private usage, the private use of property of private companies by their employees, directors or members, and their relatives, will constitute the use of that property other than for income-producing purposes. [existing section 82AK]
In those instances where an unapportioned amount is paid for property comprising more than a single unit of eligible property, the Commissioner of Taxation may apportion the amount. [existing subsection 82AN(1)]
If the Commissioner of Taxation is satisfied that the cost of acquiring or constructing property is excessive, the market value of the property will be substituted in working out an entitlement to the allowance. [existing subsection 82AN(2)]
The general investment allowance is not available for that portion of the otherwise eligible cost of property that is recovered, or is recoverable, from any person. [existing section 82AO]
Consequential amendments
Sections 50A to 50N prevent losses incurred by a company in one part of an income year being offset against profits derived in another part of the year where there has been a disqualifying change in the degree of ownership or control of the company between the two periods. The effect of these "current year loss" measures is to deny a deduction for the relevant losses.
To calculate those losses, the year is broken into periods before and after the disqualifying change and the profit or loss for each period is calculated as if each period was a year of income. Generally, income and deductions are allocated according to the period to which they relate. Those amounts that relate to both periods, such as plant depreciation, are apportioned between the periods.
Some amounts are not attributed to a particular period and are instead taken into account in the final calculation of taxable income for the whole year. One such amount is a leasing company's entitlement to the development allowance from its leasing business. As leasing companies are to be similarly entitled to the general investment allowance from their leasing business, the current year loss measures are to be amended to include a reference to amounts so allowable to leasing companies. [Clauses 21 & 22]
Allowance in addition to depreciation
Income tax law contains a number of provisions to prevent double deductions in respect of the same expenditure. Subsection 56(3) prevents double deductions for expenditure on plant by reducing the depreciable cost of plant by the amount allowed as deductions under another provision.
The general investment allowance, like the development allowance, is to be generally available in addition to depreciation deductions. Accordingly, subsection 56(3) is being amended to ensure that the depreciable cost of plant is not reduced by any amount allowed as a general investment allowance deduction. [Clause 23]
Limit on leasing companies' entitlements
Section 82AC limits the amount that leasing companies can claim for the development allowance from their leasing business to the amount of net income. Where a leasing company is entitled to deductions for both the development allowance and the general investment allowance from leasing business, the limit is to apply in relation to the sum of deductions allowable under both provisions. [Clause 24]
Arrangements for the use of property
Division 16D (sections 159GE to 159GO) deals with arrangements that have the effect of transferring property related deductions from tax-exempt bodies and the like, who are unable to use those deductions, to taxable entities who can use the deductions. The effect of the measure is to deny the taxable entity the relevant property deductions such as plant depreciation and the development allowance and treat the arrangement as if it were a loan. This amendment ensures that the general investment allowance will not be available for plant used in such arrangements. [Clause 25]
Section 170 imposes time limits on making amendments to assessments, generally 4 years from the date tax became due and payable under the original assessment. However, there are circumstances where it might be necessary to amend returns outside that 4 year period. Subsection 170(10) enables assessments to be amended at any time in a number of specified circumstances.
The general investment allowance, like the development allowance and the former investment allowance, contemplates a number of circumstances where it might be necessary to amend an assessment outside the standard 4 year period and so subsection 170(10) is being amended to include a reference to the general allowance provisions. [Clause 26]
Chapter 6 Amendments to the Foreign Investment Fund measures
Section 1 - Introduction
The foreign investment fund (FIF) measures came into effect on 1 January 1993. The measures provide for the taxation, on an accruals basis, of investments held by Australian residents in non-controlled foreign companies, interests held by Australian beneficiaries in non-controlled foreign trusts and investments in foreign life policies (FLPs) by Australian policy holders. Also, as part of these measures, new rules governing the taxation of Australian beneficiaries of foreign trust estates were introduced with effect from the 1992-93 income year.
The FIF measures aim to remove the tax advantage of deferring Australian tax by accumulating income in offshore companies and trusts that are not controlled by Australian residents. They complement the controlled foreign company and transferor trust measures which have been in operation since, generally, the 1990-91 income year.
An ongoing review of the FIF measures has been instituted to put right any anomalies which might arise in the course of the operation of the measures. The review confirms the validity of the measures which have been put in place. However, some amendments to the law are required to fine tune the measures and bed them properly with existing provisions, particularly the controlled foreign company measures.
In addition, amendments to the law are required to give effect to a number of changes to the FIF measures which were announced by the Treasurer in a press release on 9 October 1992. This announcement followed a review of the FIF measures by an independent consultant, Professor Brian Arnold, who was appointed as a consultant to advise the Government on the implementation of the measures.
The proposed amendments will:
- •
- make changes to the controlled foreign company (CFC) measures to:
- •
- exclude from the FIF income of a CFC certain dividends paid by a FIF out of comparably taxed profits;
- •
- provide ordering rules to deal with the interaction of attribution accounts under the CFC measures and attribution accounts under the FIF measures; and
- •
- clarify that the notional assessable income of a CFC is not to include a distribution paid by a FIF out of profits which have been taxed under the FIF measures;
- •
- modify the operation of the market value method for determining FIF income to:
- •
- provide a more equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method;
- •
- ensure that double taxation of income will not occur in relation to interests in a FIF which are disposed of by a taxpayer during an accounting period of the FIF;
- •
- enable taxpayers to determine the market value of an interest in a company FIF by reference to the redemption price of the interest; and
- •
- allow taxpayers to elect irrevocably to compute FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually;
- •
- modify the rules which govern when the calculation method for determining FIF income may apply by:
- •
- preventing taxpayers who cease to use the calculation method for calculating FIF income for interests in a FIF from using the calculation method again in relation to interests in that FIF (including where interests are acquired in the FIF at a future time);
- •
- enabling taxpayers to use the calculation method for the notional accounting period of a FIF which is in progress at the time the election was made; and
- •
- allow Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii);
- •
- ensure that amounts which are exempt from tax because they are paid out of profits which have been taxed under the FIF measures are not treated as exempt income for the purposes of calculating capital gains and losses under the capital gains tax provisions;
- •
- ensure that amounts upon which a beneficiary of a foreign trust estate is taxed under the FIF measures are not taxed again in the hands of a transferor of property to the foreign trust estate or the trustee of the foreign trust estate;
- •
- ensure that the FIF measures will not apply for the purposes of calculating the taxpayer's share of the net income of a trust estate if the FIF measures do not apply to the beneficiary's interest in that trust estate because of the country fund exemption;
- •
- ensure that the FIF measures do not apply to a taxpayer who is both a resident of Australia and another country where a double taxation agreement (DTA) treats the taxpayer as a resident solely of that other country;
- •
- ensure that the exemption for certain FIF interests that are trading stock can apply in relation to all interests in FIFs which would normally be treated as trading stock for the purposes of the Act;
- •
- provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income;
- •
- provide that the amortisation rate in relation to certain buildings and structural improvements for the purposes of the calculation method will be 2.5 per cent; and
- •
- correct technical problems with the drafting of paragraphs 160AFCK(2)(b), 509(b) and section 523.
A detailed explanation of each of these amendments follows:.
Section 2 - General overview of the FIF measures
The FIF measures apply to Australian resident taxpayers who, at the end of an income year, have an interest in a foreign company or trust. The measures also apply to taxpayers who hold a foreign life policy (FLP) at any time during a year of income.
The FIF measures provide a number of exemptions from FIF taxation. These exemptions are designed to exclude from the FIF measures interests in FIFs which are not the target of the measures. Where an exemption does not apply, the amount of FIF income to be included in a taxpayer's assessable income is determined using one of the following three taxing methods:
- (i)
- the market value method;
- (ii)
- the deemed rate of return method; or
- (iii)
- the calculation method.
In the case of FLPs, the amount of FIF income will be determined under the cash surrender value method or the deemed rate of return method.
Under these methods of taxation, the taxpayer's interest in a FIF is measured in relation to notional accounting periods of the FIF commencing on 1 January 1993 and for subsequent periods. The notional accounting period of a FIF is generally the same as a taxpayer's year of income. However, a taxpayer can elect to use the period for which the annual accounts of the FIF are made.
The assessable income arising under the FIF measures is included in the taxpayer's assessable income for the income year in which the notional accounting period of the FIF ends.
Section 3 - Amendments relating to the CFC measures
It is possible that a controlled foreign company (CFC) will have an interest in another company or trust which is a FIF. The amendments are designed to align the operation of the FIF measures with the CFC measures.
Background to the CFC measures
Broadly, the CFC measures operate to tax the Australian controllers of a CFC on a current basis when those profits are derived by the CFC, i.e., on an accruals basis. The measures tax the Australian controllers on their share of the passive and other tainted profits (generally, income from transactions with related parties) of the CFC where those profits are not taxed at a rate of tax comparable to that which would have applied if the profits had been taxed in Australia.
The amount included in the assessable income of an Australian controller of a CFC is calculated as a share of the attributable income of the CFC based upon the interests held by the Australian controller in the CFC.
The attributable income of a CFC is calculated on the basis that the CFC is a resident of Australia. However, the profits of the CFC which are taken into account for the purposes of this calculation are generally the low-taxed passive and other tainted profits of the CFC. In this regard, the FIF income of a CFC is specifically included in the calculation of the CFC's attributable income.
Summary of proposed amendments
Purpose of amendment: The amendments will:
- (i)
- exclude from the FIF income of a CFC certain dividends paid by a FIF out of comparably taxed profits;
- (ii)
- provide ordering rules to deal with the interaction of the operation of attribution accounts under the CFC measures and attribution accounts under the FIF measures;
- (iii)
- clarify that the income of a CFC is not to include a distribution paid by a FIF out of profits which have been taxed under the FIF measures.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
(i) Treatment of exempt dividends received by a CFC
Currently, the FIF income to be included in the assessable income of a resident company because it holds an interest in a FIF is reduced to the extent that the company receives a dividend from the FIF which is exempt under section 23AJ. The exemption under section 23AJ operates to provide relief from double taxation in instances where dividends are paid from comparably taxed profits and the shareholding of the resident company represents a substantial interest in the foreign company rather than a passive investment. Broadly, section 23AJ exempts non-portfolio dividends (i.e., dividends received by a resident company from a foreign company in which it has a 10% or greater voting interest) received by an Australian company which are paid out of profits that:
- •
- have been comparably taxed in a listed country; or
- •
- have already been taxed in Australia by assessment at the full corporate rate.
Where a resident company has an interest in a CFC, the income of the CFC that is to be included in the assessable income of the taxpayer under the CFC measures is calculated by taking into account the FIF income of the CFC. Currently, the exemption under section 23AJ does not apply for the purposes of calculating the notional assessable income of a CFC [Section 389] . However, there are a number of provisions in the CFC measures which exempt certain dividends received by a CFC for similar reasons to those for providing the exemption under section 23AJ. For consistency with the treatment of section 23AJ exempt dividends, these exempt distributions will reduce the FIF income which would otherwise be attributed to a CFC as a result of its interest in the FIF paying the dividend.
Explanation of proposed amendments
The amendments will provide that dividends which are treated as exempt income of a CFC under the CFC measures for reasons similar to those for exempting dividends under section 23AJ will reduce the FIF income which would otherwise be included in the assessable income of a CFC under the FIF measures.
This will be achieved with changes to section 530. This section operates to prevent double taxation through reducing FIF income by amounts that have either been included in the taxpayer's assessable income or have been comparably taxed in another country.
Paragraph 530(1)(d) will be replaced with a paragraph that will reduce the amount on which a taxpayer will be assessed under the FIF measures by, not only amounts which are exempt from tax under section 23AJ, but also amounts which are notional exempt income, of a CFC in which the taxpayer has an interest, under paragraphs 402(2)(c), 403(b) or section 404.
(ii) Interaction between CFC and FIF attribution account systems
Attribution accounts trace the movement of profits which have been included in the assessable income of a taxpayer under the CFC or the FIF measures so that those profits are not taxed again when they are distributed to the taxpayer. The CFC and FIF measures have their own distinct attribution account systems.
Circumstances may arise where an entity has both profits which have been taxed under the CFC measures and profits which have been taxed under the FIF measures. For instance, this may happen where a foreign company ceases to be a CFC.
The attribution account systems require provisions to address instances where an entity has both profits which have been taxed under the CFC measures and profits which have been taxed under the FIF measures. These provisions are necessary to ensure that the distributions of previously taxed profits under the CFC measures and the FIF measures are traced separately so that double counting does not arise.
Explanation of proposed amendment
The amendments will provide ordering rules to deal with the interaction of the operation of attribution accounts under the CFC measures and attribution accounts under the FIF measures. The ordering rules will treat distributions from an entity as paid firstly from profits which have been taxed under the CFC measures and secondly from profits which have been taxed under the FIF measures.
This will be achieved by reducing the amount which is treated as having been paid from profits which have been taxed under the FIF measures to the extent that the amount is treated as having been paid from profits which have been taxed under the CFC measures [New paragraph 606(2)(b)].
The extent to which an amount is treated as having been paid from profits which have been taxed under the CFC or FIF measures is determined in accordance with section 372 or section 606 respectively. These amounts are referred to as "attribution debits" for the purposes of the attribution account systems.
(iii) Distributions from profits taxed under the FIF measures
Distributions paid to a CFC by another business entity are exempt to the extent that the distribution was made out of profits of that entity which have been taxed previously under the CFC measures. It follows that this exemption should also apply where a distribution is paid to a CFC out of profits which have been included in the income of the CFC under the FIF measures.
Subsection 402(3) exempts distributions paid to a CFC to the extent that the payment gives rise to an attribution debit for the paying entity. An attribution debit will arise for the paying entity where it makes a distribution out of profits which have been taxed under the CFC measures.
Presently, however, the terms used in subsection 402(3) do not relate to terminology used in relation to FIF attribution accounts. Consequently, it is not clear that subsection 402(3) operates to exempt distributions paid to a CFC to the extent that the payment gives rise to a FIF attribution debit for the paying entity. A FIF attribution debit arises for the paying entity where it makes a distribution out of profits which have been taxed under the FIF measures.
Explanation of proposed amendments
New subsection 402(4) will clarify that the income of a CFC is not to include a distribution paid to the CFC out of profits which have been included in the notional assessable income of the CFC under the FIF measures. There are three conditions that must be satisfied before the subsection applies.
The first condition is that a "FIF attribution account payment" is made to the relevant CFC during the "eligible period" by a "FIF attribution account entity" [Paragraph 402(4)(a)] . Broadly, these terms have the following meanings:
- •
- a "FIF attribution account payment" includes:
- •
- a dividend paid by a company to a shareholder;
- •
- interest paid on a convertible note to the holder of the note; and
- •
- amounts included in a taxpayer's assessable income because of an interest in a trust or partnership; [Section 603]
- •
- the "eligible period" is the statutory accounting period for which the CFC's attributable income is being calculated; [Section 381] and
- •
- a "FIF attribution account entity" is a non-resident company, a partnership or a trust estate. [Section 601]
The second condition is that there be at least a part of the FIF attribution account payment that would be included in notional assessable income of the CFC for the period if subsection 402(4) were not taken into account [Paragraph 402(4)(b)] . Broadly, the notional assessable income of a CFC comprises those amounts which are taken into account in determining the attributable income of the CFC.
The third condition is that the FIF attribution account payment must result in a FIF attribution debit for the entity making the FIF attribution account payment in relation to the relevant taxpayer [Paragraph 402(4)(c)] . Broadly, a FIF attribution debit will arise in relation to a taxpayer where a FIF attribution account entity makes a FIF attribution account payment to the taxpayer, or to another FIF attribution account entity in which the taxpayer has an interest, out of profits which have been attributed to the taxpayer under the FIF measures. [Section 606]
Where the above conditions are satisfied, a FIF attribution account payment will not be included in the notional assessable income of a CFC to the extent that it does not exceed the grossed-up amount of a FIF attribution debit which arises, in relation to the relevant taxpayer, for the entity making the payment.
The grossed-up amount of a FIF attribution debit is determined in accordance with new section 607A.
Paragraph 607A(b) is relevant for the purposes of determining the grossed-up amount of a FIF attribution debit which arises when a CFC receives a FIF attribution account payment.
Broadly, it provides that the grossed-up amount of a FIF attribution debit is calculated by dividing the amount of the FIF attribution debit which arises for the entity making the FIF attribution account payment by the relevant taxpayer's interest in the CFC receiving the payment.
It should be noted that an amount is increased where it is divided by a percentage which is less than 100%. Hence, because it is not possible to have an interest in excess of 100% in a CFC, the grossed-up amount of a FIF attribution debit will never be less than the FIF attribution debit which gave rise to it.
It is necessary to gross-up a FIF attribution debit for the purposes of calculating the exempt amount received by a CFC because the CFC's attributable income is calculated with regard to the entire profits of the CFC and not just a particular taxpayer's share of those profits.
Section 4 - Changes to the market value method
Summary of the proposed amendments
Purpose of amendment: the market value method for calculating FIF income will be amended to:
- (i)
- provide an equitable basis of taxation where a taxpayer changes from using the deemed rate of return method of calculating FIF income to the market value method;
- (ii)
- ensure that double taxation of income will not occur for interests in a FIF which are disposed of by a taxpayer during an accounting period of the FIF;
- (iii)
- enable taxpayers to determine the market value of an interest in a FIF that is a company by reference to the redemption price of the interest on a similar basis to that presently available for calculating the market value of interests in a foreign trust under subsection 539(3); and
- (iv)
- allow taxpayers to elect irrevocably to compute FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
(i) Opening value of a FIF interest under the market value method
In determining the amount of FIF income that is to be included in a taxpayer's assessable income, the market value method takes into account the market value (or, in certain cases, the redemption value) of that interest at the beginning and end of the accounting period.
Where the market values or redemption values are not available, the taxpayer may determine FIF income by using the deemed rate of return method. If the deemed rate of return method is used in a year to calculate FIF income, the opening value of the FIF interest to be used in the next year is, subject to adjustments for distributions made by the FIF, the current year's opening value increased by the deemed income for the year. This opening value may differ from the market value of the FIF interest.
Presently, the opening value of a FIF interest for the purposes of the market value method is its quoted price on an approved stock market or, in some cases, the redemption value of the interest. This treatment does not give the correct result where the deemed rate of return method was used to calculate FIF income for the previous accounting period. This is because FIF income was determined for that previous period on the basis of a deemed profit rather than on actual profit.
Explanation of proposed amendments
The amendments will provide for instances where the deemed rate of return method is used to calculate FIF income for a FIF interest for an accounting period and the market value method is used in the next period. In this event, the opening value of the FIF interest in the next period for the purposes of the market value method is to be the same opening value as that which would have been used had the deemed rate of return method applied in that period.
A similar problem may arise where a taxpayer changes from using the deemed rate of return method to the cash surrender value method to determine FIF income for an interest in a FLP. The amendments will provide, in this event, that the opening value of the FLP interest in the next period for the purposes of the cash surrender value method is to be the same opening value as that which would have been used had the deemed rate of return method applied in that period.
New subparagraph 538(2)(c)(ii) will apply where a taxpayer changes from using the deemed rate of return method to the market value method for determining FIF income. Broadly, subparagraph 538(2)(c)(ii) has the effect that the value of an interest in a FIF at the start of the relevant period for the purposes of the calculation of FIF income under the market value method is equal to the value which would have been determined if the deemed rate of return method had applied for that period.
Example
In year 1, a taxpayer uses the deemed rate of return method to calculate FIF income for an interest in a FIF. The FIF interest is valued @ $100 at the beginning of the period. Thus, the taxpayer would be assessed on $14 ($100 x 14% x 365 days / 365 days) FIF income.
In year 2, the taxpayer uses the market value method to calculate FIF income. New subparagraph 538(2)(d)(ii) will provide that the opening value of the FIF interest in year 2 is $114, i.e., the value of the interest which would have been used if the deemed rate of return method had applied in year 2. This will be the case even though the value of the FIF interest on an approved stock exchange at the beginning of year 2 may have been a different amount.
New subparagraph 596(2)(d)(ii) mirrors the above treatment for interests held in FLPs. It will apply where a taxpayer changes from using the deemed rate of return method to the cash surrender value method for determining FIF income for an interest in a FLP. Broadly, subparagraph 596(2)(d)(ii) has the effect that the value of an interest in a FLP at the start of the relevant period for the purposes of the calculation of FIF income under the cash surrender value method is equal to the value which would have been determined if the deemed rate of return method had applied for that period.
(ii) Prevention of double taxation under the market value method
Presently, the market value method operates to include amounts in FIF income relating to the increase in value of an interest in a FIF which is disposed of during a notional accounting period of the FIF (i.e., the period for which FIF income is determined) [Paragraph 538(2)(c)] . This has the result that the increase in the value of that interest which arises in the year of disposal is included in FIF income.
However, it was not intended that the FIF measures would apply to a FIF interest disposed of by a taxpayer before the end of a notional accounting period of a FIF. Rather, it was intended that the provisions of the Act relating to the taxation of realised profits and gains (for instance, the capital gains tax provisions) should apply to such a disposal. This treatment is provided because a more precise calculation of profits and gains in relation to an interest in a FIF which is disposed of during the year of income can be obtained by using the general provisions of the Act dealing with the taxation of realised profits and gains than can be obtained by using the FIF measures which apply to approximate a FIF's profits.
Explanation of proposed amendments
The amendments will ensure that FIF income does not accrue under the market value method in relation to interests in a FIF which are disposed of by a taxpayer during a notional accounting period of the FIF.
This will be achieved by removing one of the five steps provided in section 538. Taken together, these five steps determine the movement in the market value of the interest in a FIF. The step to be removed is at paragraph 538(2)(c). This paragraph includes amounts in FIF income which relate to the increased value of an interest in a FIF which has been disposed of during the notional accounting period.
A consequence of removing paragraph 538(2)(c) is the renaming of paragraphs 538(2)(d) and 538(2)(e). That is, former paragraph 538(2)(d) is renumbered as paragraph 538(2)(c) and is changed from being the fourth step to becoming the third step. Similarly, former paragraph 538(2)(e) is renumbered as paragraph 538(2)(d) and is changed from being the fifth step to becoming the fourth step.
It should be noted that it is intended that distributions to a taxpayer from a FIF which are referable to FIF interests which were disposed of during a notional accounting period are to be taken into account when determining FIF income [New paragraph 538(2)(e)] . However, section 530 operates to reduce the taxpayer's FIF income to the extent that these distributions are included in the taxpayer's assessable income.
(iii) Redemption price
In order to apply the market value method, a taxpayer must first ascertain the market value of the taxpayer's interests in the FIF [Section 539] . Where this is not possible, a taxpayer cannot use the market value method [Section 535] . In many cases, this would result in a taxpayer having to resort to the deemed rate of return method to calculate FIF income.
Currently, a taxpayer may determine the market value of an interest in a FIF which is a trust by reference to a buy back or redemption price of the interest [Subsection 539(3)] . This option is, however, presently restricted to FIFs which are trusts and cannot be used in relation to company FIFs. Thus, the market value of an interest in a company FIF must be determined by reference to its quoted value on an approved stock exchange. If this value cannot be obtained, the taxpayer cannot use the market value method despite the availability of a redemption price for the interest in the FIF.
Explanation of proposed amendments
The amendments will enable a taxpayer to determine the market value of an interest in a company FIF by reference to the redemption price. This method is to be made available where:
- •
- the interest in the company is not listed on the relevant day on the stock market of an approved stock exchange (Schedule 3 of the Act lists the approved stock exchanges); and
- •
- the interest is included in a class of interests for which a buy-back or redemption price is offered, at intervals of not more than 12 months, by the company or an associate of the company; and
- •
- the buy-back or redemption price:
- •
- was publicly available and offered to all persons; and
- •
- was calculated by reference to the market value of the assets of the company; and
- •
- represents the arm's length valuation of the interest on that day.
This will be achieved by inserting references to companies into subsections 539(3) and (4) so that these provisions may apply equally to both companies and trusts. Subsection 539(3) presently allows a redemption value to be used in certain circumstances to value an interest in a trust. Subsection 539(4) allows certain redemption values for an interest in a trust to be used to ascertain the value of that interest at the commencement of the FIF measures.
In addition, the amendments will extend the circumstances where redemption values can be used to value an interest in a FIF. The amendments will allow the redemption price offered by an associate of a company, or of the trustee or manager of a trust, for the redemption of an interest held by a taxpayer in the company or trust to be used as the buy-back or redemption price for that interest [New paragraph 539(3)(b)] . However, the redemption price has to satisfy all of the conditions referred to previously.
(iv) Foreign currency gains and losses
Presently, FIF income under the market value method is determined using the currency in which the value of interests held in the FIF on the last day of the relevant period is expressed [Subsection 538(3)]. If FIF income arises, the amount to be included in a taxpayer's assessable income is converted to the corresponding amount in Australian currency. This treatment effectively delays the realisation of currency exchange gains and losses until the end of the period for which FIF income is being calculated.
However, some taxpayers might prefer to determine FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually.
Explanation of proposed amendments
The amendments to the law will allow taxpayers to elect irrevocably to compute FIF income and losses for all of their FIF interests on a basis that takes foreign currency gains and losses into account annually.
This will be achieved by allowing taxpayers to elect to express the amounts used to calculate FIF income in Australian currency thereby bringing to account currency exchange gains and losses at the time the transactions and values relevant to the calculation of FIF income occurred [New subsection 538(4)] . New subsection 538(5) will ensure that this election is irrevocable and that it will apply to all of a taxpayer's FIF interests.
Section 5 - Changes to when the calculation method may be used to determine FIF income
Purpose of amendment: the Bill seeks to amend the law to:
- (i)
- prevent a taxpayer who ceases to use the calculation method for calculating FIF income for interests in a FIF from using the calculation method again in relation to interests in that FIF (including where interests are acquired in the FIF at a future time);
- (ii)
- enable taxpayers to use the calculation method for determining FIF income for the notional accounting period of a FIF which is in progress at the time the election was made; and
- (iii)
- allow Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii).
Date of Effect: The amendments referred to at item (i) above will apply for notional accounting periods of a FIF ending after the date the amending Bill receives Royal Assent. The other amendments referred to will apply from the commencement of the FIF measures, i.e., 1 January 1993.
(i) Restriction upon election to use the calculation method
A taxpayer can elect to use the "calculation" method to determine FIF income in respect of the taxpayer's interests in a FIF for a notional accounting period [Subsection 535(3)] . Under this method, FIF income is generally calculated on the basis of the taxpayer's share of the realised profits of a FIF. The other methods for calculating FIF income (the deemed rate of return method and the market value method) take into account both realised and unrealised profits of a FIF.
This difference between the calculation method and the other methods in bringing to account realised and unrealised profits could be manipulated by taxpayers to obtain tax benefits. For example, a movement from the calculation method to the deemed rate of return method may enable a taxpayer to avoid taxation on a part of the FIF income. The taxpayer may use the calculation method during periods when the FIF derives only dividends and interest income from its investments and opt for the deemed rate of return method for periods where it is anticipated that the FIF would derive large capital profits from the sale of its assets that had appreciated in value.
Explanation of proposed amendments
Complicated adjustments would be required to counter the tax avoidance possibilities that could arise from allowing unfettered movement between the calculation method for calculating FIF income and other methods. Rather than providing these adjustments, the amendments will provide that a taxpayer who changes from using the calculation method of determining FIF income to another method in relation to an interest in a FIF cannot subsequently elect to use the calculation method again in relation to that FIF.
New subsection 535(4) will prevent a taxpayer from electing to use the calculation method to determine FIF income for a notional accounting period of a FIF where the taxpayer has ceased to use the calculation method for a previous notional accounting period of the FIF.
(ii) Timing of election to use the calculation method
A taxpayer can elect to use the calculation method to determine FIF income in respect of the taxpayer's interests in a FIF for a notional accounting period [Subsection 535(5)] . A notional accounting period of a FIF is the period for which its FIF income is to be determined.
To make an election to use the calculation method, it is a requirement that the taxpayer also elects to use the period for which the FIF makes out its accounts (i.e., the FIF's accounting period) as its notional accounting period [Subsections 535(3), 535(5) and 486(3)] . This allows the accounts for that period to be used for the purposes of calculating FIF income without having regard to when particular profits were derived by the FIF.
Currently, where an election to use the calculation method is made, the calculation method first applies from the next notional accounting period of the FIF which commences after the time the election was made [Subsection 535(4)] . Hence, it is not possible to use the calculation method in relation to a notional accounting period of a FIF which is in progress at the time the election to use the calculation method was made. This means that, in many instances, taxpayers are unable to use the calculation method for the first notional accounting period of a FIF in which they acquire an interest in the FIF. It also prevents taxpayers from using the calculation method for the notional accounting period of a FIF which commences from the date on which the FIF measures first apply (that is,1 January 1993).
The policy of not allowing the calculation method from applying for a notional accounting period of a FIF, where the election is made during that period to use the calculation method, is to prevent taxpayers from selecting the method for determining FIF income once the trading results of the FIF are known. Otherwise, taxpayers may be able to minimise the effects of FIF taxation measures by selectively taking advantage of timing differences which exist between the calculation method and the other methods for determining FIF income.
To enable a taxpayer to decide which method to use after the trading results of the FIF were known was seen to compound this problem. However, given the restriction upon electing to use the calculation method, as outlined at item (i) above, it is not considered necessary to provide further restrictions on taxpayers with regard to the method they use for determining FIF income. Consequently, the circumstances where a taxpayer can make an election to use the calculation method for calculating FIF income are to be extended.
Explanation of the proposed amendment
An amendment is proposed to extend the circumstances where a taxpayer can make an election to use the calculation method. The amendment will enable a taxpayer to elect, at any time during the taxpayer's year of income, to use the calculation method in relation to any notional accounting period of a FIF:
- (i)
- which is in progress at the time the election was made; or
- (ii)
- that ended in the year of income of the taxpayer in which the election was made.
This will be achieved by omitting subsection 535(4). Subsection 535(4) currently provides that the calculation method applies to the first period in respect of which a FIF makes out its accounts that begins after the day on which an election to use the calculation method is made. The availability of the calculation method is still subject, however, to a taxpayer making an election under subsection 486(3) to use notional accounting periods for the FIF which correspond to periods for which the FIF makes out its accounts. It should be noted that a taxpayer may use the calculation method for the truncated notional accounting period which arises because of the election under subsection 486(3).
Example
In the absence of an election under subsection 486(3) to use notional accounting periods for the FIF which correspond to periods for which the FIF makes out its accounts, each period that is a year of income of the taxpayer is a notional accounting period of the FIF. [Subsection 486(2)]. Hence, for most taxpayers, the notional accounting period of a FIF prior to making an election under subsection 486(3) will normally be from 1 July to 30 June each year. There are exceptions to this rule. For instance, the first notional accounting period of a FIF which was in existence prior to 1 January 1993 commences on 1 January 1993 rather than from the commencement of the relevant taxpayer's year of income. [Subsection 486(7)]
Assume that a taxpayer has a 1 July to 30 June year of income. If the taxpayer were to elect on 1 February 1994 to use notional accounting periods for a FIF which correspond to periods for which the FIF makes out its accounts, the first period for which the FIF makes out its accounts that begins during the year of income of the taxpayer in which the election was made, and all later such periods, will be notional accounting periods of the FIF [Paragraph 486(5)(a)] . In addition, the period commencing 1 July 1993 (i.e., the commencement of the taxpayer's year of income) and ending immediately before the new notional accounting period will also be a notional accounting period. [Paragraph 486(5)(b)]
Consequently, if the FIF makes out its accounts for the period 1 January to 31 December each year, the FIF would have a truncated notional accounting period from 1 July 1993 to 31 December 1993 and then notional accounting periods from 1 January to 31 December thereafter. A taxpayer may elect to use the calculation method to determine FIF income for the truncated period (i.e.,1 July 1993 to 31 December 1993).
Amendments are also provided to modify the calculation of FIF income. They are relevant for the first notional accounting period of a FIF for which the calculation method is used if that period does not correspond to the period for which the FIF makes out its accounts. [Paragraphs 580(4A)(a), 580(4A)(b), 582(7A)(a) and 582(7A)(b)]
These modifications serve two purposes. Firstly, they provide that the calculated profit of a FIF is to be determined using the accounts of the FIF for the period which ends at the end of the notional accounting period of the FIF. This is achieved by deeming the period for which the calculated profit of the FIF is to be determined to have commenced at the beginning of the corresponding period for which the FIF makes out its accounts [Paragraphs 580(4A)(c) and 582(7A)(c)] . This allows the FIF's accounts to be used for the purpose of determining the FIF's calculated profit without having to make modifications to identify which profits and outgoings relate to the notional accounting period of the FIF.
Secondly, the modifications apportion the calculated profit of a FIF on the basis of the extent to which the notional accounting period of the FIF corresponds to the period for which the calculated profit was determined. This is achieved by deeming the taxpayer to have acquired at the beginning of that notional accounting period, any interests that the taxpayer had in the FIF immediately before the notional accounting period. [Paragraphs 580(4A)(d) and 582(7A)(d)] Accordingly, the taxpayer is not treated as holding any interest in the FIF prior to the notional accounting period and subsection 580(3) will apply to apportion the taxpayer's share of the calculated profit.
Example
In the previous example, the FIF had a truncated notional accounting period of 1 July 1993 to 31 December 1993. If the taxpayer elected to use the calculation method for that period, the following modifications would be made for the purposes of determining FIF income under that method:
- (i)
- the period for which the calculated profit would be determined would be the period for which the company makes out its accounts ending on the last day of the FIF's truncated notional accounting period, i.e., for the accounting period 1 January 1993 to 31 December 1993;
- (ii)
- the taxpayer is treated as not having any interest in the FIF prior to the beginning of the commencement of the FIF's truncated notional accounting period, i.e., prior to 1 July 1993.
If the FIF is determined to have a calculated profit of $100,000 using the FIF's accounts for the period 1 January 1993 to 31 December 1993 and the taxpayer's attribution percentage in the FIF is 5%, the taxpayer's FIF income would be calculated as follows:
Taxpayer's share of FIF income = Calculated profit * Attribution percentage * (Number of days held / Total number of days)
= ($100,000 * 5% * 184 days (i.e., 1/7/93 to 31/12/93)) / 365 days = $2520
(iii) Amortisation of building expenses under the calculation method
In certain circumstances, a notional deduction is allowable for the purposes of the calculation method for expenditure incurred by a FIF in the acquisition of:
- (i)
- plant or articles within the meaning of section 54; or
- (ii)
- industrial property within the meaning of Division 10B; or
- (iii)
- any other prescribed class of property.
[Section 570]
Capital expenditure on certain buildings and structural improvements of the type set out in Division 10D of Part III of the Act are to be a prescribed class of property for the purposes of subparagraph 570(1)(a)(iii). Hence, a notional deduction will be available under section 570 in certain circumstances for the amortisation of expenditure incurred in acquiring these buildings and structural improvements. This will be achieved by prescribing all or certain types of Division 10D buildings as a class of property in the Income Tax Regulations.
The amortisation rate of 2.5% in Division 10D is to be maintained for the purposes of determining the notional deduction which may be claimed. Normally, section 570 allows an amount to be calculated as a notional deduction equal to that shown in the accounts of the FIF as relating to the amortisation of the relevant asset if the conditions set out in that section are satisfied.
There is presently no authority in section 570 to modify the rate of amortisation by Regulation. Consequently, an amendment to the law is required to provide an amortisation rate or rates for the classes of property prescribed by Regulation.
Explanation of proposed amendments
The amendments will allow Regulations to be made to prescribe the amortisation rate for a class of property prescribed for the purposes of subparagraph 570(1)(a)(iii). [Subsection 570(1A)]
By specifying a rate of amortisation, the period over which the property is amortised for the purposes of the calculation method may be different to that over which the property will be amortised in the accounts of the FIF. For the purposes of subsection 570(1A), it is a requirement that the accounts of the FIF have at some time included an amount for the amortisation of expenditure incurred in the acquisition of the property. [Paragraph 570(1A)(b)]
Where subsection 570(1A) applies, the accounts of a FIF are treated, for the purposes of subsection 570(1), as having amortised the expenditure on the relevant property on the basis of the rate of amortisation prescribed in the Regulations. Consequently, the condition in subsection 570(1) that the accounts of the FIF include an amount in respect of the amortisation of expenditure on the property can be satisfied even though the expenditure has been written off in the accounts of the FIF in earlier periods because of higher rates of amortisation.
Furthermore, the notional deduction which can be claimed under subsection 570(1) for property to be prescribed by Regulations is limited to amortisation at the relevant rate prescribed in those Regulations.
Example
Assume a FIF acquires property of a class which is prescribed for the purposes of subparagraph 570(1)(a)(iii) for $10,000 and amortises that property in its accounts at a rate of 10%. Also assume that Regulations prescribe that this class of property may be amortised at a rate of 2.5%.
Subsection 570(1A) would operate to apply subsection 570(1) as if the property had been amortised in the accounts of the FIF at a rate of 2.5% rather than 10%. Therefore, if the property was depreciated for a full year, the notional deduction available under subsection 570(1) would be limited to $250 (i.e., $10,000 x 2.5%) even though the amount shown in the accounts of the FIF was $1,000 (i.e., $10,000 x 10%).
Section 6 - Interaction of the capital gains tax provisions with the FIF measures
Summary of proposed amendments
Purpose of amendment: the amendments will ensure that amounts which are exempt from tax solely because they are paid out of profits which have been taxed under the FIF measures will not be treated as exempt income for the purposes of calculating capital gains and losses under the capital gains tax provisions.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
Generally, any capital gain arising from the disposal of an asset which was used solely for the purpose of producing exempt income is not taken into account in calculating the amount to be included in assessable income under the capital gains tax provisions. Correspondingly, a capital loss incurred by a taxpayer on the disposal of an asset which was used solely for the purpose of producing exempt income is not taken to have been incurred by the taxpayer.
The FIF measures exclude from assessable income amounts that are paid to a taxpayer by a FIF out of the profits of the FIF which have already been included in the taxpayer's assessable income under the FIF measures [Section 23AK] . These amounts ought not to be treated as exempt income for the purposes of the capital gains tax provisions because the exemption under section 23AK is provided in order to prevent double taxation rather than to entirely exclude the amounts from the tax base.
Explanation of proposed amendment
The amendment will ensure that amounts which are exempt from tax solely because they are paid out of profits which have been taxed under the FIF measures will not be treated as exempt income for the purposes of calculating capital gains and losses under the capital gains tax provisions.
Subsection 160Z(6) provides that a capital gain arising from the disposal of an asset used solely for the purpose of producing exempt income is not included as assessable income under the capital gains tax provisions. Also, subsection 160Z(9) ensures that a capital loss incurred by a taxpayer from the disposal of an asset which was used solely for producing exempt income is not taken to be a capital loss. For these purposes, the meaning of 'exempt income' is modified by subsection 160Z(10). To achieve the proposed amendment subsection 160Z(10) will include a reference to section 23AK. This reference will ensure that amounts exempt from the FIF measures under section 23AK will not be treated as exempt income for the purposes of the capital gains tax provisions.
Section 7 - Prevention of double taxation of the income of a foreign trust
Summary of proposed amendments
Purpose of amendment: the amendments will ensure that amounts upon which a beneficiary of a foreign trust estate is taxed under the FIF measures are not taxed again in the hands of an eligible transferor in relation to the foreign trust estate or the trustee of the foreign trust estate.
Date of Effect: These amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
Taxation of the beneficiaries of a foreign trust
Presently, no amount will be included in a beneficiary's assessable income under section 97 where the FIF measures apply to a beneficiary in relation to a non-resident trust estate [Subsection 96A(1)] . Section 97 includes in a beneficiary's assessable income, the share of the net income of a trust estate based upon the share of the income of the trust estate to which the beneficiary is presently entitled. Broadly, the net income of a trust estate is calculated on the basis that the trustee is a resident taxpayer.
Amounts paid by a foreign trust estate to an Australian resident beneficiary will still be included in a beneficiary's assessable income under section 99B. This includes distributions by the foreign trust estate which are made out of current year income which, prior to the FIF measures, would have been assessable to the beneficiary under section 97 as amounts to which the beneficiary was presently entitled. However, double taxation under the FIF measures is avoided because the FIF income arising from the beneficiary's interest in the foreign trust estate is reduced to the extent that the beneficiary is assessable on a distribution from the trust. [Section 530]
Taxation of the trustee of a foreign trust estate
The trustee of a foreign trust estate may be assessable on that part of the net income of the trust which is not included in the assessable income of a beneficiary under section 97. [Subsections 99(4), 99(5), 99A(4B) and 99A(4C)]
There is no reduction of the trustee's assessable amount where an amount has been included in the assessable income of a beneficiary under section 99B. Thus, where an amount relating to the current year income of a trust estate is included in the assessable income of a beneficiary under section 99B, it is possible for both the beneficiary and the trustee to be assessed on the same amount. The amendments will ensure that a trustee will not be assessed on these amounts.
Broadly, the assessable income of a taxpayer who has transferred property to a foreign trust estate may include a share of the net income of the foreign trust estate. The amount to be included in the assessable income of the transferor is reduced by, amongst other things, amounts included in the assessable income of a beneficiary under section 97.
There is no reduction of the transferor's assessable amount where an amount has been included in the assessable income of a beneficiary under section 99B. Thus, where an amount relating to the current year income of a trust estate is included in the assessable income of a beneficiary under section 99B, it is possible for both the beneficiary and the transferor to be assessed on the same amount. The amendments will ensure that a transferor will not be assessed on these amounts.
Explanation of proposed amendments
The amendments will ensure that amounts upon which a beneficiary of a foreign trust estate is taxed under the FIF measures are not taxed again in the hands of an eligible transferor in relation to the foreign trust estate or the trustee of the foreign trust estate.
This will be achieved by treating amounts which would, but for subsection 96A(1), be included in a beneficiary's assessable income under section 97 to have been included in the beneficiary's assessable income under section 97 for the purposes of taxing the trustee or a taxpayer who has transferred property to the trust estate [Subsection 96A(1A)] . Thus, the amount upon which the trustee or transferor is taxed will be reduced to the extent that a beneficiary would have been taxed under section 97 if not for subsection 96A(1). [Paragraphs 99(4)(a), 99(5)(b), 99A(4B)(a), 99A(4C)(b) and sub-subparagraph 102AAU(1)(c)(i)(A)]
Section 8 - Country fund exemption
Summary of proposed amendments
Purpose of amendment: the amendments will ensure that the FIF measures do not apply for the purposes of calculating a beneficiary's share of the net income of a trust estate where the FIF measures do not apply to the beneficiary's interest in that trust estate because of the country fund exemption.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
A taxpayer is exempt from the FIF measures in respect of interests held in an approved foreign trust [Section 513]. The list of approved foreign trusts is in Schedule 6 of the Act. Presently, the list consists of certain trusts established in India, the Republic of Korea and Taiwan.
Where this exemption from the FIF measures applies to a taxpayer's interest in an approved foreign trust, the taxpayer is assessed under the general provisions of the Act dealing with the taxation of trust beneficiaries. Of particular relevance is section 97 which includes in a beneficiary's assessable income, the share of the net income of a trust estate based upon the share of the income of the trust estate to which the beneficiary is presently entitled.
Broadly, the net income of a trust estate is calculated on the basis that the trustee is a resident taxpayer. Consequently, the FIF measures apply for the purposes of calculating the net income of an approved foreign trust. This means that where an Australian beneficiary is presently entitled to a share of the net income of an approved foreign trust, the amount to be included in the beneficiary's assessable income under section 97 will include a share of the trust's FIF income. It also means that the active business and other exemptions from the FIF measures will need to be applied separately for each FIF interest of an approved foreign trust for the purposes of determining the FIF income which is to be included in its net income.
The proposed amendments will ensure that the FIF measures do not apply for the purposes of calculating the net income of an approved foreign trust. These amendments are being made because, in compiling the list of approved foreign trusts, the investments of these trusts were examined. The trusts are approved for listing only if the investments made by the trusts are substantially not investments to which the FIF measures would apply. Consequently, it is not considered necessary to require the beneficiaries to determine whether the FIF investments of an approved foreign fund satisfy one of the exemptions from the FIF measures.
Explanation of proposed amendments
The amendments will ensure that the FIF measures do not apply for the purposes of calculating a beneficiary's share of the net income of a trust estate where the FIF measures do not apply to the beneficiary's interest in that trust estate because of the country fund exemption (i.e., Division 8 of Part XI). [Subsection 485A(3)]
Section 9 - Exclusion from FIF measures of certain dual residents who are treated under a DTA as a residents solely of another country
Summary of proposed amendments
Purpose of amendment: the amendments will ensure that the FIF measures do not apply to a taxpayer who is both a resident of Australia and another country where a double taxation agreement treats the taxpayer as a resident solely of that other country.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
It is possible for a taxpayer to be treated as a resident of Australia under our tax law and as a resident of a foreign country under its tax laws. Our double taxation agreements (DTAs) contain provisions to allocate the residency status of a taxpayer, who is treated as a resident of both Australia and the treaty partner country, to one of those countries for purposes of applying the DTA.
It was intended that the FIF measures should only apply to residents of Australia. The amendments will clarify that the measures do not apply to a dual resident where Australia has agreed in a DTA to treat that resident as a resident solely of the treaty partner country for the purposes of the agreement.
Explanation of proposed amendments
The amendments will ensure that the FIF measures do not apply to a taxpayer who is both a resident of Australia and another country where a DTA treats the taxpayer as a resident solely of that other country. This will be achieved limiting the FIF measures so that they only apply to Part XI Australian residents.
A Part XI Australian resident is currently defined by reference to a resident within the meaning of section 6. Section 6 defines the term resident for the purposes of the Act unless a contrary intention to that meaning is expressed in a particular provision. However, a Part XI Australian resident does not include an entity if:
- (a)
- there is a DTA in force in respect of a foreign country; and
- (b)
- that DTA contains a provision that is expressed to apply if, apart from the provision, the entity would, for the purposes of the DTA, be both a resident of Australia and a resident of the foreign country; and
- (c)
- that provision has the effect that the entity is, for the purposes of the DTA, a resident solely of the foreign country. [Section 470]
A difficulty with this approach is that the residency assumption for the purposes of calculating the net income of a partnership or trust estate does not make the hypothetical taxpayer (e.g., the trustee) a resident within the meaning of section 6 and hence, a "Part XI Australian resident". Accordingly, the amendments will make it clear that the FIF measures apply for the purposes of calculating the net income of a trust or partnership. [Subsection 485A(2)]
Section 10 - Definition of trading stock
Summary of proposed amendments
Purpose of amendment: the amendments will ensure that the exemption under section 521 for certain FIF interests that are trading stock can apply in relation to all interests in FIFs which would normally be treated as trading stock for the purposes of the Act.
Date of Effect: these amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
The FIF measures do not apply to FIF interests which are trading stock where a taxpayer elects to use the market value to value those interests for the purposes of the trading stock provisions [Section 521] . This treatment is provided because the increase in the value of those FIF interests are effectively taxed under the trading stock rules.
A technical difficulty has arisen because the meaning of "trading stock" is modified for the purposes of the FIF measures such that it does not include securities within the meaning of the Corporations Law [Section 470] . Hence, trading stock would not include, amongst other things, shares held in a FIF. It was not intended that the meaning of "trading stock" be limited in this way for the purposes of the trading stock exemption.
The modified meaning of trading stock given by section 470 is correctly used for the purposes of section 568 of the calculation method. Section 568 provides that a taxpayer who uses the calculation method of computing FIF income can deduct the cost of acquiring trading stock. The restricted definition of trading stock in section 470 has the correct effect in denying a deduction under section 568 for the acquisition of securities within the meaning of the Corporations Law which are trading stock.
Explanation of proposed amendments
The amendments will ensure that the exemption under section 521 for certain FIF interests that are trading stock can apply in relation to all interests in FIFs which would normally be treated as trading stock for the purposes of the Act.
This will be achieved by omitting the definition of "trading stock" from section 470. Hence, the term "trading stock" will have the meaning given to it by subsection 6(1) where it is used in the FIF measures unless a contrary intention is expressed. It will therefore have its normal meaning for the purposes of section 521.
The restricted definition of trading stock for the purposes of section 568 will be maintained by making it clear that the term "trading stock" does not include securities within the meaning of the Corporations Law where it is used in that section.
Section 11 - Definition of passive income
Summary of proposed amendments
Purpose of amendment: the amendments will provide that the exclusion from passive income of amounts that arise from an asset necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer has effect from the 1992-93 year of income;
Date of Effect: these amendments will apply from the commencement of the Income Tax Assessment Amendment (Foreign Income) Act 1992 .
Under the current law, foreign tax credits and foreign losses are calculated separately for each class of foreign income [Division 18 of Part III and section 79D] . In broad terms, the classes of foreign income are interest income, modified passive income (i.e., passive income other than interest), offshore banking income and all other income. The classes of interest income and modified passive income are combined into one class, which is called "passive income", for the purposes of calculating foreign tax credits.
The FIF measures contained provisions to exclude from passive income, amounts that relate to assets necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer. This change was made because these amounts are more correctly characterised as being derived from carrying on a business activity than as being derived from passive investments.
Explanation of proposed amendments
The Income Tax Assessment Amendment (Foreign Income) Act 1992 which excluded from passive income amounts that relate to assets necessarily held by a taxpayer in connection with an insurance business actively carried on by the taxpayer will be amended to clarify that the exclusion applies for the 1992 -93 and later years of income only.
Section 12 - Technical amendments
Summary of proposed amendments
Purpose of amendment: the amendments correct technical problems with the drafting of paragraphs 160AFCK(2)(b), 509(b) and section 523.
Date of Effect: These amendments will apply from the commencement of the FIF measures, i.e., 1 January 1993.
Section 523 is intended to exempt a taxpayer from taxation in respect of foreign investment fund income that would otherwise be taken to accrue from a foreign company that engages in active business (section 522). Presently, however, section 523 sets out the conditions required for the exemption but does not specifically provide for the grant of the exemption. Accordingly, section 523 requires amendment to provide the exemption.
Paragraph 509(b) refers to subparagraph (a)(i). The reference should be to paragraph 509(a).
Paragraph 160AFCK(2)(b) refers to the "notional assessable income" of a taxpayer". The reference should be to the "assessable income" of the taxpayer.
Explanation of proposed amendments
The amendments correct technical problems with the drafting of paragraphs 160AFCK(2)(b), 509(b) and section 523.
Chapter 7 Company Tax Instalment System
Summary of proposed amendments
Purpose of amendment: The Bill will amend Part VI of the Income Tax Assessment Act 1936 to improve the equity of the company tax instalment system (relative to other taxpayers, particularly unincorporated businesses) by implementing a new quarterly system of company tax instalments.
Date of Effect: The new company tax instalment system will apply from and including:
- a.
- the 1994-95 year of income - for instalment taxpayers with a likely tax for the 1994-95 year of income of less than $300000;
- b.
- the 1995-96 year of income - for all other instalment taxpayers.
Background to the legislation
The current instalment payment system for companies and trustees of certain other funds (Division 1B of Part VI of the Income Tax Assessment Act 1936) was announced in the 1989-90 Budget and applied to 1989-90 and subsequent years of income. Under this system, companies were generally required to pay their instalments under one of the following methods, depending on their level of notional (i.e. previous year's tax) or estimated tax (i.e. taxpayer's estimate of current year's tax):
| Notional or Estimated Tax | Method of Payment |
|---|---|
| Less than $1000 | One only payment (full tax due and payable) on the 15th day of the 9th month after the end of the year of income. |
| From $1000 up to $20000 | Initial payment (85% of notional or estimated tax) on 28th day of the month after the end of the year of income and a final balancing payment on the 15th day of the 9th month after the end of the year of income; |
| or | |
| one only payment (full tax due and payable) on the 15th day of the 6th month after the end of the year of income. | |
| $20000 or more | Initial payment (85% of notional or estimated tax) on 28th day of the month after the end of the year of income and a final balancing payment on the 15th day of the 9th month after the end of the year of income. |
These provisions were subsequently amended (for the 1990-91 and 1991-92 years of income) to defer the date of the initial payment.
Explanation of proposed amendments
While the new company tax instalment system has some administrative aspects that are similar to the current arrangements (Division 1B of Part VI of the Income Tax Assessment Act 1936) it is very different in its effect on companies. In general, there are more instalments to pay, the instalments are paid earlier, and there is less involvement by the Commissioner of Taxation in checking estimates made by the instalment taxpayer.
A flowchart of the new system illustrating its basic structure is set out below.
The instalment taxpayer in the new system is the same as the relevant entity in the existing Division 1B of Part VI of the Income Tax Assessment Act 1936 . [Subsection 221AZK(1)]
Step 2 - Classification of Instalment Taxpayers
All instalment taxpayers will, for any particular year, be classified as small, medium or large. The classification of an instalment taxpayer affects the number and timing of instalments payable by that taxpayer. The classification also determines whether the new company tax instalment system applies to an instalment taxpayer from the 1994-95 year of income or the 1995-96 year of income. Note, the new system does not apply to large instalment taxpayers until the 1995-96 year of income. [Subclause 53(2)]
The classification of an instalment taxpayer is made at the 1st day of the 9th month of the year of income. For example, the classifying date for an instalment taxpayer who balances on 30 June is 1 March.
Instalment taxpayers are classified on the basis of their likely tax for the current year at the classifying date.
Once an instalment taxpayer is classified on the 1st day of the 9th month of the year of income, the classification cannot alter in respect of that year of income . The amount of the instalment to be paid may alter on the lodgement of an estimate of likely tax but the classification and instalment schedule cannot alter until classification at the next classifying date.
If the instalment taxpayer's likely tax is:
Less than $8000 - the taxpayer is classified as small ;
$8000 up to $300000 - the taxpayer is classified as medium ;
Over $300000 - the taxpayer is classified as large .
[See Table 1 in subsection 221AZK(2)]
The likely tax is:
- a.
- the latest amount estimated by the taxpayer to be its income tax payable in the current year of income (there can be 2 estimates in each year of income), or if there has been no estimate made
- b.
- the amount of the taxpayer's income tax assessed in the previous year of income, or if there is no income tax assessed in the previous year of income
- c.
- the amount of the taxpayer's income tax assessed in the last year of income in which the taxpayer was assessed, or if the taxpayer has never been assessed
- d.
- taken to be nil. [See Table 2 in subsection 221AZN(1)]
The timing and amount of instalments payable in relation to a particular year of income are as follows:
| Classification of taxpayer | Instalment due on 1st day of: | Instalment amount |
|---|---|---|
| Small | month18 | 100% of tax assessed for current year |
| Medium | month 12 | 25% of likely tax for current year |
| month 15 | 25% of likely tax for current year | |
| month 18 | 25% of likely tax for current year | |
| month 21 | tax assessed for the current year, less previous instalments for the current year | |
| Large | month 9 | 25% of likely tax for current year |
| month 12 | 25% of likely tax for current year | |
| month 15 | 25% of likely tax for current year | |
| month 18 | tax assessed for the current year, less previous instalments for the current year | |
| [See Table 1 in subsection 221AZK(1)] | ||
The date the instalment is liable to be paid is the first day of the month shown in Table 1. A payment for month12 is a payment on the first day of the twelfth month of the year of income. A payment for month 18 is a payment on the first day of the eighteenth month after the start of the year of income. For example, in a year of income starting on 1 July 1996, a payment due in month 18 would be due on 1 December 1997.
An instalment taxpayer may lodge, up until and including its 3rd instalment payment, an estimate of its income tax payable in the current year of income. Two such estimates may be made in respect of any one year of income. [section 221AZO and subsection 221AZQ(2)]
The effect of making an estimate will vary depending upon the time at which the estimate is made. If the estimate is made prior to or at the classifying date, both the classification of the instalment taxpayer and the amount of the instalments will be determined on the basis of that estimate. If an estimate is made after the classifying date then only the amount of the instalments may vary according to that estimate.
Where an estimate is lodged and the amount of instalments already paid exceeds the amount of instalments that would have been payable based on that estimate, the Commissioner will refund to the instalment taxpayer the excess amount. Where an estimate is lodged and the amount of instalments already paid is less than the amount of instalments that would have been payable based on that estimate, the instalment taxpayer must pay that difference at the time of making that estimate. [sections 221AZQ and 221AZR]
If an instalment taxpayer makes an estimate of its income tax payable in the current year and the actual amount of tax payable in that current year exceeds the estimate by 10% or more, additional tax by way of penalty at 16% per annum will be levied for the period the estimate is incorrect. That is, for the period until another estimate is lodged or the due date for the last instalment, whichever is the earlier. The Commissioner of Taxation may, in special circumstances, remit that penalty in whole or in part. [section 221AZP]
The Commissioner of Taxation may waive or reduce an instalment amount. Such a waiver can occur before or after the instalment has been paid. If after, the Commissioner will refund any excess payment of instalment. [section 221AZL]
These provisions contain anti-avoidance measures similar to those contained in Part IVA and related provisions of the Income Tax Assessment Act 1936. The related provisions mentioned include the anti-avoidance penalty provisions of Part VII of that Act. [section 221AZU]
The benefits referred to in this section include those benefits arising from arrangements to avoid or reduce the payment of an instalment under Division 1C.
The new company tax instalment system will apply from and including:
- a.
- the 1994-95 year of income - for those instalment taxpayers who are classed as small or medium at the first day of the ninth month of the 1994-95 year of income; or
- b.
- the 1995-96 year of income - for all other instalment taxpayers (see transitional provisions below for special arrangements for large instalment taxpayers in the 1995-96 year of income). [Clause 53]
The following instalment table will apply to large instalment taxpayers in the 1995-96 year of income:
| Classification of taxpayer | Instalment due on 1st day of: | Instalment amount |
|---|---|---|
| Large | Instalment 2 - month 12 | 25% of likely tax for current year |
| Instalment 3 - month 15 | 25% of likely tax for current year | |
| Instalment 4 - month 18 | tax assessed for the current year, less previous instalments for the current year |
In summary, as a transitional measure in their first year under the new arrangements, large instalment taxpayers will not be required to make their first instalment. [Subclause 53(2)]
As an additional transitional measure to ensure that small and medium instalment taxpayers do not defer the commencement of these new arrangements by lodging an inflated estimate in the 1994-95 year of income (in order to be classified as a large instalment taxpayer in that year), an over-estimates penalty will apply. [Clause 54]
Chapter 8 Company Tax Rates Reduction
Summary of proposed amendments
Purpose of amendment: Amendment of the Income Tax Rates Act 1986 to lower company and related tax rates.
Date of Effect: To apply in respect of assessments for the 1993-94 and subsequent years of income.
Background to the legislation
At present the following entities are subject to the company tax rate of 39 per cent on their taxable income:
- •
- public companies;
- •
- private companies;
- •
- corporate limited partnerships;
- •
- the non-fund component of non-mutual life assurance companies;
- •
- trustees of corporate unit trusts;
- •
- trustees of public trading trusts; and
- •
- trustees to whom subsection 98(3) of the Assessment Act applies (non-resident companies as presently entitled beneficiaries).
A life assurance company is required to keep certain amounts of assets in the insurance funds of the company. These are "fund" assets and the remainder are "non-fund" assets. These non-fund assets may produce assessable income.
In regard to the non-fund component of the taxable income of life assurance companies, the relevant companies can be considered in two classes:
- •
- non-mutual, where the assets of a company belong to the shareholders, who are entitled to a percentage of the profits, and to policy holders; the non-fund component of such companies belongs to the shareholders; and
- •
- mutual, where the assets of a company are wholly owned by the policy holders alone; the non-fund component of such companies, which is relatively small, belongs to the policy holders.
Because the non-fund component of taxable income of a non-mutual company accrues generally to shareholders the appropriate rate of tax is currently that applicable to companies generally, 39 per cent.
Because the non-fund component of the taxable income of a mutual company is divisible only among policyholders the appropriate rate of tax is the "trustee" rate. This rate is derived on the basis that a life assurance company pays tax on behalf of policyholders whose average marginal rate of tax has been determined to be 39 per cent. Currently,the trustee rate is only coincidentally the same as the rate of tax applicable to companies generally.
As the rate of tax applicable to the non-fund component of taxable incomes of both non-mutual and mutual companies is coincidentally the same, the Principal Act does not distinguish between these two classes of companies to which the income accrues.
At present the following taxable entities are not subject to the tax rate applicable to companies of 39 per cent but to various rates:
- •
- registered organisations;
- •
- non-mutual life assurance companies on other than their non-fund component;
- •
- mutual life assurance companies;
- •
- Pooled Development Funds, (PDF component);
- •
- trustees of superannuation funds;
- •
- trustees of approved deposit funds; and
- •
- trustees of pooled superannuation trusts.
Note that the Accident Disability/Residual Life Assurance (AD/RLA) component of taxable income of both a non-mutual and a mutual life assurance company is taxable at 39 per cent but this rate is only coincidentally the same as the rate generally applicable to companies. This rate, known as the "trustee" rate, is the same as that applicable to the non-fund component of the taxable income of mutual life insurance companies and based on the average marginal rate of tax of policy holders (see earlier discussion on the non-fund component of mutual companies).
A company that is a Pooled Development (PDF) is taxed on its taxable income at the concessional rate of 30 per cent from the time it becomes a PDF until the last year of income in which it is a PDF. In any year of income in which it is not a PDF on the last day it is not taxed as a PDF and the rate reverts to 39 per cent.
Currently, a non-profit company which is not a registered organisation is not taxable if its taxable income is $416 or less. On taxable income in excess of $416 a rate of 55 per cent is payable until the shading in threshold is reached. The threshold is determined as the point where the tax calculated at the rate of 55 per cent is equivalent to the tax that would be calculated if the whole of taxable income was subject to a rate of 39 per cent. At present that threshold is $1,429. On taxable income above this upper threshold this type of company is taxable at the rate of 39 per cent generally applicable to companies.
Explanation of proposed amendments
The rate of tax imposed on companies generally will be reduced from 39 per cent to 33 per cent to be effective for assessments in respect of the 1993-94 and subsequent years of income [Clause 60 (a) and Clause 64] . The lower rate will apply to all payments of company tax in respect of companies balancing on 30 June 1994, or payments made after 30 November 1993 in respect of companies balancing after that date in lieu of 30 June 1994.
The rate of tax on the non-fund component of the taxable income of non-mutual life insurance companies will be reduced from 39 per cent to 33 per cent, the new rate applicable to companies generally [Clause 60(b)] . The rate of tax on the non-fund component of mutual life insurance companies will remain unchanged at the "trustee" rate of 39 per cent.
The concessional rate of tax applied to a company that is a PDF will be reduced from 30 per cent to 25 per cent [Clause 60(c)].
The shading in threshold that applies in respect of non-profit companies, other than registered organisations, will be reduced from $1,429 to $1,039 to take account of the reduction in the company tax rate from 39 per cent to 33 per cent. [Clause 60(c)]
Other entities whose rate of tax is affected by the company rate
The rate cut will also apply to corporate limited partnerships [Clause 60] , corporate unit trusts [Clause 61] , trustees of public trusts [Clause 62] and trustees to whom subsection 98(3) of the Income Tax Assessment Act 1936 applies [Clause 63]
Generally, the rates of tax in relation to the taxable income of companies taxable at rates other than the company rate of 39 per cent, for example, registered organisations, will not change. The exception is that the concessional rate on PDFs will be reduced from 30 per cent to 25 per cent. The rate of tax of 39 per cent on the AD/RLA component of taxable income of life assurance companies and the non-fund component of taxable income of mutual life assurance companies will not be reduced. These details are summarised in the following table:
| Category | Rate Change |
|---|---|
| Companies generally including corporate limited partnerships | 39% to 33% |
| Private companies | |
| - taxable income | 39% to 33% |
| - undistributed amount | unchanged |
| Registered organisations | unchanged |
| Life assurance companies - non-fund component of taxable income of: | |
| - non-mutual | 39% to 33% |
| - mutual | unchanged |
| - all other components | unchanged |
| Pooled Development Funds | |
| - PDF component | 30% to 25% |
| - other | 39% to 33% |
| Non-profit companies | |
| - within the shading in range | unchanged |
| - above the shading in range | 39% to 33% |
| Trustees of corporate unit trusts | 39% to 33% |
| Trustees of public trading trusts | 39% to 33% |
| Trustees to whom subsection 98(3) of the Assessment Act applies (non-resident companies as presently entitled beneficiaries) | 39% to 33% |
| Trustees of superannuation funds, approved deposit funds and pooled superannuation trusts | unchanged |
Glossary of Commonly Used Terms
| Term | Definition |
|---|---|
| Accounts | Accounts means ledgers, journals, profit and loss accounts and balance sheets. It also includes statements, reports and notes attached to, or intended to be read with, any of the above items. |
| Approved exchanges / approved markets | The stock exchanges and financial markets whose quoted market values are accepted for the market value method. The list of approved stock exchanges can be found at Schedule 3 of the Act. |
| Attribution account | An attribution account establishes a link between:
|
| Attribution account entity | An attribution account entity is an entity for which a resident taxpayer is to maintain an attribution account (in order to trace distributions of attributed income). An entity includes:
|
| Attribution credit | When an amount is attributed to a taxpayer from an entity, the attribution account is credited (attribution credit) with the amount of the attributable income. |
| Attribution debit | When an entity subsequently distributes income that has been attributed to a taxpayer, the amount of the distribution is debited (attribution debit) to the attribution account. The amount of the debit cannot exceed the balance of the account, which is referred to as the attribution surplus. |
| Attribution surplus | An attribution surplus exists if the total of the attribution credits for an entity exceeds its attribution debits. |
| Calculated profit | The profit arising to a FIF in the FIF's notional accounting period as calculated under the FIF measures using the calculation method. The taxpayer's share of these profits is included in assessable income. |
| Calculation method | An alternative method, available at the taxpayer's election, to determine the amount to be included in a taxpayer's assessable income under the FIF measures. The amount is calculated by determining a taxpayer's share of a FIF's profits. A FIF's profits are calculated using rules similar to (but simpler than) those that apply for a resident taxpayer. |
| Cash surrender value method | Method of taxation applying to taxpayers who have an interest in a FLP. In general, the amount included in assessble income is calculated by measuring the increase, if any, in the cash surrender value of an interest in a FLP between the last day of the previous notional accounting period and the last day of the current notional accounting period, with an adjustment for acquisitions, disposals and distributions. |
| Certificate of allotment | Certificate from the Chief of Defence Force stating a period of allotment and that the duty in the particular area is in respect of service with a specified organisation |
| Certificate of revocation | Certificate revoking certificate of allotment |
| Controlled foreign company or CFC | A company that is not a resident of Australia and is controlled by five or fewer residents. |
| Deemed rate of return method | The backup method to determine the amount to be included in a taxpayer's assessable income under the FIF measures. The amount is calculated by applying a deemed rate of return to the value of the FIF or FLP interest. |
| Eligible duty | Where a person serves with a specified organisation in a specified area after a specified date, that duty qualifies for exemption |
| FIF | Foreign Investment Fund, i.e., a foreign company or foreign trust. |
| FIF interest | An interest in a Foreign Investment Fund. |
| Foreign Life Policy (FLP) | A foreign life policy is a life assurance policy issued by a non-resident. |
| Interest in a FIF | The total of all instruments in a company held by the taxpayer (such as a share, option, convertible note etc.) or interests held in a trust (such as a unit, option to acquire a unit, a note convertible into a unit). |
| Market value method | The primary method to determine the amount to be included in a taxpayer's assessable income under the FIF measures. In general, the amount is calculated by measuring the increase, if any, in the market value of a FIF interest between the last day of the previous notional accounting period and the last day of the current notional accounting period with adjustment for acquisitions, disposals and distributions. |
| Non-portfolio interest | An interest of 10 per cent or more of the voting interests in a company. |
| Notional accounting period | The period by reference to which the FIF measures apply. In general, this will be the same as a taxpayer's year of income. The taxpayer may elect that the notional accounting period coincide with the accounting period which the FIF uses for reporting to shareholders or beneficiaries. In relation to FLPs, the taxpayer may elect that the notional accounting period of the FLP coincide with the period for which cash surrender values are available . |
| Operational area | An area specified by section 23AC to be eligible for the income tax exemption |
| Operational service | Service for which an income tax exemption is provided under section 23AC |
| Specified area | An area designated as eligible for the concession |
| Specified date | Earliest date from which service in a specified area with a specified organisation can be eligible for the income tax exemption |
| Specified organisation | Allotment with a particular force or operation, as prescribed by the Regulations |
| Termination date | Date an operational area ceases to be operational and, therefore, eligible for the exemption |
| Transferor trust | A non-resident trust to which a resident taxpayer has made, or is deemed to have made, a transfer of property or services under Division 6AAA of Part III the Act. |