SENATE

Explanatory Memorandum

TO THE BILL AS INTRODUCED (Circulated by authority of the Treasurer,the Hon Ralph Willis, MP)

General outline and financial impact

Foreign income

Amends the income tax law to:

(a)

provide that the cost base of non taxable Australian assets owned by a foreign company that becomes a controlled foreign company (CFC) after 30 June 1990 is their market value at the time the company became a CFC;

(b)

ensure that tax arising under the CFC measures is not avoided by liquidating the CFC;

(c)

ensure that a taxpayer cannot claim a credit for foreign tax where the tax is refunded to the taxpayer or to an associate of the taxpayer and;

(d)

allow the Commissioner of Taxation to make adjustments, reflecting arm's length values, to amounts used in determining whether a CFC has passed the active income test.

Date of effect:

(a)

1 July 1995

(b)

CFCs that cease to exist on or after the date of introduction of the Bill where winding-up begins on or after that date.

(c)

Date of introduction of the Bill

(d)

1 July 1995

Proposal announced: Not previously announced.

Financial impact: The revenue impact for each of the amendments is as follows:

(a)

Unquantifiable loss.

(b)

Unquantifiable but potentially significant gain

(c)

Unquantifiable gain

(d)

Unquantifiable gain

Compliance cost impact: The amendment described in paragraph (a) will reduce compliance costs because taxpayers who acquire a foreign company will no longer be required to ascertain the value of non taxable Australian assets held by the company at a time prior to the acquisition.

The amendment described in paragraph (b) will increase compliance costs. Taxpayers are not currently required to apply the CFC measures where a CFC is liquidated prior to the end of a statutory accounting period. In this regard, the changes will result in the CFC measures applying where a CFC is liquidated. Accordingly, taxpayers with an interest in a CFC which is liquidated prior to the end of a statutory accounting period will incur additional compliance costs similar to those which arise for taxpayers with an interest in a CFC at the end of a statutory accounting period.

The amendments described in paragraphs (c) and (d) will not have a significant impact on compliance costs and are only relevant where there is an arrangement to generate false foreign tax credits or where a CFC enters into a non arm's length transaction with an associate.

Rebatable and frankable dividends

Amends the income tax law so that dividends that are debited to share capital or share premium accounts or revaluation reserves of a company are disqualified from being rebatable or frankable.

Date of effect: The amendments will apply to distributions paid after 7.30 pm AEST on 9 May 1995 unless declared before that time.

Proposal announced: 1995-96 Budget, 9 May 1995

Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of this measure can be made. However, the proposed amendments are expected to prevent a significant loss to the revenue.

Compliance cost impact: The proposed amendments will not have any significant compliance cost impact. The only additional requirement is for a company to ascertain whether a dividend is debited to share capital or share premium accounts or revaluation reserves. This information will be readily available to the company.

Bankruptcy and losses

Amends the income tax law to:

•

ensure that subsection 79E(8) of the Income Tax Assessment Act 1936 denies deductions for losses incurred prior to bankruptcy notwithstanding that the bankruptcy is later annulled in connection with arrangements under which debts are released

•

prevent net capital losses incurred prior to bankruptcy or release from debts under bankruptcy law from being taken into account in ascertaining future net capital gains or losses.

Date of effect: The amendments relating to annulment of bankruptcy will apply to annulments occurring after 25 February 1995. The amendments relating to net capital losses will apply to taxpayers who become bankrupt or who have been released from debts after 25 February 1995.

Proposal announced: The Treasurer's Press Release No. 19 of 26 February 1995.

Financial impact: The revenue gain will be less than $1million per year.

Compliance cost: The compliance cost is minimal because the existing law already requires taxpayers to compute and maintain records of amounts for which tax claims will be denied under these amendments.

Reduction of PAYE early remitter threshold

Amends the income tax law to reduce the threshold at which the twice monthly remittance arrangements apply. Where group employers have an annual PAYE remittance in excess of $1 million per year (previously $5 million) they will be required to remit PAYE deductions twice monthly.

Date of effect: The amendment applies to deductions made on or after 1 December 1995.

Proposal announced: 1995-96 Budget, 9 May 1995.

Financial impact: $275 million will be brought forward into the 1995-96 year of income.

Compliance cost impact: Additional up front compliance cost will be incurred by those employers who are required to adjust their operations to take into account that they are now early remitters. Employers will also face a funding cost to replace the money that is remitted earlier.

Depreciation on trading ships

Extends the date on which the prime cost concessional depreciation rate is available under section 57AM from 1 July 1997 to 30 June 2002.

Date of effect: Royal Assent

Proposal announced: 1995-96 Budget,9 May 1995

Financial impact: This proposal will cost the revenue $11 million in 1997-98 and $16 million in 1998-99.

Compliance cost impact: The cost of compliance with this provision will not change.

Infrastructure borrowings

Amends the income tax law to increase the infrastructure borrowings tax rebate from 33 per cent to 36 per cent in line with the increase in the company tax rate.

Date of effect: Applies in respect of assessable income for the 1995-96 and subsequent income years.

Proposal announced: 1995-96 Budget, 9 May 1995.

Financial impact: The estimated cost to the revenue of the increase in the infrastructure borrowings rebate is $2 million in 1995-96, $8 million in 1996-97 and $10 million in 1997-98. However, under subsection 93Y(1) of the Development Allowance Authority Act 1992 the maximum total cost to the Commonwealth of the infrastructure borrowings tax concessions is capped as follows:

•

1995-96 - $100 million

•

1996-97 - $150 million

•

1997-98 - $200 million

Compliance cost impact: None.

Group Certificates and other PAYE provisions

Amends the income tax law to:

•

require that original group certificates are returned to the Australian Taxation Office by employers to facilitate electronic data capture of employment income information. This also necessitates a change in the basis of allowing tax instalment credits to a basis consistent with other collection mechanisms;

•

remove the tax stamp provisions and replace them with a tax voucher system;

•

provide that employers who remit less than $10,000 per annum of tax instalment deductions are only required to remit tax instalment deductions quarterly;

•

offset excess PAYE credits against other liabilities owing to the Commissioner;

•

remove the requirement on employers to return unused group certificates; and

•

remove redundant provisions relating to the Commissioner's former priority to recover unremitted PAYE deductions over all other debts in cases of insolvency.

Date of effect: The group certificate and tax stamp amendments will apply from 28 days after Royal Assent. The requirement for employers who remit less than $10,000 per annum of tax instalment deductions will apply to quarters beginning after Royal Assent. The repeal of the redundant Commissioner's priority provisions of the Act does not apply to amounts that became payable under those provisions prior to Royal Assent.

Proposal announced: Not previously announced.

Financial impact: Unquantifiable revenue savings through increased integrity of the income matching system. Possible public debt interest savings from the new tax voucher system. Expected reduction in other debts owed to the Commissioner from the proposed altered credit offset provisions.

Compliance cost impact: Any employer now required to register as a group employer will be subject to the attendant group employer obligations and resultant compliance costs. These costs are not expected to be significantly different to the existing costs of those employers in meeting their tax obligations in respect of their employees. Other measures are not expected to have any compliance cost.

Superannuation guarantee charge - notional earnings base

Amends the Superannuation Guarantee (Administration) Act 1992 to extend the use of pre 21 August 1991 employee earnings bases if employers restructure their superannuation funds. Currently employers can only use such bases if they continue to contribute:

•

to the same fund; and

•

under the same law, award, arrangement or scheme;

as for an employee for whom they were contributing immediately before 21 August 1991.

The Bill allows pre 21 August 1991 earnings bases to be kept by an employer if the employer contributes under the same law, award, arrangement or scheme to:

•

a new fund under the same earnings base as the original fund if employees transfer between the funds and receive equal or improved rights to benefits;

•

an existing fund in relation to an employee of a former employer who transfers to the fund from a former employer's fund because of a business acquisition, if the base was used in the former employer's fund; or

•

a former employer's fund for employees who transfer to the new employer because of a business acquisition.

Date of effect: The amendments will affect the calculation of the superannuation guarantee charge on and from 1 July 1995 for qualifying changes of employers and/or funds that occur after 3.55pm Canberra legal time on 28 June 1994 (the time the Treasurer announced the measure in Parliament). The measure only affects an employer's contributions from 1 July 1995 so that contributions made by employers for the 1994-95 year do not need to be reduced.

Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.

Financial impact: None.

Compliance cost impact: The amendments will affect some employers contributing to superannuation funds that enter into reorganisations. The amendments allow these employers to keep existing notional earnings bases if they meet the conditions in the Bill. They must keep records which show they have met these conditions.

Employers may incur costs in getting advice on this measure. However, the measure will provide for desirable restructuring of superannuation funds resulting in lower administrative costs to employers, without a forced change from an existing earnings base.

Superannuation guarantee charge - excess benefits

Amends the Superannuation Guarantee (Administration) Act 1992 to exempt employers from the superannuation guarantee charge (SGC) in respect of employees who make an election because their accumulated superannuation entitlements exceed the pension reasonable benefits limit (RBL). Employees who make an election to exempt an employer from the SGC will not be able to claim deductions for personal superannuation contributions.

Date of effect: Royal Assent.

Proposal announced: Treasurer's Statement on Superannuation Policy of 28 June 1994.

Financial impact: There will be minimal financial impact.

Compliance cost impact: There are two elements to compliance cost impacts for this measure:

•

for employers, there are potential compliance cost savings because they will not have to provide superannuation support for employees who make an election and, consequently, will not have to calculate, or keep records of, superannuation contributions for those employees.

•

superannuation funds, approved deposit funds and other organisations may incur some costs in providing the information to employees who need to demonstrate that they have exceeded the pension RBL. However, it is expected that most employees will use the periodic statements issued by the funds in the normal course of events.

Minor amendment

The Bill also makes a minor technical amendment to the tax law.

CHAPTER 1 - Foreign income

Overview

1.1 This chapter describes the amendments to the foreign income provisions made by Part 1 of Schedule 1 of the Bill. There are four proposed amendments. These will:

•

provide that, for the purposes of the controlled foreign company (CFC) measures, the cost base of assets owned by a company that becomes a CFC after 30 June 1990 is their market value at the time the company became a CFC (section 1);

•

ensure that tax arising under the CFC measures is not avoided by liquidating the CFC (section 2);

•

clarify that a taxpayer is not entitled to a credit for foreign tax where the tax is refunded to the taxpayer or to any other person. A credit will also not be available where any other benefit is provided as a result of the payment of foreign tax (section 3);

•

clarify that the Commissioner of Taxation may make adjustments, reflecting arm's length values, to amounts used in determining whether a CFC has passed the active income test (section 4).

A glossary of some terms used in the foreign income provisions is at the end of this chapter.

Section 1 - CGT cost base uplift

Summary of the amendments

Purpose of the amendments

1.2 The amendments will provide that, for the purposes of the CFC measures, the cost base of assets owned by a company that becomes a CFC after 30 June 1990 is their market value at the time the company became a CFC. [Division 1]

Date of effect

1.3 The amendments are to apply for asset disposals after 30 June 1995. [Item 12]

Background to the legislation

1.4 Broadly, the Australian controllers of a CFC may be assessed on a capital gain derived by the CFC on the disposal of a tainted asset (normally financial instruments, e.g., loans, shares etc.). The amount of the capital gain is determined using a modified form of the capital gains tax provisions [Subdivision 7C of Part X].

1.5 One of the modifications made to the capital gains tax provisions is that a CFC is deemed to have acquired its pre 30 June 1990 assets for their market value at that date [section 412]. This treatment ensures that Australian controllers are not assessed on capital gains derived by a CFC to the extent those gains accrued prior to the commencement of the CFC measures.

1.6 The modification also has the affect that the Australian controllers of a CFC may be assessed on a capital gain referable to the period after 30 June 1990 and before the company became a CFC. It has been suggested that this treatment is unfair because the amount paid for shares in a company will reflect the underlying value of the company's assets.

1.7 It was submitted that only capital gains and losses which accrue after a company becomes a CFC should give rise to attributable income. Capital gains which accrue after a foreign company becomes a CFC only come within the Australian tax base because the foreign company has become controlled by Australian residents. It can be distinguished from the case of the disposal of a taxable Australian asset by a foreign company or the disposal of an asset by an Australian company because those assets remain within the Australian tax base irrespective of who controls the company.

1.8 The proposed amendments will remove the taxation of gains on non-taxable Australian assets that accrue prior to a company becoming a CFC thus facilitating corporate restructures. Compliance costs would also be reduced by removing the need to make asset valuations for a time prior to a company becoming a CFC.

Explanation of the amendments

1.9 The proposed amendments will provide that the attributable income of a CFC will only include a capital gain or loss on the disposal of an asset which accrues from the later of:

•

the time the asset was acquired or deemed to be acquired; and

•

the first day at the end of which the company became a CFC.

1.10 This result will primarily be achieved by substituting section 406 with a new section. [Item 5; new section 406]

1.11 Existing section 406 defines the term '30 June 1990 non-taxable Australian asset' which is used in the modifications that apply when calculating the attributable income of a CFC. The term is also used in other provisions dealing with the taxation of resident trust estates that become controlled foreign trusts and modifications to the capital gains tax provisions for asset disposals by former CFCs that become residents of Australia. Broadly, the effect of the term is that only capital gains and losses which accrue after 30 June 1990 on the disposal by a CFC or former CFC of non-taxable Australian assets will be subject to Australian tax.

1.12 New subsection 406 will ensure that capital gains and losses arising on the disposal of non-taxable Australian assets will only be subject to Australian tax to the extent they accrue after the later of 30 June 1990 and the time a company becomes a CFC. This will be achieved by substituting the term '30 June 1990 non-taxable Australian asset' with "commencing day non-taxable Australian asset". A CFC's 'commencing day' will be 30 June 1990 if the company was a CFC at that time. The commencing day will otherwise be the first day at the end of which a company became a CFC.

1.13 The amendments will apply to asset disposals after 30 June 1995 [item 12] . Capital gains and losses arising on asset disposals prior to 1 July 1995 are unaffected. Accordingly, a loss referable to the period prior to a company becoming a CFC will normally continue to be available where the loss is realised prior to 1 July 1995.

1.14 An exception to this rule is where a company becomes a CFC after 30 June 1995. Where a company becomes a CFC after 30 June 1995, asset disposals made prior to the company becoming a CFC will not be taken into account when calculating attributable income. This ensures that a capital loss is not available where it is incurred prior to a company becoming a CFC and is justified on the basis that a capital gain would not have been attributable if it was derived prior to the company becoming a CFC. [Item 6; new section 408A]

1.15 The new terminology requires changes to other provisions. The terms '30 June 1990 non-taxable Australian asset' and '30 June 1990' are to be replaced where appropriate by 'commencing day non-taxable Australian asset' and 'commencing day' respectively [items 7, 8, 9, 10 & 11] . In addition, definitions of the new terms are to replace definitions of the former terms [items 1, 2, 3 & 4] .

1.16 The following examples illustrate how the new rules will apply.

Example 1

1.17 A company which became a CFC on 1 August 1995 disposes of an asset on 1 October 1995. The asset was acquired on 1 May 1992.

1.18 Consequences - under the existing rules the capital gain or loss would be calculated on the change in value of the asset from 1 May 1992 to 1 October 1995. Following the amendments the asset will be deemed to have been acquired for market value on 1 August 1995 (i.e. when the company became a CFC). The capital gain or loss will therefore be calculated on the change in value of the asset from 1 August 1995 to 1 October 1995.

Example 2

1.19 A company which became a CFC on 1 March 1993 disposes of an asset on 1 October 1995. The asset was acquired on 1 May 1992.

1.20 Consequences - under the existing rules the capital gain or loss would be calculated on the change in value of the asset from 1 May 1992 to 1 October 1995. Following the amendments the asset will be deemed to have been acquired for market value on 1 March 1993 (i.e. when the company became a CFC.) The capital gain or loss will therefore be calculated on the change in value of the asset from 1 March 1993 to 1 October 1995.

Section 2 - Dissolution of CFCs

Summary of the amendments

Purpose of the amendments

1.21 The amendments will ensure that an attributable taxpayer in relation to a CFC is attributed income under the CFC measures where the CFC is liquidated and ceases to exist before the end of the CFC's statutory accounting period. [Division 2]

Date of effect

1.22 The amendments are to apply to a company (being a CFC) that ceases to exist on or after the date of introduction of the Bill where the winding up or process that results in the company ceasing to exist begins on or after the date of introduction of the Bill. Typically, a company will commence winding-up when a court orders or members of the company pass a resolution to that effect. [Item 16]

Background to the legislation

1.23 The intention of the CFC measures is to tax certain foreign source income derived by CFCs on an accruals basis in the hands of attributable taxpayers. The income that is attributed under the CFC measures is not comparably taxed and is passive income or income derived from related party transactions.

1.24 Attribution of income under the CFC measures occurs at the end of a CFC's statutory accounting period which is a twelve month period running from 1 July to 30 June (subsection 319(1)) or another twelve month period that aligns with the CFC's usual accounting period (subsection 319(2)).

1.25 When a CFC enters into liquidation and ceases to exist before the end of its usual statutory accounting period no attribution of income occurs for the period of less than twelve months that commences from the end of its previous statutory accounting period to the time the company ceases to exist. Thus, the intent of the CFC measures may be defeated by a company liquidating and no longer existing at the end of its statutory accounting period.

Explanation of the amendments

1.26 A shortened statutory accounting period for a company that ceases to exist before the end of its usual statutory accounting period (as determined under the current section 319) is provided by the inclusion of a new subsection 319(6). Where a company is a CFC at the beginning of what would be its statutory accounting period under section 319 (ignoring subsection 319(6)) (paragraph 319(6)(a)) and the company ceases to exist before the end of its statutory accounting period then paragraph 319(6)(b) prescribes that the end of the statutory accounting period will be immediately before the company ceases to exist. [Item 13; new subsection 319(6)]

1.27 In most cases, a company will cease to exist when it is finally dissolved or de-registered under the company law applicable in its country of residence.

1.28 The provision of a shortened statutory accounting period for cases where a CFC ceases to exist under new subsection 319(6) necessitates amendment of section 371 and section 375 - provisions dealing with attribution credits and attributed tax account credits respectively.

Attribution credits

1.29 To prevent double taxation an attribution account is maintained by a taxpayer with an attributable interest in a CFC. In the case of income attributed under section 456 the attribution credit arises at the end of the statutory accounting period of the CFC. However, with the inclusion of a shortened statutory accounting period (new subsection 319(6)) it is not appropriate for the credit to arise immediately before the company ceases to exist as this could lead to double taxation when income of the CFC which is subject to attribution at the end of the statutory accounting period is distributed before the company ceases to exist.

1.30 When a CFC has a shortened statutory accounting period because the company ceases to exist (new subsection 319(6)) the attribution credit under paragraph 371(1)(a) will arise at the beginning of the statutory accounting period. [Item 14; new paragraph 371(5)(aaa)]

1.31 In cases where new subsection 319(6) does not apply the attribution credit under paragraph 371(1)(a) will arise at the end of the statutory accounting period. [Item 14; new paragraph 371(5)(a)]

Attributed tax account credits

1.32 The purpose of attributed tax accounts is to account for foreign tax that has been paid on income attributed to a taxpayer under the CFC measures. An attributed tax account credit arises at the end of the CFC's statutory accounting period when income is attributed to a taxpayer under 456. For the reasons outlined above in relation to the timing of attribution credits, it is not appropriate for the attributed tax account credit to arise immediately before a CFC ceases to exist.

1.33 When a CFC has a shortened statutory accounting period because the company ceases to exist (new subsection 319(6)) the attributed tax account credit under paragraphs 375(1)(a) and 375(1)(da) will arise at the beginning of the statutory accounting period. [Item 15; new paragraph 375(3)(aa)]

1.34 In cases where new subsection 319(6) does not apply the attributed tax account credit under paragraphs 375(1)(a) and 375(1)(da) will arise at the end of the statutory accounting period. [Item 15; new paragraph 375(3)(a)]

1.35 The following example illustrates the operation of the amendments.

Example

1.36 A CFC elects a statutory accounting period that aligns with its usual accounting period of 1 January to 31 December. The company members pass a resolution to wind-up the company on 1 August 1995 and it is finally de-registered in accordance with the corporation law where it is resident on 2 November 1995. As the company has ceased to exist during what was its statutory accounting period, new subsection 319(6) creates a new statutory accounting period - 1 January 1995 to 2 November 1995.

1.37 As the CFC's statutory accounting period ended on 2 November 1995, any attributable amounts from the period 1 January to 2 November 1995 will be included in an attributable taxpayer's year of income ending on 30 June 1996. For the purpose of keeping attribution accounts and attributed tax accounts, amounts included under section 456 and the claimable foreign tax paid on that section 456 amount will be credited in the taxpayer's respective accounts in relation to the CFC on 1 January 1995.

Section 3 - Refunds of foreign tax

Summary of the amendments

Purpose of the amendments

1.38 The amendments will clarify that a taxpayer is not entitled to a credit for foreign tax where the tax is refunded to the taxpayer or to any other person. A credit will also not be available where any other benefit is provided as a direct result of the payment of foreign tax. [Item 17 of Division 3]

Date of effect

1.39 The amendments are to apply to refunds of tax made after the date of introduction of the Bill. [Item 18]

Background to the legislation

1.40 Cases have been encountered where some foreign governments have proposed arrangements to collect tax from a taxpayer and subsequently refund that tax or provide some form of benefit to the taxpayer or to another person. These arrangements can be used to generate a false foreign tax credit on profits channelled through or derived in those countries.

1.41 The generation of a false foreign tax credit could be a problem because the credit may be used to reduce Australian tax payable on foreign source income. This would be an abuse of provisions intended to provide relief from double taxation.

Explanation of the amendments

1.42 The proposed amendments will make it clear that arrangements to generate false foreign tax credits will not be tolerated. If an amount of foreign tax paid does not truly represent the genuine amount payable, a foreign tax credit will not be allowed for any amount subsequently refunded or otherwise made available to the taxpayer or any other person. [New subsection 6AB(5A)]

1.43 The amendment primarily deals with the refund or provision of a benefit via another person to the payer of foreign tax. The existing law clearly has the effect of reducing a foreign tax credit for a refund of tax to the payer.

1.44 It is necessary for the new provision to apply to refunds and benefits provided to any other person due to the vast array of arrangements that can be used to receive an indirect benefit from the payment of foreign tax. In practice the person receiving the benefit will normally be closely associated with the payer. However, arrangements may involve persons whose only connection with the payer is a commercial relationship or an association with a person who is a party to a commercial relationship.

1.45 A credit will normally be denied where a benefit is provided to any person that is calculated with regard to foreign tax paid by the person seeking to claim the credit (new paragraph 6AB(5A)(b)). There are two types of benefits which will not result in the denial of a tax credit.

1.46 First, a foreign tax credit will not be denied where a general benefit arises for the payer or to another person as a result of the payment of foreign tax. A general benefit is a benefit other than a benefit that arises as a direct result of tax paid by the payer (new subparagraph 6AB(5)(b)(i)).

1.47 Secondly, a credit will not be denied where the only benefit is a reduction in a tax liability of the payer or another person (subparagraph 6AB(5A)(b)(ii)). This exclusion is intended to ensure that a credit is not denied where a country provides an imputation credit, a rebate of tax, a foreign tax credit or a similar type of concession. A credit will be denied if a concession results in more than a reduction of a tax liability, e.g. an amount becomes payable to the taxpayer or to another person.

1.48 Whilst the existing law can be used to deny false foreign tax credits, the amendment will ensure that the law is capable of dealing with emerging opportunities to generate false credits.

Section 4 - Tainted income

Summary of the amendments

Purpose of the amendments

1.54 The amendments will clarify that the Commissioner of Taxation may make adjustments, reflecting arm's length values, to amounts used in determining whether a CFC has passed the active income test. [Item 19 of Division 4]

Date of effect

1.55 The amendments will apply for statutory accounting periods of CFCs ending after 30 June 1995. [Item 20]

Background to the legislation

1.56 The Australian controllers of a CFC are generally not taxed on the CFC's tainted income where it passes the active income test (paragraph 384(2)(a), subparagraph 385(2)(a)(i) and Division 8 of Part X). This treatment ensures that small amounts of tainted income derived by a CFC are exempt from taxation on a current basis where the CFC primarily carries on a genuine business activity.

1.57 The active income test relies on amounts shown in the recognised accounts of a CFC (section 434) and is only available where those accounts have been prepared in accordance with commercially accepted accounting principles and the accounts provide a true and fair view of the financial position of the CFC (paragraph 432(1)(c)).

1.58 Problems have been encountered in applying the active income test where a CFC has entered into non arm's length transactions with a related party. The Commissioner may make adjustments reflecting arm's length values when determining a CFC's attributable income (section 400 & Division 13 of Part III). It is not clear, however, whether the adjustments affect the active income test because the amounts used for the purposes of the test are those recorded in the recognised accounts of a CFC and not necessarily amounts which have been adjusted for income tax purposes.

1.59 An inability to make adjustments to amounts used in determining the active income test may result in a CFC satisfying the test in circumstances where it should have failed. The Australian controllers of the CFC may thereby escape accruals taxation on tainted income which should be caught by the CFC measures.

Explanation of the amendments

1.60 The Commissioner will be able to make adjustments for the purposes of the active income test where, in calculating the attributable income of the CFC, the Commissioner would make a transfer pricing adjustment in relation to the acquisition or supply of property by the CFC. [New subsection 434(3)]

1.61 New subsection 434(3) would in practice apply only to transactions not covered by section 440. Section 440 provides that arm's length values are to be used in applying the active income test to the calculation of gains and losses on the disposal of assets other than trading stock.

1.62 It is not accepted that adjustments cannot be made under the existing law to amounts used in determining whether a CFC has passed the active income test. The amendment will clarify that adjustments can be made.

Glossary

Attributable taxpayer

1.63 A person who has, in general, a 10 per cent or greater interest in a Controlled Foreign Company or in a non-resident trust for the purposes of Part X of the Principal Act.

Attribution account

1.64 An attribution account establishes a link between:

•

income that has been attributed to the taxpayer from an entity; and

•

income actually distributed to that taxpayer by the entity.

1.65 This makes it possible to identify when, and to what extent, it is necessary to provide relief from double taxation on the distribution of profits which have been taxed on an accruals basis.

Controlled foreign company or CFC

1.66 A company that is not a resident of Australia and is controlled by five or fewer residents - see Part X of the Principal Act.

Statutory accounting period

1.67 The statutory accounting period is used as the measurement period of the CFC measures. It is a period of 12 months, ending on 30 June, unless the foreign company has elected for a 12 month period ending on another day (section 319).

CHAPTER 2 - Rebatable and frankable dividends

Overview

2.1 Part 2 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to disqualify from being rebatable or frankable those dividends that are debited to, or paid out of amounts transferred from, share capital or share premium accounts or asset revaluation reserves of a company.

Summary of the amendments

Purpose of the amendments

2.2 The proposed amendments are to prevent companies taking advantage of the section 46 inter-corporate dividend rebate to ensure tax free distributions to corporate shareholders, or transferring franking credits to shareholders by inappropriate means.

Date of effect

2.3 The proposed amendments are to take effect for dividends declared and paid after 7.30 p.m. Eastern Standard Time on 9 May 1995. Dividends declared before that time but paid afterwards are not subject to these amendments. [Item 33]

2.4 However, dividends paid from amounts transferred from a share capital or share premium account or asset revaluation reserve where the transfer occurred before that time are not subject to the amendments. Nor are dividends paid under certain transitional arrangements (see paragraphs 2.53 to 2.55 below). [Items 33-34]

Background to the legislation

2.5 The inter-corporate dividend rebate, available under sections 46 and 46A of the Act, effectively frees from tax all dividends received by resident public companies from resident companies, and franked or group company dividends received by resident private companies from resident companies.

2.6 Existing provisions of the Act are being exploited by schemes that rely on the section 46 inter-corporate dividend rebate to ensure tax-free distributions to corporate shareholders. These schemes rest on the characterisation as a dividend of certain distributions debited to a company's share capital or share premium account or asset revaluation reserve. Moreover, the characterisation of these distributions as a dividend enables a company to pass on franking credits to shareholders ordinarily unable to access them.

Explanation of the amendments

What dividends do the amendments apply to?

2.7 The amendments prevent a dividend (other than certain in specie distributions explained below in paragraphs 2.23 to 2.25) being rebatable under section 46 or 46A of the Act or frankable to the extent that it is debited to a disqualifying account, or the notional disqualifying account. These accounts are explained below. [Item 21 - new section 46G; item 26 - new paragraph (g) in the definition of 'frankable dividend in subsection 160APA(1)]

Disqualifying account

2.8 A disqualifying account is a share capital account, a share premium account (including a 'tainted' share premium account - explained below in paragraphs 2.11 to 2.13), an asset revaluation reserve (as defined below in paragraph 2.14) or a shareholders' capital account held by a life assurance company (explained below in paragraph 2.15). All other accounts and reserves of a company are non-disqualifying accounts. [Item 21 - new subsections 46H(1)-(3)]

Share capital account

2.9 A share capital account comprises amounts paid by shareholders as consideration for shares in the company (other than share premiums). [Item 21 - new paragraph 46H(1)(a)]

Share premium account

2.10 A share premium account, defined in subsection 6(1) of the Act, comprises premiums received by a company on shares issued by it. Company distributions debited to share premium accounts are usually excluded from the definition of a dividend (see, for example, paragraph (d) of the definition of a dividend in subsection 6(1)). However, such distributions can be dividends if subsection 6(4) of the Act applies (where, under an arrangement, shares are issued at a premium and the premiums are distributed as part of the arrangement).

2.11 If amounts other than share premiums received by the company are credited to a share premium account, that account is 'tainted' and ceases to be a share premium account for tax purposes. This follows from paragraph (a) of the definition of share premium account in subsection 6(1). For example, a share premium account may be tainted by the inclusion of an amount of profits.

2.12 Similarly, in terms of paragraph (b) of the definition of share premium account, if a share premium account is credited with an amount in respect of a share premium and that amount cannot be identified in the books of the company as a share premium, that account will also cease to be a share premium account for tax purposes.

2.13 To prevent avoidance of these proposed amendments by deliberately tainting a share premium account prior to debiting dividends to that account, new subsection 46H(2) ensures that a tainted share premium account is treated in the same way as an untainted share premium account. If, for example, a share premium account is tainted by the inclusion of $1,000 which is covered by paragraph (a) or (b) of the definition of share premium account, the whole of the original account, plus the $1,000 tainting amount, is treated as a disqualifying account. [Item 21 - new subsection 46H(2)]

Asset revaluation reserve

2.14 An asset revaluation reserve is a reserve (however called) comprising profits arising from the re-valuation of an asset or assets to the extent that those profits have not been realised by disposing of the asset. If a reserve contains such profits in addition to other amounts, only that part of the reserve comprising the re-valuation profits is taken to be an asset revaluation reserve. In such cases, the company will determine to what extent a debit to the reserve is a debit to that part of the reserve which is an asset revaluation reserve (i.e. the part of the reserve comprising profits arising from the revaluation of assets which have not been disposed of). [Item 21 - new paragraph 46H(1)(d)]

Shareholders capital account

2.15 A shareholders' capital account comprises shareholders' capital (as defined in the Life Insurance Act 1995) held in a statutory fund of a life assurance company. A statutory fund contains assets included in the company's life, superannuation, roll-over or accident and disability insurance business. [Item 21 - new paragraph 46H(1)(b)]

Notional disqualifying account

2.16 Every company has a notional disqualifying account. However, the existence of the account is only relevant if there is a surplus in the account at the time a dividend is paid. [Item 21 - new subsection 46I(1)]

2.17 The notional disqualifying account of a company has a surplus if the amounts credited to the account exceed the amounts debited to the account. Credits arise if an amount is transferred from a disqualifying account to a non-disqualifying account (for example, from a share premium account to retained profits) and the transfer is not an excluded transfer (explained below at paragraphs 2.32-2.39). Debits arise if the reverse occurs, or if a dividend debited to a non-disqualifying account is paid by the company when there is a surplus in the notional disqualifying account. [Item 21 - new subsections 46I(2)-(5)]

2.18 The notional disqualifying account, therefore, comprises amounts of share capital, share premiums and profits arising from the revaluation of assets that have been transferred from their respective accounts. Dividends paid by the company after the transfer are deemed to be paid first out of the amounts transferred, irrespective of the debits made in the company's books. This treatment is necessary to prevent the purpose of the proposed amendments being thwarted by effectively paying dividends out of disqualifying accounts by first transferring amounts from those accounts to different accounts.

Apportionment of debits for same day dividends

2.19 If a number of dividends are paid on the same day, the total debits to a disqualifying or notional disqualifying account must be apportioned equally across all the dividends. For these purposes, debits arising in relation to in specie distributions covered by the exception explained below are disregarded. [Item 21 - new section 46L]

2.20 For example, if a company pays dividends to all shareholders on a particular day and 50 per cent of the total dividend paid by the company is debited to a disqualifying account, then each shareholder is deemed to receive a dividend that is 50 per cent debited to a disqualifying account. This has the effect that only half the dividend is frankable or rebatable.

Deemed dividends

2.21 Certain provisions of the Act deem dividends to have been paid as a result of a distribution, payment or crediting of some kind. For example, section 159GZZZP provides that, in an off-market share buy-back, so much of the purchase price of the share as exceeds the paid-up capital of the share and any amount debited against a share premium account is taken to be a dividend paid by the company out of profits of the company. Notwithstanding that the dividend is deemed to be paid out of profits, new section 46J will prevent these deemed dividends being rebatable or frankable to the extent that they are debited to a disqualifying account or the notional disqualifying account. [Item 21 - new section 46K]

2.22 For example, if a share paid-up to $10 is bought back off-market for $100, and the company debits $10 to the share capital account, $40 to the share premium account and $50 to an asset revaluation reserve, the $50 deemed dividend will not be rebatable or frankable, because it is debited to an asset revaluation reserve.

What dividends do the amendments not apply to?

In specie distributions

2.23 A company may distribute an asset to shareholders instead of paying a cash dividend (for instance, on the liquidation of the company). Distributions of assets as dividends are called in specie distributions.

2.24 If an asset revaluation reserve has been created in relation to an asset and the asset is distributed by the company as a dividend to a shareholder, the company would debit the asset revaluation reserve. Unless the proviso concerning revaluation profits of assets that have been disposed of applies (see paragraph 2.14 above), these in specie distributions would not be rebatable or frankable. However, it would be inappropriate to prevent a dividend being rebatable or frankable in these circumstances because the effect of the transaction is the same as if the company disposed of the asset to a third party and paid a dividend to the shareholder from the proceeds of the disposal (i.e. a realised profit).

2.25 An exception is therefore made to the rule that dividends debited to an asset revaluation reserve are not rebatable or frankable. The exception applies where a dividend is a distribution of property other than money (i.e. an in specie distribution) and the property is an asset that has been revalued (resulting in a revaluation profit). If the asset revaluation reserve in relation to the distributed asset is debited, or the notional disqualifying account is debited because profits in the reserve were transferred to another account, the dividend may be rebatable and frankable to the extent that the debit is attributable to the profits arising on the revaluation. [Item 21 - new subsections 46G(2) and 46M(2)]

Excluded transfers

2.26 The crediting of the notional disqualifying account because of transfers from disqualifying accounts (explained above in paragraphs 2.16-2.18) prevents a company circumventing the measures of the Bill by transferring share capital and asset revaluation reserve profits to other accounts and then paying rebatable and frankable dividends from those other accounts.

2.27 There are, however, circumstances where this treatment is inappropriate. These circumstances are where:

(a)

a company offsets accumulated losses against share capital, or losses in the value of an asset against an asset revaluation reserve;

(b)

a life assurance company transfers share premiums from its shareholders' funds to a statutory fund (i.e. a fund containing assets included in the company's life, superannuation, roll-over or accident and disability insurance business); or

(c)

a life assurance company revalues assets held in its statutory fund and subsequently transfers an amount from the statutory fund to the shareholders' fund.

(a) Transfers to offset losses

2.28 A company may reduce its share capital by writing off accumulated losses against paid-up capital or share premiums. This effectively involves a transfer from a share capital account (a disqualifying account) to another account (a non-disqualifying account).

2.29 Similarly, a company may reduce its asset revaluation reserve to offset a loss in the value of an asset to correctly reflect the recoverable value of that asset in the accounts of the company. This also results in a transfer from a disqualifying account to a non-disqualifying account.

2.30 However, in the ordinary course of events, neither of these transfers facilitate the payment of a dividend. The company therefore, has not put itself in a position by which it could circumvent the provisions of the Bill.

2.31 Therefore transfers to offset accumulated losses or to reflect a reduction in value of assets are 'excluded transfers'. An excluded transfer is a transfer from a disqualifying account to a non-disqualifying account that, contrary to the general rule, does not give rise to a credit in the notional disqualifying account. [Item 21 - new subsection 46I(3)]

What is an excluded transfer?

2.32 In relation to capital reductions to offset accumulated losses, an excluded transfer is a transfer from a share capital account or share premium account which gives effect to a reduction in paid-up share capital or share premiums that have been lost or ceased to be represented by assets. This would be the case, for example, in a capital reduction scheme under paragraph 195(1)(b) of the Corporations Law. An exception is provided in relation to certain dividend payment or replacement arrangements (explained below). [Item 21 - new subsections 46J(1) and (2)]

2.33 To prevent companies obtaining the benefit of the exemption in relation to accumulated losses that are likely to be recovered, the loss or deficiency in share capital or share premiums must be permanent. In the context of capital reductions, the courts have provided guidance as to what permanent means: see for example Re Jupiter House Investments (Cambridge) Ltd [1985] 1 WLR 975 at 979. These judicial decisions will be relevant for the purposes of determining whether the permanency test in new paragraph 46J(2)(b) is satisfied.

2.34 In relation to the reduction in value of an asset, an excluded transfer is a transfer from an asset revaluation reserve to reflect a decrease in value of the asset. Once again, this is subject to the exception for certain dividend payment or replacement arrangements. [Item 21 - new subsections 46J(1) and (3)]

What is a dividend payment or replacement arrangement?

2.35 To prevent abuse of the exemptions explained above, excluded transfers do not include transfers to the extent to which they constitute dividend payment or replacement arrangements. If part of a transfer is made under a dividend payment or replacement arrangement, and the remainder is not so made, then only the remainder will be an excluded transfer. [Item 21 - new subsection 46J(5)]

2.36 A dividend payment or replacement arrangement is defined as a transfer under an arrangement in which the company will pay a dividend directly or indirectly from the transferred amount, or will use the transferred amount to replace, directly or indirectly, an amount from which a dividend was paid. [Item 21 - new subsection 46J(6)]

2.37 For example, a company with an accumulated loss may reduce the par value of its shares to offset that loss (thereby effectively transferring an amount from its share capital account to the accumulated loss account). If the amount of the reduction in par value equals the loss then, assuming the company had not undertaken the transfer as part of an arrangement involving the payment of a dividend, the transfer would be an excluded transfer.

2.38 However, if in the above example the reduction in par value exceeded the loss to be offset, there may be a dividend payment arrangement which would preclude the amount of the excess transferred being an excluded transfer. This would depend on whether, on the facts of the case, the transfer could be described as part of an arrangement involving the payment of a dividend. The company could show that there was no such arrangement by, for instance, demonstrating a reason for the excess transfer which did not involve the payment of a dividend, and by conclusively showing that the excess will not be distributed as a dividend. An undertaking to a court that, as part of a capital reduction scheme, the excess will be held in a special reserve and not distributed to shareholders would be sufficient for these purposes.

2.39 A dividend payment or replacement arrangement requires a link, other than a merely temporal link, between the transfer and the payment of the dividend. This link may, for example, be a preconceived plan under which the company makes a transfer intending to subsequently pay a dividend from all or part of the amount transferred.

(b) Transfers of share premiums by life assurance companies

2.40 As part of its ordinary business, a life assurance company may transfer share premiums from its shareholders' funds to a statutory fund it maintains to eliminate a deficit in the statutory fund or to provide capital for investment.

2.41 Life assurance companies can transfer share premiums to their statutory funds without triggering the rebatable and frankable dividend measures. This is made possible because the Bill provides for a shareholders' capital account as a disqualifying account, comprising shareholders' capital (as defined in the Life Assurance Act 1995) held in a statutory fund. [Item 21 - new paragraph 46H(1)(b)]

2.42 A transfer from a share premium account to a shareholders' capital account will be a transfer between disqualifying accounts. Therefore the transfer will not create a credit in the notional disqualifying account. Similarly, a life assurance company will be able to transfer amounts from a shareholders' capital account held in one statutory fund to a shareholders' capital account in another statutory fund without causing a credit to the notional disqualifying account.

2.43 A transfer from a shareholders' capital account held in a statutory fund to a non-disqualifying account will generally give rise to a credit in the notional disqualifying account because of new subsection 46I(3). However, one type of transfer from a shareholders' capital account that does not facilitate the payment of a dividend is a transfer to enable a distribution to participating policy-holders pursuant to paragraph 63(3)(c) of the Life Insurance Act 1995. Therefore, to prevent a credit arising in the notional disqualifying account, this type of transfer is defined as an 'excluded transfer'. Excluded transfers are explained above in paragraphs 2.32 to 2.39. [Item 21 - new subsection 46J(4)]

(c) Revaluation of statutory fund assets

2.44 It is also an ordinary part of a life assurance company's business to revalue assets to determine the surplus held in the statutory fund that can be allocated to policyholders or shareholders. This surplus can be transferred to shareholders' funds to pay dividends.

2.45 Notwithstanding that the value of assets is a factor in determining any surplus in the statutory fund, the surplus could also be attributable to the taxed profits of the statutory fund. The amount of the surplus attributable to the asset revaluation reserve cannot be determined. Therefore profits from the revaluation of assets of a statutory fund are excluded from the definition of the asset revaluation reserve disqualifying account. This means that a transfer of profits, including from the revaluation of assets, from the statutory fund of a life assurance company to its shareholders' fund will not affect the company's ability to pay frankable and rebatable dividends. [Item 21 - new subparagraph 46H(1)(d)(ii)]

How much of the rebate is denied?

2.46 The inter-corporate dividend rebate is not allowed to the extent the dividend is debited to a disqualifying account or the notional disqualifying account. If, for example, $40 of a $100 dividend is debited to a disqualifying or notional disqualifying account, with the remainder debited to profits, 40 per cent of the rebate otherwise arising will be denied to the shareholder. [Item 21 - new subsection 46G(1)]

2.47 If the dividend is a frankable dividend, new section 46L will, as explained below, apply to treat the original dividend as two separate dividends. In these cases the dividend that is not a frankable dividend (i.e. the $40 of the original dividend debited to a disqualifying or notional disqualifying account) will be denied the rebate, while the rebate for the dividend which is frankable (i.e. the remaining $60 of the original dividend) will still be available. [Item 21 - new subsection 46G(1) and new section 46M]

What part of the dividend is not frankable?

2.48 If a dividend is debited wholly against a disqualifying or notional disqualifying account then the whole of the dividend is an unfrankable dividend. [Item 21 - new subsection 46L(3)]

2.49 If only part of the dividend is debited against a disqualifying or notional disqualifying account, the dividend is treated as comprising two separate dividends, an unfrankable dividend (representing the part of the dividend debited to a disqualifying or notional disqualifying account) and a frankable dividend (representing the remaining part). This dual dividend treatment applies for the purposes of provisions of the Act relevant to calculating the inter-corporate dividend rebate or the extent to which a dividend is franked or frankable (for example section 46F, which denies the rebate for unfranked dividends paid to non-group private companies). Beyond this, it does not affect the amount of a dividend included in assessable income, or the tax payable on that dividend. [Item 21 - new subsection 46M(4)]

2.50 Section 160AQF of the Act effectively provides that two or more dividends paid under the same resolution have to be franked to the same extent (for these purposes, dividends paid under different resolutions but paid on the same class of shares may be deemed to be paid under the same resolution by section 160AQG). This requirement could not be satisfied if one of the dividends is an unfrankable dividend because of the application of new subsection 46M(3) , or is a dividend which is treated as two dividends by new subsection 46M(4) , one of which is unfrankable. Therefore, a dividend that is treated as unfrankable because of those new subsections is deemed not to be a dividend to which section 160AQF or section 160AQG applies. As a result, if for example, two $100 frankable dividends are debited half to a disqualifying account and half to profits (thereby deeming each dividend to be two $50 dividends, one frankable and one not), only the $50 frankable dividends need to be franked to the same extent under section 160AQF. [Item 21 - new subsection 46M(4); items 27 and 28]

Transitional provisions

2.51 The proposed amendments apply to dividends paid, or deemed to be paid (for example, a liquidator's distribution or off-market share buy-back), after 7.30 p.m. Eastern Standard Time on 9 May 1995 (the starting time) unless the dividend:

•

is not a deemed dividend and was declared before that time; or

•

was a dividend paid under an excluded transitional arrangement (explained below in paragraphs 2.53 to 2.55). [Subitem 33(1)]

2.52 Credits to the notional disqualifying account do not arise in relation to transfers from disqualifying accounts that occurred before the starting time or transfers under an excluded transitional arrangement (see below). Therefore if an amount is transferred to a non-disqualifying account from a disqualifying account before the starting time, subsequent dividends debited to a non-disqualifying account will not be prevented from being rebatable or frankable by reason of the transfer. Transfers after the starting time would result in a credit to the notional disqualifying account and therefore would prevent subsequent dividends being frankable or rebatable. [Subitem 33(2)]

Excluded transitional arrangement

2.53 Some companies may, prior to the announcement of these proposed amendments, have already embarked on a particular arrangement with a legitimate expectation that dividends paid under the arrangement will be rebatable and frankable. To avoid unnecessary disruption to commercial arrangements, the proposed amendments will not apply to excluded transitional arrangements.

2.54 An excluded transitional arrangement is an arrangement, plan or proposal that began to be implemented and was announced to shareholders before the starting time and under which there is a court-approved capital reduction. If a dividend is paid under the arrangement within six months of the starting time, the proposed amendments do not apply. Similarly, credits to the notional disqualifying account do not arise in relation to transfers from disqualifying accounts under an excluded transitional arrangement within that period. [Item 34]

2.55 The requirement that the arrangement begins to be implemented prior to the starting time means that something integral to the arrangement must be done before that time. The announcement of the arrangement to shareholders needs to be in writing (for example, a Stock Exchange Announcement), or at a general meeting of the company. Provided the arrangement begins to be implemented and is announced before the starting time, the court approval and capital reduction may occur after that time. [Item 34]

Consequential amendments

2.56 The proposed amendments explained above achieve the aim of the rebatable dividend adjustment (RDA) provisions in the Act more comprehensively and simply. These provisions and their related provisions are therefore redundant and are repealed with effect from the date of effect of the proposed amendments. However, the pre-acquisition profits RDA defined in subsections 160ZK(5)-(7) is not affected by these amendments. [Item 22 - repealed section 159GZZZMA; item 23 - omitted subsection 159GZZZP(3); item 24 - amended subsection 159GZZZQ(1); item 25 - omitted subsection 159GZZZQ(2); item 29 - substituted subsection 160ZA(4A); item 30 - substituted subsection 160ZA(5A); item 31 - omitted subsection 160ZL(5); item 32 - repealed section 160ZLA]

CHAPTER 3 - Bankruptcy and losses

Overview

3.1 Part 3 of Schedule 1 of the Bill will strengthen the provisions of the Income Tax Assessment Act 1936 ('the Act') that deny deductions for losses where taxpayers are released from debts under bankruptcy law (whether as bankrupts or not).

3.2 The Bill will also remove an existing anomaly that taxpayers, although denied revenue losses, are allowed to claim net capital losses incurred before bankruptcy or release from debts under bankruptcy law.

Summary of the amendments

Purpose of the amendments

3.3 The amendments will:

•

ensure that the Act denies deductions for losses incurred before bankruptcy notwithstanding that the bankruptcy is later annulled in connection with arrangements under which debts are released;

•

prevent net capital losses incurred before bankruptcy or release from debts under bankruptcy law from being taken into account in ascertaining future net capital gains or losses; and

•

ensure that a capital loss is taken to have been incurred by a taxpayer who pays an amount in respect of a debt that was taken into account in determining the amount of a net capital loss that, upon bankruptcy or release from debts under bankruptcy law, is prevented from being taken into account in ascertaining future net capital gains or losses.

Date of effect

3.4 The amendments relating to annulment of bankruptcy will apply to annulments occurring after 25 February 1995. The amendments relating to capital losses will apply to taxpayers who become bankrupt or who have been released from debts after 25 February 1995 [item 40] . This accords with the Government's announcement of 26 February 1995.

Background to the legislation

Annulment of bankruptcy

3.5 Subsection 79E(8) of the Act denies deductions for general domestic losses of the post-1989 years of income incurred before bankruptcy or, where the taxpayer has not become a bankrupt, incurred before release from any debts by the operation of an Act relating to bankruptcy. Subsections 79F(8), 80(4), 80AAA(9) and 80AA(6) operate in similar circumstances to deny film losses of post-1989 years of income, general domestic losses of the pre-1990 years of income, film losses of pre-1990 years of income and primary production losses of pre-1990 years of income respectively. The following discussion refers to subsection 79E(8) losses but is equally applicable to these other types of revenue losses.

3.6 There is a technical argument, based partly on the decision of the Federal Court in Oates v FC of T 91 ATC 4060, that subsection 79E(8) might not apply if a release from debts occurred in circumstances where a bankruptcy was annulled. The argument would be that, following Oates, all annulments are excluded from paragraph 79E(8)(a), and that paragraph 79E(8)(b) could not apply because any release in conjunction with an annulment would not be 'by the operation of an Act relating to bankruptcy'.

3.7 The amendments remove the uncertainty. They ensure that deductions for losses are denied where annulment occurs in connection with arrangements under which debts are released. As a result, such a taxpayer will be denied deductions for losses incurred in the pre-bankruptcy period as if the bankruptcy had not been annulled.

Net capital losses

3.8 Although revenue losses incurred before a taxpayer's bankruptcy or release from debts under bankruptcy law are not deductible there is nothing in the existing law that prevents the same taxpayer's net capital losses incurred in the same period from being taken into account. The amendments relating to net capital losses will protect the integrity of the policy behind the provisions denying revenue losses upon bankruptcy or release by extending similar treatment to net capital losses.

Explanation of the amendments

Annulment of bankruptcy

3.9 The Bill will insert new subsections into the Act to provide that where:

•

a taxpayer's bankruptcy is annulled under section 74 of the Bankruptcy Act 1966; and

•

under the composition or scheme of arrangement the taxpayer is required to enter into as a condition for annulment under section 74 of the Bankruptcy Act, the taxpayer has been or can be released from certain debts;

the taxpayer is denied deductions for revenue losses under the provisions of the Act listed in paragraph 3.5 as if the taxpayer was still a bankrupt and the annulment had never occurred.

Types of losses

3.10 The Act generally allows deductions for various types of revenue losses (for example, general domestic losses and film losses). Deductions for those losses are denied, however, when a taxpayer becomes a bankrupt or is released from debts under bankruptcy law. The new provisions will ensure that deductions for the following losses are denied in certain circumstances of annulment of bankruptcy:

•

general domestic losses of the post-1989 years of income [item 35 - new subsection 79E(8A)] ;

•

film losses of post-1989 years of income [item 35 - new subsection 79F(8A)] ;

•

general domestic losses of the pre-1990 years of income [item 36 - new subsection 80(4AA)] ;

•

film losses of pre-1990 years of income [item 37 - new subsection 80AAA(9A)] ; and

•

primary production losses of pre-1990 years of income [item 38 - new subsection 80AA(6A)].

Reason for annulment

3.11 The new provisions will apply to annulments under subsection 74(5) of the Bankruptcy Act where a bankruptcy is annulled upon the passing of a special resolution at a meeting of creditors of the bankrupt. Upon passing such a resolution, the creditors effectively accept the bankrupt's proposal for a composition or a scheme of arrangement. Such arrangements may provide for the bankrupt to be released from debts either immediately or at some time in the future.

3.12 Section 153A of the Bankruptcy Act provides for the annulment of a bankruptcy where, for example, the trustee in bankruptcy is satisfied that all the bankrupt's debts have been paid in full. The bankruptcy may also be annulled under section 153B of the Bankruptcy Act if the Court is satisfied that a person ought not to have been made a bankrupt - for example because the person is already a bankrupt. Neither of these reasons for annulment, however, will attract the operation of the new provisions as they do not contemplate release from debts.

Arrangements for release

3.13 The new provisions will apply where under the composition or scheme of arrangement required under subsection 74(5) of the Bankruptcy Act, the taxpayer is or can be released from certain debts. This includes, for example, arrangements whereby creditors accept less than the full amount of debts in full satisfaction of the debts due to them. Also included are arrangements whereby the bankrupt is allowed to manage his/her affairs over a period of time with a view to the payment of as much of the debts as possible. Under these circumstances, the new provisions will apply on the basis that there is a possibility that the bankrupt will be released from some part of the debts, say, if such amounts remain unpaid by the end of the agreed period of time. The new provisions will not apply where, for example, creditors agree to accept full payment of the debts due to them by instalments over a fixed period of time.

Types of debt

3.14 The acceptance by creditors of a composition or scheme of arrangement under subsection 74(5) of the Bankruptcy Act does not, except with the consent of the creditor concerned, release the bankrupt from a debt that would not be released by his or her discharge from bankruptcy [paragraph 75(2)(a) of the Bankruptcy Act]. Accordingly, the new provisions will only apply where arrangements have been made for the release from debts from which the bankrupt would have been released if he or she had instead been discharged from the bankruptcy.

3.15 This is consistent with the policy underlying the existing paragraph 79E(8)(a), which denies deductions for losses on the basis that the taxpayer is expected to be released from debts upon discharge from bankruptcy.

Net capital losses

3.16 The Bill will amend Part IIIA of the Act to ensure that net capital losses incurred in respect of the year of income immediately before the year of income in which the taxpayer becomes a bankrupt or is released from debts under bankruptcy law will not be taken into account in ascertaining whether a net capital gain accrues or a net capital loss is incurred in respect of the latter year of income or any subsequent year of income. [Item 39 - new subsection 160ZC(4A)]

3.17 Subsections 79E(8) and 79F(8) of the Act (the latter applies to film losses) and their predecessors, subsections 80(4), 80AAA(9) and 80AA(6), deny deductions for losses incurred before the day on which a taxpayer became a bankrupt or was released from debts under bankruptcy law. This amendment accords broadly comparable treatment to net capital losses in that net capital losses incurred in respect of the year of income before bankruptcy or release occurs are to be ignored for the purposes of calculating future net capital gains or losses.

3.18 The treatment of the two kinds of losses will differ to an extent, however, in that net capital losses are to be denied in the year of income in which bankruptcy or release occurs whereas subsections 79E(8), etc. first deny revenue losses in the year of income following the year of income in which bankruptcy or release occurs. The reason lies in the fact that a net capital loss is the cumulative net sum of the gains and losses on disposals of assets over consecutive years whereas a revenue loss is incurred in respect of a particular year of income (see subsections 160ZC(3) and (4)).

3.19 The amendment affecting the treatment of net capital losses applies notwithstanding an annulment of bankruptcy in connection with arrangements under which debts are or can be released. Where:

•

a taxpayer's bankruptcy is annulled under section 74 of the Bankruptcy Act 1966; and

•

under the composition or scheme of arrangement the taxpayer is required to enter into as a condition for annulment under section 74 of the Bankruptcy Act, the taxpayer has been or can be released from debts from which the taxpayer would have been released if he or she had instead been discharged from the bankruptcy;

no net capital losses incurred in respect of the year of income immediately before the year of income in which the taxpayer became a bankrupt or was released from debts under bankruptcy law would be taken into account in ascertaining whether a net capital gain accrued or a net capital loss was incurred in respect of the latter year of income or any subsequent year of income. [Item 39 - new subsection 160ZC(4B)]

3.20 The Bill will also insert new provisions into the Act to ensure that a taxpayer who makes a payment in respect of a debt will be taken to have incurred a capital loss in the year of income in which payment is made, where:

•

the taxpayer incurred a net capital loss that is not allowed to be taken into account because of the new subsection 160ZC(4A) ('denied net capital loss'); and

•

the Commissioner of Taxation is satisfied that the debt was taken into account in working out the amount of the denied net capital loss.

[Item 39 - new subsection 160ZC(4C)

3.21 The amount of the capital loss taken to have been incurred because of the payment of a debt is to be the smallest of the following:

•

the amount of the payment;

•

so much of the debt as the Commissioner is satisfied was taken into account in calculating the amount of the denied net capital loss; and

•

the amount of the denied net capital loss less the sum of capital losses arising from earlier payments in respect of debts taken into account in calculating that denied net capital loss.

[Item 39 - new subsection 160ZC(4D)]

CHAPTER 4 - Reduction of PAYE early remitter threshold

Overview

4.1 Part 4 of Schedule 1 of the Bill amends the Income Tax Assessment Act 1936 (the Act) to lower, from $5 million to $1 million, the threshold at which a group employer is deemed to be an 'early remitter'. Consequently, the twice monthly remittance arrangements will affect group employers who have annual PAYE remittances in excess of $1 million per year.

4.2 Instalment deductions made by early remitters in the first 14 days of a month must be paid to the Commissioner by the 21st day of that month and deductions made in the balance of the month must be paid by the 7th day of the following month. This is in lieu of a single payment on the later date.

Summary of the amendments

Purpose of the amendments

4.3 To reduce from $5 million to $1 million the tax instalment threshold above which a group employer is required to remit tax instalments twice monthly instead of once.

Date of effect

4.4 The amendment applies to instalments deducted on or after 1 December 1995. [Item 43]

Background to the legislation

4.5 Broadly, section 221EC of the Act provides for a group employer to be an early remitter for a particular month where any one of three situations exist.

4.6 The first situation is when the total PAYE remittances of a group employer, for any income year ending on or after 30 June 1989 and before the deduction month, exceeded $5 million

4.7 The second situation is where a group employer was included in an eligible employer group at the end of any income year ending on or after 30 June 1989 but before the deduction month, and the total PAYE remittances of any such income year of the employers in that group exceeded $5 million. An eligible employer group consists of any collection of two or more companies each of which is a subsidiary of the other company or of the same company.

4.8 The third situation is where the Commissioner has determined a group employer to be an early remitter under subsection 221EC(5) of the Act, and has served a notice to that effect on the employer.

4.9 A group employer who comes within any one of the above three situations is an early remitter until the Commissioner determines, by notice in writing served on the group employer, that the group employer is not an early remitter for the particular month or months specified in the notice or for all months after and including the month so specified.

Explanation of the amendments

4.10 The Bill proposes that the references to $5 million in subsection 221EC(1) of the Act be omitted and substituted with $1 million. [Items 41 & 42]

4.11 This will result in all group employers (including those included in an eligible employer group) with tax instalment deductions exceeding $1 million being early remitters unless the Commissioner has determined otherwise. Previously, only those group employers with deductions exceeding $5 million were early remitters.

4.12 The early remitter obligation of those group employers, who become early remitters because of the lowering of the threshold, start in respect of deductions made on or after 1 December 1995. [Item 43]

CHAPTER 5 - Infrastructure borrowings

Overview

5.1 Part 6 of Schedule 1 of the Bill will amend the Income Tax Assessment Act 1936 (the Act) to increase the infrastructure borrowings tax rebate from 33 per cent to 36 per cent. The change in the infrastructure borrowings tax rebate corresponds to the increase in the company tax rate from 33 per cent to 36 per cent.

5.2 The increase in the infrastructure borrowings tax rebate will align the benefits of the two tax concessions for companies provided by the Act for certain infrastructure borrowings. These tax concessions provide eligible lenders with the option of:

•

excluding from assessable income interest and other receipts derived from infrastructure borrowings; or

•

obtaining an infrastructure borrowings tax rebate where a lender includes infrastructure borrowing amounts in assessable income.

Summary of the amendments

Purpose of the amendments

5.3 To increase the infrastructure borrowings tax rebate.

Date of effect

5.4 The increase in the infrastructure borrowings tax rebate will apply to the 1995-96 and subsequent income years.

Background to the legislation

5.5 Division 16L of Part III of the Act contains tax concessions designed to encourage private investment in the construction of certain public infrastructure projects.

5.6 These provisions provide eligible lenders with the option of:

•

excluding from assessable income the interest and other receipts derived from infrastructure borrowings (section 159GZZZZE); or

•

obtaining an infrastructure borrowings tax rebate where a lender includes infrastructure borrowing amounts in assessable income (section 159GZZZZG).

5.7 The infrastructure borrowings tax rebate is currently set at a rate that results in the tax benefit for companies of non-assessability of interest and other receipts being the same as the tax benefit that is conferred by the infrastructure borrowings tax rebate. Accordingly, the infrastructure borrowings tax rebate is currently set at 33 per cent for the 1994-95 year of income.

5.8 Following the increase in the company tax rate to 36 per cent for taxable income of the 1995-96 and subsequent years of income, the infrastructure borrowings tax rebate is to be increased to 36 per cent. This will maintain the equivalent tax benefit for companies between non-assessability of interest and other receipts and assessability of these receipts with the benefit of the infrastructure borrowings tax rebate.

Explanation of the amendments

5.9 Subsection 159GZZZZG(1) of the Act provides the rate of the infrastructure borrowings tax rebate for:

•

natural persons;

•

companies;

•

corporate unit trusts;

•

public trading trusts;

•

approved deposit funds;

•

superannuation funds; and

•

pooled superannuation trusts.

Section 94J of the Act ensures that the rebate also applies to corporate limited partnerships.

5.10 This rate is to be increased from 33 per cent to 36 per cent, effective in respect of assessable income for 1995-96 and subsequent income years. [Item 45; amended paragraph 159GZZZZG(1)(d)]

5.11 Similarly, the infrastructure borrowings tax rebate is to be increased from 33 per cent to 36 per cent for:

•

beneficiaries of trust estates [item 46; amended paragraph 159GZZZZG(2)(e)] ;

•

trustees of trust estates [item 47; amended paragraph 159GZZZZG(3)(e)] ; and

•

partnerships [item 48; amended paragraph 159GZZZZG(4)(e)] .

5.12 These increases are also to apply in respect of assessable income for the 1995-96 and subsequent income years.

CHAPTER 6 - Group certificates and other PAYE provisions

Overview

6.1 The amendments contained in Schedule 2 of the Bill are concerned with the group certificate and other Pay-As-You-Earn (PAYE) provisions of the Income Tax Assessment Act 1936 (the Act).

6.2 The amendments will bring the group certificate and other PAYE requirements in the tax law into line with current and future administrative practices that have evolved in response to taxpayer needs, perceived administrative efficiencies and changes in technology.

6.3 This chapter explains the amendments under the following headings:

•

Provision of original group certificates to the ATO ;

•

Removal of tax stamps ;

•

Small remitters ;

•

Removal of redundant provisions ;

•

Other technical changes ; and

•

Consequential amendments to other Acts .

Summary of the amendments

Purpose of the amendments

6.4 The amendments will alter the group certificate and other PAYE provisions of the Act to:

•

require original group certificates to be sent to the Australian Taxation Office (ATO) by employers to facilitate electronic data capture of employment income information. This also necessitates a change in the basis of allowing tax instalment credits to a basis consistent with other collection mechanisms [item 13 - new subsections 221F(5A) to (5G)] ;

•

offset excess PAYE credits against other liabilities owing to the Commissioner of Taxationincluding in his capacity as Child Support Registrar [item 24 - new subsections 221H(4) and (4A)] ;

•

remove the requirement to return unused group certificates to the ATO [item 13] ;

•

remove the tax stamp provisions as they relate to employers and replace them, as they relate to self employed persons, with a tax voucher system [item 27 - new section 221K] ;

•

allow employers who remit less than $10,000 per annum in tax instalment deductions ("small remitters") to the ATO to remit quarterly [item 8 - new sections 221EDA to 221EDC] ; and

•

remove redundant provisions relating to the Commissioner's former priority to recover unremitted PAYE deductions over all other debts in cases of insolvency [item 33] .

Date of effect

6.5 The group certificate, group employer and tax stamp amendments will generally apply from 28 days after Royal Assent. [Subitems 51(1), (2), (3), (4) and (5)]

6.6 The changes to provide for employers who remit less than $10,000 per annum to remit quarterly apply after Royal Assent.

6.7 The repeal of the redundant Commissioner's priority provisions of the Act does not apply to amounts that became payable under those provisions prior to Royal Assent. [Subitem 51(6)]

Background to the legislation

6.8 The ATO has been progressively updating the technology it uses in order to more efficiently undertake its task of improving compliance with Australia's income tax laws. One aspect of the updating has been the trialing of optical character recognition (OCR) equipment to assist with the capture of group employer data. This will allow the ATO to more quickly and accurately record and match that data with return form information, and so identify areas of potential non-compliance.

6.9 The use of OCR equipment requires original quality documentation to be sent to the ATO. In order to have original group certificates given to the ATO by employers, substantial recasting of the group certificate and related PAYE provisions of the Act is required.

6.10 The recasting has provided an opportunity to do a number of other amendments to the provisions to respond to other technological changes and taxpayer needs.

6.11 The opportunity has also been taken to bring the provisions of the Act relating to the application of credits up to date with more recent tax laws, as well as doing away with the need for employers to return unused group stationery to the ATO.

Explanation of the amendments

Provision of original group certificates to the ATO

6.12 The amendments change the group employer provisions so that an employer will be required to forward original group certificates to the ATO and give 2 copies to employees. This will enable the ATO to use electronic data capture equipment to capture the information contained on the group certificates, generating administrative efficiencies in this area. [Item 13 - new subsections 221F(5A), (5C), (5H) and (5J)]

6.13 In making amendments to the group employer obligations provisions, a general recasting has been necessary with renumbering and some modernising of language and general drafting style. In addition, the obligations imposed by these provisions are generally imposed on "employers" rather than group employers. Accordingly, even though an employer may not be registered as a group employer they will still be obliged to provide for their employee's tax deduction requirements. [Item 13]

6.14 Other changes made in line with this process include:

•

The new definition of "group certificate form" inserted in subsection 221A(1) [item 3] ;

•

The insertion of new subsection 221EAA(1A) in the provisions that make provision for penalty for failure to make PAYE deductions reflects modernised drafting [item 5] ;

•

New subsections 221F(5E) and (5F) are a re-expression of the existing subsection 221F(5E) and new subsection 221F(5G) a re-expression of the existing 221F(5G) [item 13] ; and

•

The amendments made to subsections 221F(7), (12), (14) and (15) are as a result of the renumbering [items 14, 16, 18 and 19] .

6.15 The provision of original group certificates to the ATO necessitates amendments to the PAYE crediting provisions. At present entitlement arises from presentation to the Commissioner of a group certificate. This is no longer appropriate given the employee will only be issued with copies of the certificate and not the original. The amendments will make the basis of entitlement to credit the fact of deductions having been made. This places the PAYE provisions on a similar footing to other more recently enacted collection systems, such as the prescribed payments system. [Item 24 - new subsection 221H(2)]

6.16 Existing subsections 221F(9) to (11) provide for a situation where the Commissioner allowed credit, on the basis of what was shown in a group certificate, in excess of the tax instalments that were actually deducted from the employee's pay. The subsections allowed the Commissioner to recover the discrepency from the employer and then the employer to recover the amount from the employee. The subsections are removed as inappropriate with the new basis of allowing credit [item 15] . Wrongly credited amounts will now be recovered from the employee who received the benefit under new subsection 221H(5) [item 24] .

6.17 The definition of "group certificate" in subsection 221A(1) is amended to remove the reference to section 221S. Section 221S allows the Commissioner to enter into arrangements with Australian based authorities of other countries for PAYE purposes in respect of any locally engaged staff. Under such an arrangement a group certificate was not necessarily issued to an employee, however, the Commissioner was obliged to apply the crediting arrangements as if one were. This is no longer appropriate because of the basis of entitlement to credit no longer being tied to the group certificate. [Items 1 and 34]

6.18 The amendmentsrepeal section 221Q that allowed the Commissioner, not having received a group certificate from an employee because their employer did not issue one, to allow credit for tax instalments deducted if he was satisfied that the deductions had been made. The provision is no longer necessary because of the new basis of allowing credit [items 33, 39 and 41] . Similarly, subsection 221F(8) permits the Commissioner, where he has released an employer from the obligation to issue a group certificate in certain circumstances, to apply the crediting provisions in respect of the relevant employee as if a group certificate had issued for the purposes of allowing credit. The provision is being amended to reflect the new basis for allowing credit [item 15] .

6.19 Where a taxpayer has excess PAYE credits upon assessment, the amendmentsallow the Commissioner to apply the excess credit to amounts owed by the taxpayer to the Commissioner, such as for child support, sales tax, fringe benefits tax and group tax, before issuing a refund. This aligns the PAYE credit application provisions with similar more recent provisions in the fringe benefits and income tax laws. [Item 24 - new subsections 221H(4) and (4A)]

6.20 The PAYE provisions contain offence provisions that deal with improperly obtaining credits for tax instalments by, for example, presenting false group certificates. These offence provisions are being amended to reflect that employees will only be presenting copies of group certificates, or tax vouchers, under the proposed changes. [Item 37 - new subparagraph 221V(f)(i)]

6.21 The group certificate, group employer obligations and crediting changes will apply from 28 days after Royal Assent. This will mean that if Royal Assent were, for example, on 15 December, then the changes apply to any employer required to complete a group certificate, or credits the Commissioner applies, after 12 January. This is so even though the deductions may have been made before 12 January. [Subitems 51(1), (3), (4) and (5)]

Removal of tax stamps

6.22 For PAYE purposes, the ATO now registers all employers as group employers irrespective of the number of employees. Compared to tax stamps, the group employer arrangements are a more efficient means of accounting for tax for employees, both for the employer and the ATO. Tax stamps have been unavailable from the ATO for employment purposes since early 1993. As the relevant provisions of the income tax law are effectively redundant, they are repealed by this Bill. [Item 21]

6.23 Because of the removal of tax stamps, subsection 221A(1) is amended to remove definitions relevant to that system. [Item 2]

6.24 In recent years, tax stamps have been sold to self employed persons seeking to make provision for their end of year tax liability under section 221K of the Act. Included in the amendments are measures to provide for a new tax voucher system to replace this use of tax stamps. [Item 27 - new section 221K]

6.25 Under the tax voucher amendments, the ATO will issue a voucher to the value of any payment made by a self-employed person in providing for their end-of-year tax liability. There will be an original and two copies of the tax voucher produced; the original for inclusion in the purchaser's income tax return [items 22 and 23] , one copy to be retained by the ATO and one copy for the purchaser's records. Credit for the value of all tax vouchers purchased by the taxpayer in a year of income will be allowed against the income tax liability assessed to the taxpayer. These changes are reflected in the recast section 221H [item 24] .

6.26 Subsection 221A(1) contains most of the definitions for the PAYE provisions. A new definition of "tax voucher" has been inserted. [Item 3]

6.27 The PAYE provisions contain offence provisions that deal with improperly obtaining credits for tax stamps. The amendments align these provisions with the new tax voucher system. [Items 36 and 37 - new subparagraph 221V(f)(ii)]

6.28 The shortfall test to determine imposition of provisional tax on salary or wages income (section 221YAB) is amended to remove reference to tax stamp credit from the definitions of 'credited amounts' and 'PAYE deductions' because of the removal of tax stamps [items 40 and 42] . As the application of tax voucher credit is provided for under section 221H, there is no change to the operation of the provisional tax shortfall test because of the change from tax stamps to tax vouchers.

6.29 The amendments made by items 4, 9, 10, 11, 25, 26, 28, 29, 30, 31, 32, 35, 38, 47, 48 and 49 are amendments to the Act that are partly or wholly consequential to the removal of tax stamps.

6.30 The tax stamp amendments will apply from 28 days after Royal Assent [subitem 51(2)] . To the extent that a tax deduction sheet was required to be kept before that time, the law as currently enacted will continue to apply.

6.31 The tax voucher amendments apply from Royal Assent. [Subitem 51(3)]

Transitional

6.32 Item 53 continues the former tax stamp crediting arrangements for tax stamps purchased before the commencement of the amendments. That is, tax stamps purchased before the commencement of the amendments will need to be surrendered in order to qualify for credit. Where they were before, tax stamps credited in accordance with this transitional provision will continue to be taken into account for provisional tax purposes.

Small remitters

6.33 The current group employer provisions require employers to remit tax instalments deducted during a month by the seventh day of the following month unless they are classified as an 'early remitter'. Early remitters are required to remit more frequently.

6.34 However, by virtue of a discretion available to the Commissioner to vary an employer's obligations, the ATO's administrative practice has been to allow small employers to remit tax instalment deductions on a quarterly basis. The quarterly remittance cycle for small employers has been in operation since 1 July 1990.

6.35 The amendments provide for:

•

an employer to become a small remitter by application. The conditions to be satisfied for an application to be accepted are that the employer:

-

has total PAYE remittances in the last full financial year less than $10,000; or

-

estimates that total PAYE remittances will be less than $10,000 for the year in which the employer wishes to become a small remitter;

•

acceptance or rejection of the application by the Commissioner with notification;

•

revocation of the small remitter status with notification. Small remitter status will be revoked where the employer does not comply with one or more of their PAYE obligations and the Commissioner considers it appropriate to revoke or the Commissioner is satisfied that the employer's PAYE remittances will be $10,000 or more; and

•

appeal rights for the employer dissatisfied with any of the decisions or notifications. [Item 8 - new sections 221EDA to 221EDC]

6.36 The benefit of being a small remitter is that small remitters pay to the Commissioner tax instalment deductions made:

•

between 1 July and 30 September - by 7 October;

•

between 1 October and 31 December - by 7 January;

•

between 1 January and 31 March - by 7 April; and

•

between 1 April and 30 June - by 7 July;

instead of normal monthly remittance. [Item 13 - new subsection 221F(5)]

6.37 New definitions, to support the small remitter legislative framework, have been inserted in subsection 221A(1). [Item 3]

6.38 The changes to provide for employers who remit less than $10,000 per annum to remit quarterly apply after Royal Assent of this Bill.

Transitional

6.39 Item 52 provides that employers who are now making quarterly remittances can continue to do so as small remitters under the new law without the need to reapply.

Removal of redundant provisions

6.40 The amendments repeal section 221P of the Act which formerly dealt with the Commissioner's priority to recover unremitted tax instalments deducted in cases of insolvency. [Item 33]

6.41 Section 221P's function has been replaced by the approach provided by the Prompt recovery - estimates and agreements provisions in Division 8 of Part IV of the Act which allow the Commissioner to serve an estimate of the unremitted group tax owed by an employer, for which the employer (director/s) become personally liable. These provisions have applied since July 1993.

6.42 The references to section 221P in the Commissioner's priority provisions in the prescribed payments (subsection 221YHJ(4)) and certain natural resource payments (subsection 221YHZD(4)) provisions are removed as a consequence of the repeal of the section. [Items 43, 44, 45 and 46]

6.43 The repeal of the Commissioner's priority provisions and omission of references does not apply to amounts that became payable under those provisions prior to Royal Assent of this Bill. [Subitem 51(6)]

Other technical changes

6.44 The tabulated amendments made by item 50 reflect drafting policy regarding provisions referring to a person of either gender. The amendments add to any references to a person in the masculine only, the feminine equivalent and have no other substantive effect.

Consequential amendments to other Acts

6.45 The Schedule also makes consequential amendments to the Bankruptcy Act 1966, Child Support (Registration and Collection) Act 1988, Crimes (Taxation Offences) Act 1980, Crown Debts (Priority) Act 1981 and Taxation (Interest on Overpayments and Early Payments) Act 1983 in line with:

•

the forwarding of original group certificates to the ATO by employers,

•

the removal of the redundant Commissioner's priority to unremitted group tax provisions, and

•

the removal of tax stamps. [Items 54 to 55, 57 to 63]

6.46 The changes to the Bankruptcy Act 1966 apply to group certificates or copies of group certificates (whichever the taxpayer was issued with) referable to contribution assessment periods that end 28 days or more after Royal Assent. [Item 56]

6.47 Amounts that became payable or creditable under these provisions before the amendments commenced remain so payable or creditable. [Item 64]

CHAPTER 7 - Superannuation guarantee charge - notional earnings base

Overview

7.1 Part 1 of Schedule 3 of the Bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA) to extend the use of pre 21 August 1991 employee earnings bases if employers restructure their superannuation funds. Currently employers can only use such a base if they contribute:

•

to the same fund; and

•

under the same law, award, arrangement or scheme;

as for an employee for whom they were contributing immediately before 21 August 1991.

7.2 The Bill allows pre 21 August 1991 earnings bases to be kept by an employer if the employer contributes under the same law, award, arrangement or scheme to:

•

a new fund under the same earnings base as the original fund if employees transfer between the funds and receive substantially the same or improved rights to benefits;

•

an existing fund in relation to an employee of a former employer who transfers to the fund from a former employer's fund because of a business acquisition, if the base was used in the former employer's fund; or

•

a former employer's fund for employees who transfer to the new employer because of a business acquisition.

Summary of the amendments

Purpose of the amendments

7.3 This measure will give effect to one of the changes announced by the Treasurer in his 28 June 1994 Statement on Superannuation Policy. The measure will ensure that the SGAA earnings base regime does not inhibit sensible and desirable restructuring of superannuation funds. Without these amendments employers would generally have to contribute under the standard earnings base of ordinary time earnings if restructuring, although an established pre 21 August 1991 earnings base could properly continue to be used without the restructure.

Date of effect

7.4 The amendments will affect the calculation of the superannuation guarantee charge on and from 1 July 1995, where qualifying restructures occur on or after 3.55pm ACT legal time on 28 June 1994 (the time the Treasurer announced the measure in Parliament). Therefore employers reorganising funds after the announcement need not lose an existing employee earnings base for contributions made for contribution periods on or after 1 July 1995. [Item 10]

7.5 Employers that restructured after the Treasurer's Statement but before 1 July 1995 will have changed to the ordinary time earnings base from the time of the restructure. On 1 July 1995 these employers will be able to revert to the pre 21 August 1991 earnings base to which they had previously contributed.

7.6 The measure only affects an employer's contributions from 1 July 1995 so that contributions already made by employers during the 1994-95 year and contributions due for that year will not be reduced.

Background to the legislation

Purpose of notional earnings bases

7.7 The minimum level of superannuation support required by employers under the SGAA is worked out as a percentage (the charge percentage) of the employee's notional earnings base (NEB) for a contribution period.

How are earnings bases currently worked out?

7.8 An employee's NEB under the SGAA is generally the higher of:

•

ordinary time earnings (OTE) (section 14); or

•

the measure of earnings of the employee used in an award, law, occupational superannuation arrangement or superannuation scheme under which the employer's superannuation obligation is determined (section 13 or 14).

However, employers who were using a lower measure under an existing obligation immediately before 21 August 1991, when the SGAA regime was announced, may be able to continue to use that base under section 13. This helps to avoid the administrative costs of changes to established arrangements.

Section 13

7.9 An employee's NEB is currently determined under section 13 of the SGAA if:

•

the employer was contributing to a superannuation fund for the benefit of an employee, perhaps another employee, immediately before 21 August 1991 (pre-21 August earnings base) under an arrangement, award, law or scheme;

•

the employer contributes under the same scheme for the current employee for whom the NEB is being determined; and

•

the contributions are made to the same fund as for the pre 21 August 1991 employee.

7.10 An employee's NEB under section 13 is, in general, the earnings of the employee by reference to which contributions are calculated under the award, arrangement, law or scheme.

7.11 An employer can only continue with a base less than OTE if that base was in use immediately before 21 August 1991. So a base by reference to which the employer ceased to calculate contributions before 21 August 1991 can not be resumed later.

Section 14

7.12 An employee's NEB is determined under section 14 of the SGAA if an employer first contributed to a fund after 20 August 1991. Generally the NEB in these circumstances is OTE. However, if the employer is contributing to a fund under an award, arrangement, law or scheme, the employee's NEB is:

•

if the earnings base is equal to or greater than OTE - the earnings of the member on which the employer's superannuation contributions for the member are based; or

•

if the earnings base is less than OTE and is specified by the law (operative immediately before 21 August 1991) or under the industrial award under which the employer contributes - the earnings base on which the contributions are based.

Why are the amendments necessary?

7.13 Employers can now keep using the earnings base they were using immediately before 21 August 1991. They can use it for new employees, if those employees become members of the same fund and are contributed for according to the same earnings base. Employers keep the same earnings measure even if the employees who were members immediately before 21 August 1991 are no longer employed, or are no longer fund members.

7.14 However, if the employer is different or the fund is different, the former earnings measure can't continue to be used. The employer must apply section 14, to continuing employees and to new employees, and so must change the superannuation arrangements that apply.

7.15 In some circumstances this can inhibit sensible restructuring of superannuation arrangements. For instance, an employer might wish to consolidate existing superannuation funds, or move all employees to a new fund with standardised administration arrangements - these changes might significantly reduce costs of administration of the funds. Yet any such change would result in an increase of the earnings base by which the employer's contributions are assessed, for existing employees to whom the base applied, and for new employees to whom the former base would have applied had the employer made no change.

7.16 Another example is found when a business is sold. Currently the employees who transfer to the new employer may be the subject of contributions based on an established earnings base; the new employer must change to a new base for those employees, even if they are employed in the same business and on the same terms as before. Keeping their existing superannuation arrangements could significantly reduce costs of administering the change of employers. Of course, the new employer has no basis for applying the old base to new employees - any new employees of that employer would not have had their employer contributions calculated by reference to the old base. Any change to the law should avoid discouraging the sale of businesses - but no change should provide for the sale of earnings bases that the new employer could not otherwise have used for new employees.

7.17 The amendments are necessary to ensure that the cost of changes to an established earnings base need not inhibit restructuring of superannuation funds, and need not restrict the sale of a business. Where an established earnings base is maintained, employees will not go to the higher earnings base under section 14; but their earnings base will be no worse than before, and the restructure of superannuation arrangements may well reduce administrative costs of the fund, with consequent benefits for employees as well as employers.

7.18 The amendments enable the relationship between an employer and/or the superannuation fund to be broken upon a restructure, but still allow an established earnings base to continue to be used, if particular conditions are met. Without the amendments employers contributing to restructured funds would need to contribute under a section 14 NEB.

7.19 Restructures which would provide administrative savings should not be prevented by the need to change an established earnings base. However, the amendments only apply if there is such continuity in using an established earnings base that administrative convenience outweighs the general move to OTE as a standard minimum base for contributions. So, if the employer changes, the established NEB must have been used by a predecessor employer of the employee; and if the base wasn't used in the same fund, it must have been used in a predecessor fund for the employer who used it.

Explanation of the amendments

Desirable restructures

7.20 Some of the types of restructures that the amendments will apply to include situations in which:

•

an employer amalgamates existing superannuation funds that the employer contributes to or transfers members to a new fund such as a master trust to obtain administrative cost savings compared to the existing structure;

•

an employer acquires another business with an existing fund and seeks to close the acquired fund and transfer the members to the employer's fund in order to achieve lower administrative costs by having only one remaining fund; or

•

an employer acquires another business with an existing fund and because of the unique benefit design of the fund seeks to keep that fund open rather than incurring the cost of redefining benefit scales for the members of that fund.

7.21 An employer who seeks to acquire a lower earnings base should not benefit from these measures. An employer who rationalises existing superannuation arrangements should not be disadvantaged by losing an established earnings base. An employer to whom employees transfer when the business in which they work is acquired should not have to change their established earnings base. But an employer without such links to an established earnings base should not be able to acquire the use of that base. Otherwise the general rule in section 14 could be avoided, without cause.

How the provision applies

7.22 Existing subsection 13(1) is replaced by new subsections 13(1) and (1A) [item 1] . These provisions build on the previous rule, that applied if the employer had contributed to the same fund, under the same earnings base, under the same award, arrangement, law or scheme for any employee immediately before 21 August 1991. New subsection 13(1B) provides a diagram of the simplest case in which new subsection 13(1) applies.

7.23 New subsection 13(1) establishes if an employer of an employee (the current employee ) is entitled to have a NEB determined under section 13.

7.24 For new subsection 13(1) to apply the following must exist:

•

the current employee must be a member of a superannuation fund ( current fund ie. the fund that contributions under the NEB will be made to);

•

the employee's employer ( current employer ) must contribute to the current fund for the current employee for a contribution period;

•

the contributions must be made under an applicable authority; and

•

new subsection 13(1A) applies.

7.25 The new subsection 13(1A) rule asks whether the current employer, or a predecessor employer of that employee, was contributing under the same earnings base and the same award, arrangement, law or scheme immediately before 21 August 1991. The employer who was contributing in this way may have done so to the same fund, or to a predecessor fund in relation to that employer.

7.26 Subsection 13(5) is amended to include a definition of applicable authority as:

•

an industrial award;

•

a law of the Commonwealth, a State or a Territory;

•

an occupational superannuation arrangement; or

•

an applicable superannuation scheme.

7.27 Employers may contribute to superannuation funds for the benefit of employees according to one or more of these authorities. However they can only use an existing earnings base if the authority under which the base was established immediately before 21 August 1991 is still the authority under which they contribute.

7.28 New subsection 13(1A) applies if the current employer or a predecessor employer (refer paragraphs 7.59 to 7.69) of the current employee was contributing under an applicable authority immediately before 21 August 1991 to:

•

the current fund; or

•

a predecessor fund (refer paragraphs 7.35 to 7.40) of the employer who was contributing immediately before 21 August 1991;

according to the same applicable authority, for the current employee or for another employee.

7.29 New subsection 13(1A) applies by reference to conditions satisfied by:

•

the current employer; or

•

the predecessor employer of the current employee;

in relation to:

•

the current employee; or

•

an employee other than the current employee.

7.30 These conditions may be satisfied in the same fund (the current fund), or in a predecessor fund.

7.31 The employer who was contributing immediately before 21 August 1991 according to the established NEB may be a predecessor employer. If that established earnings base is to be used by the current employer, the other employer must be a predecessor employer at the time the established NEB is to be used, not just some earlier or later time.

7.32 The fund to which an employer was contributing immediately before 21 August 1991 according to the established NEB may be a predecessor fund of that employer. If that established earnings base is to be used by the current employer, the fund must be a predecessor fund at the time the established NEB is to be used by the current employer, not just some earlier or later time.

7.33 A fund that has become a predecessor fund of another fund does not stop being a predecessor fund just because it ceases to exist. So, for instance, if the benefits of all employees in a fund are transferred to another fund so as to make the original fund a predecessor fund of the other fund, the original fund could be wound up without changing its status. In the same way, a predecessor employer does not stop being so just because it ceases to exist.

7.34 The term 'was contributing' refers to situations in which an employer:

•

contributed in respect of a contribution period for an employee in a fund; or

•

had a liability to contribute for a contribution period, even if no contribution was made and so the superannuation guarantee charge became payable.

What is a predecessor fund?

7.35 New subsections 13(4D) & (4E) & (4F) define a predecessor fund [item 4] . The meaning of the term is similar to the definition of a successor fund in the Superannuation Industry (Supervision) Regulations. A successor fund is defined by regulation under subsection 31(1) of the Superannuation Industry (Supervision) Act 1993 in subregulation1.03(1) of the SISR.

7.36 Under subregulation 6.29 of the SISR a member's benefit can not be transferred from a fund without the member's consent unless the transfer is to a successor fund. The transfer of member benefits from a fund to a successor fund must meet the following conditions (subregulation 1.03(1)):

•

after the transfer the successor fund confers on the member equivalent rights to the rights that the member had under the original fund concerning the benefits; and

•

before the transfer, the trustee of the fund had agreed with the trustee of the original fund that the fund would confer on the member equivalent rights.

7.37 Under section 13, an employer can use an earnings base established by them in relation to one employee for other employees covered by the same applicable authority. So new subsection 13(4E) applies the test for a successor fund in relation to the employer, not each individual employee.

7.38 New subsection 13(4D) provides that, where new subsection 13(4E) or (4F) apply, then a fund (the test fund ) is a predecessor fund of another fund ( primary fund ) in relation to an employer if the test fund is a predecessor fund of the primary fund in relation to an employer (current or predecessor employer) at a particular time ( test time ).

7.39 New subsection 13(4E) enables a connection between two funds to qualify a fund as a predecessor fund of the other if, some time on or after 3.55pm legal time in the ACT on 28 June 1994 and before the connection needs to be found:

•

at least part of one or more members' benefits of an employee of the employer are transferred by the test fund to the primary fund;

•

the primary fund provides substantially the same or improved rights to benefits to the test fund for all employees who have had benefits transferred in this way;

•

the trustees of each fund agree in writing before the transfer that such rights to benefits will be provided.

7.40 Therefore a primary fund that does not provide substantially the same or improved rights to benefits for each employee, immediately after that employee's benefits are transferred to it, will not meet the test, and the previous fund will not be a predecessor fund. Rights to benefits must be of the same value overall to be substantially the same, but there could be some respects in which rights to benefits are reduced, if these are balanced or outweighed by other rights to benefits which are increased.

What is the effect of having a predecessor fund relationship?

7.41 If the predecessor fund relationship exists an employer can use a section 13 NEB from the predecessor fund in calculating contributions for members of the primary fund. The employer can make contributions under that NEB in the primary fund for contribution periods (or part periods) while the former fund is a predecessor fund. Such contributions can be made for:

•

members with benefits transferred from the predecessor fund, employed by the employer;

•

new members of the primary fund who join later, employed by the employer.

7.42 This treatment extends to all those employees for whom contributions are made under the same applicable authority - the same award, arrangement, law or scheme. A diagram illustrating the operation of a typical successor fund transfer is contained in new subsection 13(1C) .

Example 1

7.43 In this example fund X becomes a predecessor fund to fund Y in relation to employer A when member B transfers to fund Y and satisfies the conditions in new subsection 13(4E) .

7.44 New subsection 13(4F) enables every fund in a chain of funds to have a predecessor fund relationship if the test in new subsection 13(4E) is met successively for each pair of funds in the chain (commencing from the pair in the chain directly linked to the original fund in the chain with the section 13 NEB).

7.45 Under new subsection 13(4F) the number of funds in the chain can be unlimited. It is not necessary that the same member transfer through each fund in a chain for the first fund in the chain to be a predecessor fund of the last fund in the chain. The simplest situation in which new subsection 13(4F) applies is shown in a diagram in new subsection 13(4G) .

7.46 A later pair of funds in a chain of funds may first gain a predecessor fund (PF) relationship before an earlier pair in the chain. The chain of funds can still satisfy new subsection 13(4F) , if the later pair has a member transfer between them after the earlier pair's PF relationship was created, resulting in new subsection 13(4E) continuing to be satisfied. In that case, the funds have gained a predecessor fund relationship by a transfer of member benefits after the previous predecessor fund relationship was in place, even though there had already been a benefit transfer.

7.47 The end of an earlier fund in a chain of funds does not extinguish the predecessor fund relationship. Accordingly a predecessor fund relationship may continue even if all earlier funds in the chain have been terminated.

Example 2

7.48 Fund A (section 13 NEB) becomes a predecessor fund to fund B (section 14 NEB) in relation to employer X when employee G transfers to fund B as new subsection 13(4E) is satisfied. A member of fund B, employee H transfers to fund C (section 14 NEB).

7.49 The effect of new subsection 13(4F) is that fund A becomes a predecessor fund of fund C in relation to employer X if new subsection 13(4E) applies to the transfers by G and H. Employer X may contribute to all fund C's future members from 1 July 1995 on a NEB under section 13 (if all other conditions are met).

7.50 Employer X may also contribute to all members transferred from funds A and B to fund C on a section 13 NEB, if new subsections 13(4E) and (4F) apply to all transfers. Members of funds B and C, for whom contributions were already made under a section 14 base cannot have that base reduced. Subsection 14(3) ensures that these members will continue to have a section 14 NEB.

7.51 Had G transferred to fund B before 3.55pm on 28 June 1994, the time of the Treasurer's announcement, then the transfer would not have resulted in fund A becoming a predecessor fund of fund C.

What happens if a transfer of a member fails to bring a predecessor fund relationship into existence?

7.52 If a transfer of a member's benefits is on such terms that the original fund is not, or is no longer, a predecessor fund then:

•

from the time failure of the test occurs, the employer irrevocably loses for the primary fund, for contribution periods (or part periods) on or after that time, the ability to contribute for members of the fund under a NEB under section 13.

7.53 This will happen if the rights of any member in respect of their transferred benefits are neither substantially the same as nor better than before, immediately after the transfer.

7.54 In theory, an original (test) fund could also fail to be a predecessor only because no written agreement about rights to transferred benefits preceded the transfer. In practice, this is unlikely, as the requirement for written agreement of the trustees is drawn from the definition of a successor fund in the Superannuation Supervision (Supervision) Regulations (Reg 1.03(1)).

Example 3

7.55 Employer X contributes to fund A which has a section 13 NEB for all its members. X establishes a new fund B on 1 July 1996 and transfers a member of fund A, employee C to fund B on this date. The requirements of new subsection 13(4E) are met in respect of the transfer. Therefore for contribution periods on or after 1 July 1996, X can contribute to fund B for employee C and any new member of fund B, or members that transfer from fund A, according to section 13.

7.56 On 1 July 1997 all employee D's member benefits are transferred from fund A to fund B. D receives reduced rights in respect of these benefits in fund B compared to fund A. Accordingly new subsection 13(4E) is not satisfied in respect of this transfer. Therefore employer X must contribute for all members of fund B (including C) for all contribution periods on or after 1 July 1997 under a NEB under section 14.

7.57 There is no limit on the number of funds that can be a predecessor fund to a fund. [New subsection 13 (4D) & (4E) & (4F)]

Example 4

7.58 Employer A contributed to fund B for its employees under an established section 13 NEB. Members of the fund can transfer to new funds C, D, and E that A contributes to and the existing earnings base will apply to each new fund provided B is a predecessor fund of the new fund.

What is a predecessor employer?

7.59 New subsections 13(4A), (4B) and (4C) define a predecessor employer [item 4] . An employer must be a predecessor employer of the current employee.

7.60 The definition of a predecessor employer is relevant if an employer/fund relationship ceases because of a change of employer rather than a change of fund. In these circumstances, the former employer's earnings base can only be used by the current employer for certain employees, if the former employer is a predecessor employer of the current employer.

7.61 New subsection 13(4A) provides that if new subsections 13(4B) or (4C) apply then an employer (the test employer) is a predecessor employer of another employer (the primary employer) at a particular time (the test time). Whether an employer is a predecessor employer of a particular employee has to be determined at a particular time in applying subsection 13(1A), which determines whether an employer can use an established NEB or must go to the higher base provided under section 14 in making contributions for a period.

7.62 New subsection 13(4B) qualifies an employer as a predecessor employer of another employer's employee if, some time after 3.55pm legal time in the ACT on 28 June 1994 (the time the Treasurer announced these measures), and before the connection needs to be found:

•

the test employer transferred a business or undertaking, or an asset of a business or undertaking, to the primary employer for market value consideration;

•

the employee was employed in that business or undertaking immediately before the transfer; and

•

immediately after the transfer, the employee was employed by the primary employer at least principally in the transferred business or undertaking, or at least principally in using the asset transferred in the undertaking of the new employer.

7.63 In other words, the business or an asset of the business of a predecessor employer must be transferred for market value consideration, and an employee must be transferred because of the transfer of the business or asset. If a business or business asset is transferred at other than market value, the first employer is not a predecessor employer of an employee who is transferred. The two employers may be related, but must give and receive full market value. If an employee who is transferred to a new employer is not transferred because a business or business asset is transferred, the first employer is not a predecessor employer of the employee. In both of those cases, the loss of an established NEB under section 13 would not be a fetter on the sale of the asset or the business; and so there is no benefit for sensible commercial restructures or business acquisitions from preserving the former application of section 13.

7.64 New subsection 13(4C) enables the first employer in a chain of employers to be a predecessor employer in relation to the last employer's employee, provided each employer in the chain is the predecessor of the next according to the test in new subsection 13(4B) . The number of employers in the chain is not limited. But the same employee must transfer between each of the employers in the chain, though the business or business asset transferred might be different (example 6 illustrates this; refer paragraph 7.74).

7.65 A predecessor employer of a particular employee of a current employer is a predecessor employer from the time the test is first met. Even if the employer ceases to exist - for example, is a company that is later wound up - it is still a predecessor employer and can still be a link in the chain of predecessor employers.

7.66 If a predecessor employer (PE) relationship exists the primary employer can only contribute under section 13 for the employee that transferred from the test employer that resulted in the PE relationship being created. This ensures that employers can not acquire a business with a section 13 NEB with the purpose of transferring that base to their existing business structure.

7.67 This is unlike the predecessor fund relationship, which allows the original employer to contribute to the primary fund for any employee in the fund under a section 13 NEB, other than an employee in the primary fund prior to the fund first becoming a predecessor fund.

7.68 The more restrictive use of a section 13 NEB upon the creation of a PE relationship compared to that applying if a predecessor fund relationship is created is achieved by the operation of new subsection 13(1A) . [Item 1]

7.69 The subsection only allows a current employer to contribute under a section 13 NEB held by a predecessor employer, if the PE relationship was created in relation to the current employee. No other employee will meet this test. A predecessor fund relationship, however, does not have to exist for a current employee; it can exist for any employee of the employer.

Example 5

7.70 Employer A contributes to fund B under a NEB under section 14. A takes over employer C's business. C was contributing to fund D for its employees under a section 13 NEB. A decides to transfer C's former employees to its fund B. This would allow fund D to be closed. A is entitled to contribute to C's former employees in B under a section 13 NEB. However no existing or new employees in fund B (or any fund to which B is a predecessor fund) are entitled to have contributions made under that section 13 NEB.

7.71 Therefore once all former employees of C leave fund B, the fund will not have any members subject to a section 13 NEB.

7.72 Like predecessor funds, a chain of predecessor employers can exist with the first (test) employer being a predecessor employer to the last (primary) employer in the chain.

7.73 It is not necessary for predecessor funds to have the same employee transfer through each fund in the chain. However for a predecessor relationship to exist for a chain of employers under new subsection 13(4C) the same employee must be employed consecutively by each employer in the chain.

Example 6

7.74 Employer A becomes a predecessor employer to employer B (section 14 NEB) when employer B acquires A's business on 1 August 1994 and employee G transfers to employer B. On 1 July 1995 if employer C acquires B's business and employee G transfers to employer C, new subsection 13(4B) applies to make employer B a predecessor employer of employer C [item 4] . New subsection 14(4C) then applies so that employer A becomes a predecessor employer of employer C.

Interaction of predecessor employers and predecessor funds

7.75 New subsection 13(1A) enables an employer to contribute under a section 13 NEB for an employee of a predecessor employer in the employer's existing fund, if the predecessor employer made contributions in a predecessor fund to the employee under the section 13 NEB.

Example 7

7.76 Employer A contributes to fund C for its employees under a section 14 NEB. A acquires the business owned by employer B. Employer B has been contributing to fund D for its employees with a NEB under section 13. Employer A becomes the employer of employer B's former employees and transfers all the members of fund D to fund C.

7.77 Currently employer A would not be entitled to contribute to fund C for employer B's former employees using a NEB under section 13. New subsection 13(1A) will allow employer A to use this base for B's former employees if the predecessor fund and predecessor employer tests are met.

7.78 It is not necessary that all members of fund D transfer to C for the measure to apply.

Will a NEB under section 13 be kept if an employer restructures more than once?

7.79 There is no limit on the number of times funds can restructure and have the measure apply; that is:

•

an employee transferring from a predecessor fund to another fund which is a predecessor fund of a later fund;

•

an employee changing from one employer (predecessor employer) to a second employer who is a predecessor employer in relation to a third employer;

•

an employee changing funds several times and to new employers who meet the predecessor employer test; and

•

a combination of the above.

Record keeping

7.80 Section 79 of the SGAA provides that an employer must keep records for the purposes of the Act. Employers will need to keep records to show that new subsection 13(1) applies.

Consequential amendments

7.81 New subsection 13(5) is introduced to provide a single definition for the types of authorities under which an employer may contribute in a fund for the purposes of section 13 [item 6] . This is designed to improve the readability and clarity of section 13.

7.82 Paragraph (a) of the definition of reference earnings in subsection 13(2), subsections 13(2) and (4) and subsection 13(5) are amended as a result of the addition of new subsection 13(1) . [Items 2, 3 & 5]

7.83 New subsection 14(1A) is necessary because of the amendment of paragraph 14(1A), (ab) and (b) [item 9] . It provides that if either section 13 or section 13A apply, then section 14 does not apply.

7.84 Subsection 14(1) is amendedbecause of the addition of new subsection 14(1A). [Item 7]

7.85 Paragraphs 14(1)(a), (ab) and (b) are amended to remove the reference to contributing to an employee prior to 21 August 1991 [item 8] . The paragraphs currently contain this reference to ensure that section 14 does not apply if section 13 would apply. The same effect is achieved by new subsection 14(1A). The amendments are designed to improved the clarity of section 14.

CHAPTER 8 - Superannuation guarantee charge - excess benefits

Overview

8.1 Part 2 of Schedule 3 of the Bill will exempt employers from the superannuation guarantee charge in respect of an employee who makes an election because his or her accumulated superannuation entitlements exceed the pension reasonable benefit limit (RBL). Taxpayers who make this election will not be entitled to deductions for personal superannuation contributions.

Summary of the amendments

Purpose of the amendments

8.2 There is no policy rationale for forcing a person to accumulate superannuation benefits in excess of the RBL. However, the present superannuation guarantee system can have that effect. Therefore, the amendments will allow employees who can demonstrate that they have excess superannuation benefits to elect not to receive superannuation support from their employers.

8.3 If an employee makes such an election because he or she has accumulated superannuation benefits in excess of the RBL, there is no justification for allowing an income tax deduction to the employee for personal superannuation contributions.

Date of effect

8.4 The amendments apply from the next quarter commencing after the date of Royal Assent. Under superannuation guarantee legislation, quarters commence on 1 July, 1 October, 1 January and 1 April. [Items 14 and 16]

Background to the legislation

8.5 Employers who fail to make sufficient superannuation contributions for their employees are subject to a superannuation guarantee charge equal to the amount of the shortfall. The employer's shortfall for a year is the sum of quarterly shortfalls in respect of individual employees, as well as an interest and administration component.

8.6 A person who receives superannuation benefits in excess of the RBL is not entitled to concessional tax treatment on those benefits, which are taxed instead at the top marginal rate. There are two RBLs - a lump sum RBL for benefits taken in a lump sum and a pension RBL for amounts taken as a complying pension. The pension RBL (which is the higher figure) is currently $800 000 but is adjusted annually in line with movements in full-time adult average weekly ordinary time earnings and will rise to $836 000 for the year 1 July 1995 to 30 June 1996. The RBL provisions are contained in Division 14 of Part III of the Income Tax Assessment Act 1936 (ITAA).

8.7 Section 82AAT of the ITAA allows taxpayers who do not receive superannuation support from their employers to claim deductions for personal superannuation contributions.

Explanation of the amendments

Amendments to the Superannuation Guarantee (Administration) Act 1992

8.8 The first part of these amendments will affect the Superannuation Guarantee (Administration) Act 1992 (SGAA).

8.9 Section 19 of the SGAA provides for the calculation of quarterly shortfalls. The usual method of calculation in respect of an employee will not apply if the employee has given the employer an election removing the employer's liability to superannuation guarantee charge because the employee has accumulated excess superannuation benefits. [Item 12 - amended subsection 19(2)]

8.10 If an employee has made an election during the quarter, the quarterly shortfall for that employee for that quarter, and all subsequent quarters, will be nil. If the quarterly shortfall for an employee is nil, there is no liability to superannuation guarantee charge in respect of that employee. [Item 13 - new subsection 19(4)]

How does an employee make an election?

8.11 The election will be a statement in writing given by an employee to an employer, electing that the employer will not be liable to superannuation guarantee charge for that employee. Once the election is made it will be irrevocable. [Item 13 - new subsections 19(4) and (5)]

8.12 The election must be accompanied by supporting statements in writing showing that, at the test time, the total of the following amounts exceeds the ordinary pension RBL:

•

the sum of adjusted RBL amounts of previous benefits , as calculated under section 140ZA of the ITAA. Broadly, these are superannuation benefits (including superannuation pensions) which the employee has previously received that have been counted for RBL purposes; and

•

the employee's entitlement amounts . Broadly, the entitlement amounts are the sum of the employee's vested superannuation benefits that are counted for RBL purposes.

8.13 An employee will be able to elect out of Superannuation Guarantee if, at the test time, the sum of these amounts exceeds the ordinary pension RBL specified in section 140ZD of the ITAA. The fact that the employee may have a higher transitional RBL does not change this situation.

8.14 The test time is the time at which the employee wants the entitlement amount to be calculated.

8.15 The election and supporting statements can be in any format, providing they contain sufficient information and are in writing. There will be two kinds of supporting statements. As evidence of the amount of benefits previously received, the employee will be required to obtain a statement from the Commissioner of Taxation. As evidence of the employee's entitlement amounts, the employee will be required to obtain statements from the trustee or manager of each body in which a benefit is held. [Item 13 - new subsections 19(6) and 19(7)]

What are the employee's entitlement amounts?

8.16 The entitlement amount in relation to a particular benefit depends upon the source and nature of the benefit. For each source of benefit, the entitlement amount will be equal to the resignation RBL amount or the sum of two resignation RBL amounts . The resignation RBL amount is only that part of the superannuation entitlement that is counted for RBL purposes. Therefore, it does not include, for example, undeducted contributions or concessional component.

Benefits in a complying approved deposit fund (ADF)

8.17 If the employee has benefits in a complying ADF, the benefits will be solely a present or future entitlement to a lump sum. The resignation RBL amount will be the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time. [Item 11 - new subsection 15A(2); definition of resignation RBL amount in new subsection 15A(6)]

Benefits in a deferred annuity

8.18 If the employee has benefits in a life insurance company or registered organisation in the form of a deferred annuity, the resignation RBL amount will be the RBL amount, worked out under section 140ZI of the ITAA, of the ETP that would be payable if the employee commuted the entitlement at the test time. [Item 11 - new subsection 15A(3); definition of resignation RBL amount in new subsection 15A(6)]

Benefits in a complying superannuation fund

8.19 If the employee has benefits in a complying superannuation fund, the benefits may be in the form of a present or future entitlement to a lump sum, an entitlement to a pension that has not become payable or a combination of lump sum and pension. In addition, the employee may be able to choose whether to take the benefit as a lump sum or a pension, or as a combination of lump sum and pension.

8.20 If the employee can elect the amount of benefit which is taken as a lump sum and the amount which is taken as a pension, the resignation RBL amount is the greatest of:

•

the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and elected to take the whole of the benefit as a lump sum;

•

the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time and elected to take the whole of the benefit as a pension; and

•

the sum of the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and elected to take part of the benefit as a lump sum and the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time and elected to take part of the benefit as a pension.

8.21 If the benefit in the superannuation fund is solely a present or future entitlement to a lump sum, the resignation RBL amount will be the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time.

8.22 If the benefit in the superannuation fund is solely an entitlement to a pension that has not become payable, the resignation RBL amount will be the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time.

8.23 If the benefit in the superannuation fund is a fixed combination of a present or future entitlement to a lump sum and of a pension that has not become payable, the resignation RBL amount will be the sum of the RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if the employee resigned at the test time and the RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if the employee resigned at the test time.

[Item 11 - new subsections 15A(4) and (5); definition of resignation RBL amount in new subsection 15A(6)]

Amendments to the ITAA

8.24 The second part of these amendments will affect section 82AAT of the ITAA.

8.25 A person who has made an election that his or her employer should not be liable to superannuation guarantee charge on behalf of the employee will not be entitled to deductions for personal superannuation contributions. [Item 15 - new subsection 82AAT(1F)]

8.26 Deductions will not be allowed for contributions made during the quarter in which the election was made, or for any later quarter. A quarter for these purposes is a period of three months, beginning on 1 July, 1 October, 1 January and 1 April. [Items 15 and 16]

Example

8.27 Elizabeth works for Jasper Enterprises. Elizabeth has a considerable amount of vested superannuation benefits and decides she does not want to have any additional superannuation contributions made on her behalf.

8.28 Elizabeth has the following accumulated superannuation benefits:

•

$120 000 in the Access ADF (including $40 000 undeducted contributions);

•

$150 000 in a lump sum personal superannuation fund (including $30 000 undeducted contributions); and

•

accumulated benefits in the Jasper Superannuation Fund which can be taken at Elizabeth's option as a lump sum or a pension (or any combination of lump sum and pension). The RBL amount, worked out under section 140ZH of the ITAA, of the ETP that would be payable if Elizabeth resigned and elected to take a lump sum is $500 000. The RBL amount, worked out under section 140ZK of the ITAA, of the pension that would be payable if Elizabeth resigned and elected to take a pension is $650 000. The RBL amount of any mixture of lump sum and pension is between these two amounts.

8.29 Therefore, Elizabeth's entitlement amounts are as follows:

•

$80 000 in Access ADF;

•

$120 000 in Elizabeth's personal superannuation fund; and

•

$650 000 in the Jasper Superannuation Fund.

8.30 In addition, Elizabeth previously received superannuation benefits which were counted for RBL purposes. The sum of adjusted RBL amounts of those previous benefits worked out under section 140ZA of the ITAA is $90 000.

8.31 Elizabeth obtains statements from the trustees of the superannuation funds and the ADF providing evidence of her superannuation entitlements. She also obtains a statement from the Commissioner of Taxation in relation to the benefits she has previously received that were counted for RBL purposes.

8.32 As the sum of these amounts ($940 000) exceeds the ordinary pension RBL of $836 000 for the 1995-96 year, Elizabeth decides to give an election (together with the accompanying statements) to Jasper Enterprises in February 1996 to remove Jasper's responsibility to make additional superannuation contributions on Elizabeth's behalf.

8.33 As a consequence Jasper is not liable for the superannuation guarantee charge contributions in respect of Elizabeth for the January 1996 and later quarters. In addition, Elizabeth is not entitled to a deduction for any personal superannuation contributions made on or after 1 January 1996.

CHAPTER 9 - Miscellaneous provisions

Depreciation on trading ships

9.1 This amendment extends the operation of the special provision relating to the depreciation of trading shipping from 1 July 1997 to 30 June 2002. [Item 44 of Schedule 1]

9.2 This amendment will be effective from the date of Royal Assent.

Amendment of the Taxation Laws Amendment (Drought Relief Measures) Act 1995

9.3 This amendment corrects an error in subsection 170(10) by inserting Part XII after subsection 221YRA(2). [Items 1 and 2 of Schedule 4]

9.4 This amendment is effective from the moment immediately after the commencement of the Taxation Laws Amendment (Drought Relief Measures) Act 1995. [Subclause 2(2)]

Index Table