House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

GENERAL OUTLINE

Income Tax Assessment Act 1936

The Bill will amend the Income Tax Assessment Act 1936 -

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to authorise the making of regulations -

•.

to increase and target more effectively the rebate of tax (the pensioner rebate) allowable to recipients of social security pensions, benefits and allowances (other than unemployment, sickness or special benefits) or service pensions (proposal announced in the April 1989 Economic Statement); and

•.

to increase where necessary and to target more effectively on the basis of age levels the rebate of tax (the beneficiary rebate) allowable to recipients of social security unemployment, sickness or special benefits, the Job Search Allowance, the Formal Training Allowance or allowances payable under certain Commonwealth education schemes (proposal announced in the Budget on 15 August 1989);

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to make the following changes to the Medicare levy provisions (proposal announced in the Budget on 15 August 1989) -

•.

to exempt from Medicare levy a person otherwise personally exempt, but presently required to pay one-half of the levy because he or she has a dependant, where either -

(a)

the dependant is liable to pay the levy; or

(b)

the person has a spouse who is liable to pay the levy and the spouse contributes to the maintenance of the dependant; and

•.

to allow a married (or defacto) couple who are both otherwise personally exempt from Medicare levy, but are presently required to pay one-half of the levy because they have a dependant, to agree as to which of them is to be exempt from paying Medicare levy;

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to allow losses, including film losses and foreign source losses, incurred by a taxpayer during the 1989-90 and subsequent years of income to be tax deductible over an unrestricted period. At present these losses are allowable deductions for seven years only (proposal announced in the Budget on 15 August 1989);

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to provide that certain eligible capital expenditures incurred by a taxpayer on or after 16 August 1989, engaged in quarrying operations is deductible on a similar basis as for taxpayers engaged in mining operations, except that the statutory maximum write off period is to be 20 years and capital expenditure on housing and welfare facilities is to be excluded from deductibility (proposal announced in the Budget on 15 August 1989);

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to provide income tax exemption for not-for-profit bodies established for -

•.

the promotion or encouragement of any game or sport; or

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community service purposes (proposals announced in the Budget on 15 August 1989);

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to repeal the exemption from income tax of the Australian Wool Testing Authority Ltd for income derived on or after 1 July 1990 (proposal announced in the Budget on 15 August 1989);

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to provide that companies will incur franking debits in respect of dividends paid under dividend streaming arrangements after 30 June 1990 where -

•.

an unfranked or partly franked dividend is paid in substitution for a franked dividend;

•.

tax-exempt bonus shares are issued in substitution for a franked dividend;

•.

a dividend is paid by another company in substitution for a franked dividend; and

•.

franked dividends are paid in substitution for unfranked dividends paid by another company (proposal announced in the Budget on 15 August 1989);

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to ensure that eligible securities lending arrangements will be treated as though lenders had not sold and repurchased securities, with the treatment of borrowers also being adjusted (proposal announced in the Budget on 15 August 1989);

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to enable profits from the disposal of contaminated live stock to be brought to account over five years or applied to reduce deductions for the cost of replacement stock (proposal announced on 1 September 1989);

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to remove a requirement under the film industry tax concession that certain funds be deposited in a film account in the Australian Film Industry Trust Fund;

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to make minor amendments to the tax file number provisions;

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to allow income tax deductions for gifts to -

•.

The Borneo Memorials Trust Fund (proposal announced on 5 December 1989);

•.

the Guadalcanal and Solomon Islands War Memorial Foundation (proposal announced on 5 December 1989);

•.

Australian Vietnam Forces Welcome Home '87 Pty Limited, where the gift is for the purpose of the Australian Vietnam Forces National Memorial project (proposal announced on 5 December 1989); and

•.

the Life Education Centre or a non-profit company that conducts life education programs under the auspices of the Life Education Centre (proposal announced on 6 December 1989).

Debits Tax Administration Act 1982

The Bill will amend the Debits Tax Administration Act 1982 to exempt from debits tax amounts deducted under the tax file number arrangements where interest is paid or credited to an account in respect of which a file number has not been quoted.

Sales Tax (Exemptions and Classifications) Act 1935

The Bill will also amend the Sales Tax (Exemptions and Classifications) Act 1935 to exempt from sales tax imported uncut precious and semi-precious gemstones and imported coins that are legal tender in a country other than Australia (proposal announced on 18 October 1989).

FINANCIAL IMPACT

The estimated cost of increasing the pensioner rebate of tax is $50 million in 1989-90 and $150 million in 1990-91.

The estimated gain to revenue from the changes to the beneficiary rebates of tax is $12 million in 1990-91.

The revenue cost of allowing concessions to prescribed persons in respect of their half Medicare levy liability is estimated to be $2 million in 1989-90 and $4 million in a full year.

The provision of an unrestricted carry-forward period for taxation losses will not result in any revenue cost until the 1998-99 financial year. The cost for that year is estimated to be of the order of $5 million increasing thereafter to a full year annual cost of $20 million.

The cost to the revenue of extending the mining provisions to include quarrying operations is estimated at $10 million in 1990-91 and 1991-92 and is expected to peak at $20 million later in the decade. There will be no cost to revenue in the 1989-90 year.

The exemption from income tax of certain not-for-profit bodies is estimated to cost $1 million in 1990-91 and each subsequent year.

Taxing of the Australian Wool Testing Authority Ltd is expected to produce revenue gains of up to $1 million per annum.

The revenue savings that will arise under the amendments to prevent dividend streaming arrangements from exploiting the imputation system cannot be quantified but will prevent the potential loss of significant revenue amounts.

The amendments which enable profits from the disposal of contaminated live stock to be spread over 5 years or set off against the cost of replacement stock will cost less than $0.5 million in relation to each of the income years 1987-88 and 1988-89; most of the cost will be recouped in subsequent years.

The revenue cost of the amendment to extend the income tax gift provisions to admit The Borneo Memorials Trust Fund and the Guadalcanal and Solomon Islands War Memorial Foundation is estimated to be $35,000 and $15,000 respectively in a full financial year. Deductions for gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited will cost about $500,000 in the 1990/91 financial year.

The revenue cost of gifts to a non-profit company that conducts life education programs under the auspices of the Life Education Centre is expected to be $200,000 in a full financial year. There is no cost in specifically listing the Life Education Centre in the gift provisions as the centre is currently treated as a public benevolent institution under those provisions.

The proposed sales tax exemptions for uncut gems and imported coins is estimated to cost $3 million in a full year.

Other amendments proposed by the Bill will have a negligible revenue impact.

MAIN FEATURES

The main features of this Bill are as follows -

Income Tax Assessment Act 1936

Pensioner rebates (Clause 40)

The Bill will authorise the making of regulations to give effect to changes in the pensioner rebate arrangements for the 1989-90 and subsequent income years, proposed in the April 1989 Economic Statement.

Different levels of pensioner rebate of tax will be available for -

•

married pensioners, where the pensioner receives the married-rate of pension during the year;

•

married pensioners, where the pensioner receives the single-rate of pension during the year, because the couple are unable to live together due to infirmity or illness; and

•

single pensioners, where the pensioner receives the single-rate of pension during the year of income.

The new rebates will allow a married pensioner couple to receive, in addition to the pension, a combined amount of non-pension income of $70 per week ($3,640 per annum) in 1989-90 and 1990-91, before becoming liable for tax. For single pensioners, the rebate will be set to allow them to receive, in addition to the pension, $25 per week ($1,300 per annum) non-pension income in 1989-90, and $40 per week ($2,080 per annum) in 1990-91, before becoming liable for tax. For 1991-92 and subsequent years, the amount of the non-pension income that can be received by both married or single pensioners before becoming liable for tax will be subject to indexation, as provided for by the law that authorises the payment of the pension.

The rebates will continue to shade-out at a rate of 12.5 cents for every dollar of taxable income in excess of the appropriate shade-out threshold.

For married pensioners any unused portion of their rebate and shade-out threshold will be transferred to the spouse.

A pensioner who is eligible for more than one level of rebate because, during the year of income, he or she receives more than one of the rates of pension outlined, will be entitled to the rebate which gives the greatest benefit.

The method of calculating the rebates and shade-out thresholds will be provided for in the Income Tax Regulations.

Beneficiary rebates (Clause 40)

The Bill will authorise the making of regulations to give effect to changes in the beneficiary rebate arrangements to target them more effectively for the 1989-90 and subsequent income years, as proposed in the 1989-90 Budget. The beneficiary rebates are available for recipients of the Job Search Allowance, social security unemployment, sickness or special benefits, the Formal Training Allowance and the living allowances paid under certain Commonwealth education schemes. There will be separate rebates of tax for the following groups -

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single, under 18 years and living at home;

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single, under 18 years and living away from home;

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single, aged 18 to 20 years;

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single, 21 years and over;

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single, aged 60 to 64 years and in receipt of unemployment benefits for six months or more; and

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married.

The rebates will continue to be reduced by 12.5 cents for each dollar of taxable income in excess of the level of the appropriate shade-out threshold. The method of calculating the rebates and shade-out thresholds will be provided for in the Income Tax Regulations.

The Bill proposes to override the provisions of the Acts Interpretations Act 1901 which would otherwise prevent the making of regulations to apply retrospectively. This is because the drafting of the regulations will require numerous cross-references to the social security and veterans' affairs legislation, to identify the specific pension, allowance or benefit in respect of which each rebate is to be available. It follows that changes of the Income Tax Regulations following any amendments of the social security or veterans' affairs legislation may require retrospective application back to the date of effect of those amendments.

Medicare levy (Clause 58)

This Bill will give effect to the announcement in the 1989-90 Budget that a person who is otherwise personally exempt from the Medicare levy will no longer be required to pay half levy in respect of a year of income because he or she has a dependant, where the dependant is separately liable to the levy in respect of the year. Persons who may be exempt from the levy include those entitled to free medical treatment under repatriation legislation or as a member of the Defence Forces.

Two further concessions are also being extended. First, where a person who is otherwise personally exempt from the Medicare levy has a spouse who is separately liable to pay full levy, such a person will no longer be required to pay half levy in respect of a period because he or she had a dependant child during the period if the child is also a dependant of the spouse in that period.

Secondly, where in respect of a period a person who is otherwise personally exempt from Medicare levy has a spouse who would otherwise be exempt, only one of them will now be required to pay half levy in respect of a dependent child. In order to qualify they must agree as to which of them will pay the half Medicare levy.

These changes will apply to assessments in respect of income of the 1989-90 and subsequent years of income.

Unrestricted carry-forward of taxation losses (Clauses 11 to 15 and 59)

This Bill will give effect to the proposal announced in the 1989-90 Budget to remove the seven year limit on the carry-forward of all taxation losses incurred during the 1989-90 and later years of income.

Under the existing law, deductions for general losses, other than those incurred in engaging in primary production, are restricted to income derived during the seven years of income following the year in which the loss was incurred. Primary production losses are not under any such time restriction.

Film losses and foreign source losses are similarly subject to a seven year carry-forward restriction. Film losses incurred in a previous year, however, may only be deducted from film income and foreign losses from foreign source income.

The existing law also imposes a seven year restriction on the period over which debts paid in relation to losses incurred before a taxpayer became a bankrupt or was released from debts under the Bankruptcy Act are tax deductible. This restriction applies to general losses not incurred in engaging in primary production activities and to film losses.

The proposed amendments will allow general domestic losses, film losses and foreign source losses incurred during the 1989-90 and later years of income to qualify for deduction on the conditions of the existing law but with no time limit on the carry-forward period.

The Bill also proposes that debts voluntarily paid by a person who has become a bankrupt, or who has been released from any debts by the operation of an Act relating to bankruptcy, that relate to losses incurred before bankruptcy or release from debts will not be subject to a time limit on deductibility.

The introduction of two new classes of domestic losses and a new class of foreign source loss proposed by the Bill, means that there will be a total of five classes of domestic losses and two classes of foreign source losses. Consequently, changes are also proposed to the order in which losses are to be deductible where the taxpayer has incurred two or more different classes of losses to take into account the new classes.

The order in which losses are to be taken into account will be governed by the following underlying principles which are consistent with those contained in the existing law -

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losses subject to a seven year restriction take precedence over those not subject to that restriction;

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film losses take precedence over other losses (as they can only be offset against film income); and

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losses will otherwise be allowable in the order in which they are incurred.

Extension of Divisions 10 and 10AAA to quarrying operations (Clauses 16 to 37, & 60)

This Bill will give effect to the proposal announced in the 1989-90 Budget to extend, from 16 August 1989, the general mining provisions of Division 10 and the mineral transport provisions of Division 10AAA of the Income Tax Assessment Act 1936 to include quarrying operations. These Divisions currently provide special deductions for certain capital expenditures such as site preparation, infrastructure, development and exploration expenditure and expenditure on certain facilities used in transporting minerals from a mine site on which mining operations are being carried on. The amendments will allow capital expenditures incurred on or after 16 August 1989 in carrying on quarrying operations to also qualify for these special deductions.

Division 10 will apply to quarrying operations on the same basis as it applies to mining operations with two exceptions. Currently, mine development expenditure is deductible in equal instalments over the lesser of the life of the mine or 10 years. Development expenditure in respect of quarrying operations will also be deductible but because quarrying operations are generally undertaken on extensive deposits which typically have a longer life than most mines, the expenditure is to be deducted in equal instalments but over the lesser of the life of the quarry or 20 years. This variation reflects the longer average life of quarries. Due to the remote location of most mine sites, Division 10 currently allows expenditure incurred on housing and welfare facilities to be eligible for the special deductions. However since quarries are more typically located near urban areas, expenditure on housing and welfare in respect of quarrying operations will be excluded from the provisions of Division 10.

Division 10 also provides an outright deduction for exploration and prospecting expenditure incurred by a taxpayer carrying on mining operations or in a business of exploring or prospecting for minerals which can be obtained by mining operations. The deduction is allowable against assessable income from all sources in the year in which the expenditure is incurred. The amendments will permit taxpayers engaged in quarrying operations to claim an outright deduction for exploration and prospecting expenditure incurred on or after 16 August 1989, from assessable income from all sources. As with general mining the deduction will also be available to taxpayers carrying on a business of exploring or prospecting for quarry materials.

Entitlements to deductions in relation to mine development and exploration and prospecting expenditure which have not been allowed as deductions to the vendor can be transferred to a purchaser of the mining or prospecting right or information under Division 10. Similarly, deductions for expenditure incurred after 15 August 1989 on quarrying operations or exploring or prospecting for quarry materials will be able to be transferred by the vendor to a purchaser of a quarrying or prospecting right or information.

Division 10AAA presently allows a deduction for expenditure of a capital nature incurred in connection with facilities used primarily and principally for the transport of minerals or processed materials obtained from carrying on mining operations, excluding the transport of minerals or processed materials wholly within the mine site. This expenditure is deductible in equal instalments over 10 years or, at the election of the taxpayer, 20 years under the provisions of Division 10AAA. The amendments will ensure that capital expenditure for the transport of quarry materials, incurred on or after 16 August 1989, is also deductible under Division 10AAA. Consistent with Division 10 this expenditure is to be deductible in equal instalments over 20 years.

Sporting Bodies and Community Service Organisations (Clause 6)

The Bill will give effect to the Budget announcement of 15 August 1989 that not-for-profit bodies established for the promotion or encouragement of any game or sport would be exempted from income tax. This extends the exemption presently enjoyed only by athletic sports and athletic games in which human beings are the sole participants.

The Bill will also give effect to the announcement in the Budget that not-for-profit community service organisations such as Lions and Rotary would be exempted from income tax. Exemption will apply broadly to bodies established for the purpose of promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of members of the community in such particular need. However, bodies established for political or lobbying purposes will not qualify.

Exemption from income tax will apply to income of sporting bodies and community service organisations in the 1989-90 year of income and subsequent years.

Termination of the exemption accorded the Australian Wool Testing Authority Ltd (Clauses 6, 62)

The Bill will give effect to proposals announced in the 1989-90 Budget to withdraw the income tax exemption provided to the Australian Wool Testing Authority Ltd (AWTA) under paragraph 23(jd) of the Income Tax Assessment Act 1936. These amendments will ensure that any income derived by the AWTA from 1 July 1990 is subject to income tax in accordance with the provisions of the Assessment Act.

The Bill also contains transitional arrangements for applying the depreciation and capital gains tax provisions. Broadly, the amendments will ensure -

•

that the accelerated depreciation provisions of former sections 57AH and 57AL have no application to plant or articles owned by the AWTA. This will ensure that the effective life rates or the effective life rates plus loadings are used to calculate depreciation deductions.

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that the capital gains tax provisions apply to the AWTA to exclude any capital gain or loss which has accrued during the tax exempt period, i.e. from the date when the asset was purchased being a date after 19 September 1985 up to and including 30 June 1990. This will ensure that the tax treatment of any gain or loss is entirely prospective.

Dividend streaming arrangements (Clauses 42 to 45)

The Bill will give effect to the measures announced in the 1989-90 Budget to address dividend selection arrangements by amending the provisions dealing with the imputation of company tax. The amendments will remove tax advantages associated with dividend selection schemes in respect of dividends paid after 30 June 1990.

Under the existing law companies are required to frank to the same extent all dividends paid on a particular class of shares. Shares are of the same class if they have the same nominal value and the same dividend, voting and return of capital rights. Dividends are required to be franked to the extent of the surplus in the franking account on the day on which a dividend is paid.

Franking credits may accrue to a company from a number of sources including the receipt of a company tax assessment, the making of an initial or further payment of company tax and the receipt of a franked dividend. (A franked dividend is a dividend with an imputation credit attached.) Franking debits arise in circumstances such as when a company pays a franked dividend or receives an amended assessment reducing the amount of tax payable. Since franking debits and credits arise only where a company is resident, only Australian resident companies can pay franked dividends.

Individual resident shareholders receiving franked dividends are entitled to a franking rebate in respect of those dividends. This rebate reduces the personal income tax payable by those shareholders. The benefits flowing from franked dividends are of less value to shareholders on incomes with marginal rates of tax lower than the company tax rate as any excess of the franking rebate over the tax payable is not refundable.

Imputation credits are not available to non-resident shareholders. However, franked dividends derived by a non-resident shareholder, whether a company or an individual, are exempt from dividend withholding tax. Thus, imputation credits attached to franked dividends paid to non-resident shareholders are of less value to those shareholders than to most Australian residents.

Companies have been able to avoid franking the dividend paid on a single class of shares to the same extent for all shareholders by using dividend selection schemes to stream franked dividends to those shareholders able to benefit most from them. A central feature of a dividend streaming arrangement is that shareholders in the company are afforded a choice as to the manner in which their dividend entitlements are to be satisfied. Dividends paid to shareholders who have not exercised an option afforded by the arrangement are taken to be paid under a dividend streaming arrangement.

Some dividend selection schemes allow shareholders who so elect to forego the right to the cash dividend that would otherwise be paid and, instead, receive bonus shares paid out of a share premium account. In addition to being exempt from tax, where these bonus shares are issued against shares held prior to 20 September 1985 no tax is payable on any capital gain arising on the disposal of the shares.

Dividend streaming can also be achieved by the use of stapled stock arrangements. Under these arrangements the holders of stapled stock may receive either a franked or unfranked dividend as determined by the company paying the dividend. Stapled stock arrangements can be used to stream franked dividends to Australian resident shareholders and unfranked dividends to non-residents.

The amendments proposed by the Bill will result in Australian resident companies being treated as having franked to the same extent all dividends paid on a single class of shares, including those paid by another company under an arrangement. They will also result in a company that has paid franked dividends under an arrangement incurring franking debits in respect of unfranked dividends paid by another company. Franking debits will arise where a company is a party to a dividend streaming arrangement and it -

•

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

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issues bonus shares that are exempt from tax instead of paying a franked dividend;

•

pays an unfranked or partly franked dividend to shareholders who receive that dividend instead of a franked dividend from another company; or

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pays a franked or partly franked dividend to shareholders who receive that dividend instead of an unfranked dividend from another company.

These franking debits will not flow through to shareholders. Thus, company shareholders will not acquire increased franking credits from which to pay franked dividends and individual shareholders will not become entitled to a greater franking rebate. If the application of these provisions results in a franking deficit at the end of the franking year, companies will be required to pay franking deficit tax. This will be the case even if the company incurs franking debits in respect of dividends paid by foreign companies from ex-Australian profits.

Securities lending arrangements (Clause 7)

The Bill will give effect to the Budget announcement of 15 August 1989 that eligible securities lending arrangements will receive rollover relief for the purposes of the capital gains and capital losses provisions of Part IIIA of the Income Tax Assessment Act 1936 and will be relieved of adverse consequences under the general income provisions of that Act.

Rollover relief will apply to eligible securities lending arrangements entered into after the date of introduction of the Bill. Relief will apply automatically: there will be no requirement to make an election. Lenders will be treated as though they had not sold and repurchased securities; a borrower's position will also be adjusted.

Taxation treatment of profits and proceeds from the disposal of live stock due to contamination (Clauses 8, 9 and 61)

This Bill will give effect to a proposal announced on 1 September 1989 concerning the treatment of profits from the disposal of live stock because of chemical contamination of live stock or property.

Each State and the Northern Territory has legislation under which chemically contaminated properties or live stock can be dealt with. This involves a quarantine process, initiated by a formal notification, from an officer or person in a Department of the State or Territory, which is usually issued as a result of tests carried out on stock at an abattoir. The process does not compel farmers to dispose of their live stock. However, the restrictions can make it economically essential that farmers dispose of their live stock to enable them to conduct farming operations that are not restricted due to chemical residues.

Section 36AA of the Income Tax Assessment Act 1936 provides a concessional basis for bringing to account profits resulting from the death or compulsory destruction of live stock in compliance with legislation for the control and eradication of disease. Section 36AAA of that Act allows profits from the forced disposal of live stock as a result of fire, flood or drought, or from the compulsory destruction of live stock in compliance with a law for the control and eradication of a disease, to be applied to reduce the deductible cost of replacement stock. Neither section deals with the voluntary disposal of live stock as a direct result of the chemical contamination of land, live stock or other property. In the absence of these provisions farmers could have abnormal receipts of income (to be taxed in relation to the year of receipt at possibly higher marginal rates than would apply under normal circumstances) and an earlier clawback of the live stock valuation concession. This Bill will extend to the voluntary disposal of contaminated live stock concessions similar to those available for forced disposals of stock.

Two options will be available. Under the first profits will be able to be applied to reduce the cost of replacement stock. Under the second option an election may be made to account for the profits over 5 years. The options will apply in relation to live stock disposed of on or after 1 July 1987.

Investment in Australian films (Clauses 38, 39, 61, 63 and 64)

Division 10BA of the Income Tax Assessment Act 1936 authorises the deduction of capital expenditure in the production of a qualifying Australian film where the expenditure is incurred for the acquisition of the initial copyright in the film. A pre-condition for the deduction is that moneys contributed towards the cost of producing a film be deposited in a film account opened in relation to the film in the Australian Film Industry Trust Fund.

As a consequence of changes announced by the Treasurer in May 1988 Division 10BA was amended by the Taxation Laws Amendment Act (No. 5) 1988. The principal impact of these amendments was a reduction in the deduction available under Division 10BA or under transitional provisions in the amending Act. The reduced rate of deduction (of 100 per cent of the qualifying expenditure) applies to -

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capital moneys expended in producing, or by way of contribution to the cost of producing, a film under a contract entered into on or after 25 May 1988;

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moneys contributed in specified circumstances, after 24 May 1988, where an underwriting agreement was not lodged before 2 June 1988;

•

moneys expended in specified circumstances under an underwritten contract, where the statutory lodgment provision was satisfied, after 30 June 1988;

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moneys not deposited in a film account opened in relation to a film before 9 June 1988 and where the film was not underwritten before 25 May 1988; and

•

moneys expended under a contract entered into on or after 25 May 1988 in a situation where the film was not substantially in production before 25 May 1988.

The basic effect of the amendments made by the Taxation Laws Amendment Act (No 5.) 1988 is that, while some contributions could attract a deduction in excess of 100 per cent where expenditure was incurred up to and including 30 June 1988, no deduction at a rate exceeding 100 per cent is available after 30 June 1988 in relation to moneys -

(a)

contributed to the cost of producing a film (and required on and after 1 July 1983 to be lodged in a film account); or

(b)

expended in producing a film.

Consistent with the amendments made by the Taxation Laws Amendment Act (No. 5) 1988, this Bill will remove the requirement for funds invested in qualifying Australian films to be placed in the Australian Film Industry Trust Fund, pending their expenditure on the film, where the 100 per cent rate of tax concession applies.

Tax File Numbers (Clauses 46 to 57)

This Bill will amend the tax file number provisions of the Income Tax Assessment Act 1936. The amendments apply to the use of tax file numbers in relation to investments with investment bodies. The use of tax file numbers in connection with investments is to commence from 1 July 1991 with a phase in period from 1 July 1990 for investments in existence at that time.

The requirement to report certain information to a Deputy Commissioner of Taxation will be streamlined. The existing requirement to send a range of declarations to the office of a Deputy Commissioner within 28 days of receipt will be modified so that it will only be necessary for an investment body to retain declarations as requested by the Commissioner of Taxation and to report details as required by the Commissioner. The declarations concerned are those declaring exemption from the tax file number requirements by children, pensioners, entities not required to lodge income tax returns and recently-arrived visitors to Australia. Another modification will permit statements reconciling the total amounts of deductions made by an investment body in respect of investors and non-residents to be forwarded to the Commissioner at the same time as annual investment income reports.

The Bill will streamline the tax file number quotation requirements of Part VA of the Assessment Act by providing for the quotation of an individual's file number where a trust tax file number does not exist for an informal trust. The provisions that require securities dealers and solicitors to retain tax file numbers for clients will also be removed. A further amendment will ensure that tax file numbers rather than details of exemptions are quoted for joint investments where a joint owner of the investment has a tax file number. Finally, persons and organisations in the business of providing business or consumer finance are to be excluded from the requirement to quote tax file numbers to borrowers where the loan is in the ordinary course of that business.

The Bill will also amend the exemption provisions contained in Division 5 of Part VA of the Assessment Act. The arrangements applying to children under 16 years will be modified to ensure that children earning annually $420 or more income from an investment will not be excluded from the tax file number system. The exemption for recently-arrived visitors' to Australia is to be incorporated into the non-residents' exemption. Non-residents of Australia who would have been liable to pay non-resident withholding tax but for certain exemptions under the withholding tax provisions are to be exempt from quoting a tax file number.

The tax file number arrangements under Division 3B of Part VI of the Assessment Act are also being amended to raise from $1 to $120 per annum the threshold for deducting and remitting tax where a tax file number has not been quoted in respect of a new account or deposit with a financial institution.

Gifts (Clause 10 and subclause 61(5))

The Bill will authorise deductions for gifts of the value of $2 or more made to The Borneo Memorials Trust Fund and the Guadalcanal and Solomon Islands War Memorial Foundation where the gifts are made after 9 November 1989 and before 1 July 1992.

Gifts to Australian Vietnam Forces Welcome Home '87 Pty Limited for the purpose of the Australian Vietnam Forces National Memorial project will also be an allowable deduction where they are made after 30 June 1989 and before 1 July 1990.

Deductions will also be authorised for gifts to a non-profit company that conducts life education programs under the auspices of the Life Education Centre. Further, the Bill will specifically list the Life Education Centre in the gift provisions. These amendments will apply to gifts made after 9 November 1989.

Amendment of the Debits Tax Administration Act 1982 Exemption for amounts deducted where tax file number not quoted (Clause 4B)

This Bill will also amend the Debits Tax Administration Act 1982 to include amounts deducted in accordance with the tax file number arrangements in the exemption provisions of that Act. This will ensure that Debits Tax is not payable on amounts deducted from accounts in respect of which a tax file number has not been quoted.

Amendment of the Sales Tax (Exemptions and Classifications) Act 1935

Exemptions for uncut gems and imported coins (Clauses 66, 67 & 68)

The Bill will make two amendments to the First Schedule of the Sales Tax Exemptions and Classifications Act 1935.

The first amendment will exempt from sales tax uncut precious or semi-precious gemstones derived directly from mining activities outside Australia and imported in the rough without having been subjected to any process or treatment that would result in an alteration of their form, nature or condition.

The other amendment proposes an exemption for imported coins that are legal tender in a country other than Australia.

The amendments apply in relation to transactions, acts and operations effected or done in relation to goods on or after the twenty-eighth day after the Bill receives the Royal Assent.

A more detailed explanation of the provisions of the Bill is contained in the following notes.

Notes on clauses

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.2) 1990.

Clause 2: Commencement

Subject to subclause 2(2), the amending Act is, by subclause 2(1), to commence on the day on which it receives the Royal Assent. But for this subclause, the Act would, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, commence on the twenty-eighth day after the date of Assent.

By subclause 2(2) the amendment of the Sales Tax (Exemptions and Classifications) Act 1935 made by Part 4 of the Bill will commence on the twenty-eighth day after the date of Royal Assent.

PART 2 - AMENDMENT OF THE DEBITS TAX ADMINISTRATION ACT 1982

Clause 3: Principal Act

This clause facilitates reference to the Debits Tax Administration Act 1982 which, in this Part, is referred to as "the Principal Act".

Clause 4: Interpretation

Debits tax applies to all debits of $1 or more, including cheque and cash withdrawals, interest fees and bank fees but not debits tax itself, made to an account on which cheques may be drawn against the financial institution.

By section 3 of the Principal Act a number of types of debit transaction to accounts are exempt from the debits tax. Clause 4 will include as an item exempt from the debits tax amounts deducted in respect of interest paid or credited to an account that a tax file number has not been quoted in relation to.

PART 3 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 5: Principal Act

This clause facilitates reference to the Income Tax Assessment Act 1936 which, in this Part, is referred to as "the Principal Act".

Clause 6: Sporting bodies, community service organisations and the Australian Wool Testing Authority

Introductory Note : sporting bodies and community service organisations

Several kinds of societies, associations or clubs are exempted from income tax under paragraph 23(g) of the Principal Act, provided they are not carried on for the purposes of profit or gain to their individual members. Among these, subparagraph 23(g)(iii) exempts such a body if established for the encouragement or promotion of a sport or game that is athletic and in which human beings are the sole participants. Bodies established for the promotion or encouragement of animal racing are exempt under subparagraph 23(g)(iv), but all other sports and games have not qualified for exemption.

Among the institutions exempted from income tax under paragraph 23(e) are charitable institutions. However, many organisations that undertake a range of activities for the benefit or welfare of the community are not charitable, and so such bodies as the traditional community service clubs - Apex, Rotary, Lions, Zonta, Quota and the like - have not qualified for exemption.

Bodies are established for exempt purposes according to their actual objects and activities from time to time. So a body set up as a literary society, say, may cease to be exempt if its purposes change. Nor can a body claim exemption if it has a mixture of purposes that include exempt purposes, but also include other purposes that are more than merely incidental. So a body which is both a sporting club and a major social club for its members may not be exempt where its social club facilities cannot be regarded as merely concomitant and incidental to its sporting activities but are in pursuit of a collateral or independent purpose.

Exemptions

This clause will amend paragraph 23(g) by substituting a new subparagraph 23(g)(iii) and by inserting a new subparagraph 23(g)(v). The new subparagraphs will exempt from income tax the income of certain sporting bodies, and certain community service organisations, respectively. The bodies exempted are required by the preamble of paragraph 23(g) to be not carried on for the purposes of profit or gain to their individual members - that is, to be not-for-profit bodies.

Paragraph (a) of this clause will substitute a new subparagraph 23(g)(iii) which will exempt from income tax not-for-profit bodies established for the encouragement or promotion of any game or sport. The exemption will apply in circumstances where the game or sport is not athletic or is not confined to human beings as the sole participants.

The bodies exempted include any qualifying society, association or club. Such bodies need not be incorporated to obtain exemption.

To be established for the required purpose, a body's present activities must show that present purpose. It is not enough for the body once to have met the test, or for its constitution to claim the purpose; nor will vagueness or imprecision in a body's constitution prevent its purpose being established from its conduct and activities.

The terms "encouragement or promotion" used in subparagraph (iii) are not specially defined, but have their ordinary meaning. The words cover both directly carrying on activities and supporting them less directly, for example by providing financial support.

Similarly, there is no special definition of what constitutes a "game" or "sport". However, the words are intended to be given their wide natural meanings. They extend to non-athletic games such as chess and bridge; to sports such as motor racing in which machines facilitate the competition of people; and to non-competitive activities such as mountaineering. The activities of pony clubs are also within the meaning of the words.

Paragraph (b) of this clause will introduce subparagraph 23(g)(v) which will exempt from income tax the income of not-for-profit bodies established for community service purposes. The words "for community service purposes" are not defined but are to be given a wide interpretation. The words are not limited to those purposes beneficial to the community which are also charitable. They extend to a range of altruistic purposes. The words would extend to promoting, providing or carrying out activities, facilities or projects for the benefit or welfare of the community, or of any members of the community who have particular need of those activities, facilities or projects by reason of their youth, age, infirmity or disablement, poverty or social or economic circumstances. An exclusion from the exemption will apply to bodies established for political or lobbying purposes.

As with sporting clubs, the bodies exempted include any qualifying society, association or club, whether incorporated or not. Similarly, a body's present conduct and activities show the purpose for which it is presently established, even if its constitution or its formation and history suggest a different purpose in the past.

The provision does not impose a narrow geographic limit by its reference to the community. Charitable purposes beneficial to the community may properly be carried out overseas, or among people everywhere; they need not be confined to the population of a particular region. Similarly, community service purposes are not required to be limited to the population, or part of the population, of a region.

When purposes are directed to the benefit or welfare of members of the community in particular need, that need must arise by reason of youth, age, infirmity or disablement, poverty or social or economic circumstances. These causes of need are intended to be read broadly. Infirmity or disablement, for example, could be intellectual or physical, and could be congenital or the product of disease or of injury. Similarly, social or economic circumstances could include such varied matters as sex, living in a remote area, or inability to speak English.

Political or lobbying purposes include standing candidates for election, campaigning for changes to the law or to government policy, and the like. Community service organisations may engage in political or lobbying activities, provided these are no more than merely incidental to other purposes beneficial to the community. But a body will be unable to claim exemption from income tax under this subparagraph if its only undertakings for the benefit of the community are political or lobbying ones.

All the traditional service clubs such as Apex, Rotary, Lions, Zonta, Quota and the like and community service organisations such as the Country Women's Association of Australia and its constituent Associations are considered to be exempt from income tax under the new subparagraph.

Australian Wool Testing Authority

Paragraph (c) of this clause will repeal paragraph 23(jd) of the Principal Act and, as a result, the income tax exemption accorded to the Australian Wool Testing Authority Ltd (AWTA) will no longer apply to income derived on or after 1 July 1990.

Paragraph 23(jd) currently provides an exemption from income tax for certain income derived by the AWTA. The exemption applies to income derived from the testing of wool and other fibres and products from wool and such fibres; the issue of certificates and the preparation of reports in relation to such tests and from investments of income earned from these or associated activities or to provide for such activities.

Clause 7: Securities lending arrangements

Introductory Note

Securities lending arrangements arise when a longer term holder of securities agrees to provide them to a borrower for a period. At the end of the period, the borrower returns replacement securities which are either the original securities or are of the same number and type as the original securities. The borrower also pays the lender a fee for the use of the borrowed securities. The lender retains the same portfolio as before.

These arrangements are commonly entered into because of the margin and settlement requirements of the securities markets. Lenders seek an additional return by way of fees paid by a borrower on top of the returns attaching to the security itself. Borrowers enter into the arrangements for three main reasons. First, there are borrowers who need to sell or complete a sale of securities, and borrow the securities they will sell. Second, there are borrowers who need to meet margin requirements and can do this more cheaply by borrowing securities than by depositing cash. (For example, in the stock options market, holding transferable securities of the kind traded is an accepted alternative to deposits of cash margins.) Third, there are borrowers established to act as intermediaries between longer term lenders and shorter term borrowers.

All lenders give, and all borrowers require, either actual title to securities or such signed transfers and the like as are necessary to be able to give title to third parties. This means that lending arrangements will generally be treated as sales and repurchases of securities. Nevertheless, the securities industry describes and treats these arrangements as loans, because in the longer term such arrangements do not alter a lender's portfolio.

Clause 7 will insert a new section 26BC in the Principal Act. Section 26BC will deal with arrangements where a taxpayer enters into an agreement to dispose of securities to another taxpayer on condition that at some later time the borrower returns the same or identical securities.

Subsection 26BC(1) defines the various securities which will be eligible for securities lending relief and defines various terms used in the provisions.

"convertible note" for a company has the same meaning as defined in subsection 82L(1) and for a trust the same definition applies except that the words "company" are replaced by "unit trust", and "shares" by "units". Broadly, the definition covers all notes relating to a loan or debt which may be converted into, or satisfied by, the issue of shares or units, or the payment up of shares or units, or which may carry an entitlement to a right or option to acquire shares or units.

"debenture" for a trust is a debt instrument that has the same operation as if it were a debenture for a company.

"eligible security" defines the type of security which will be eligible for lending relief. Shares, bonds, debentures, convertible notes, rights, options or similar financial instruments issued by a listed company; or units, bonds, debentures, convertible notes, rights, options or similar financial instruments issued by a listed unit trust or a unit trust whose units were offered to the public; or bonds, debentures, rights, options or similar financial instruments issued by a government or government authority will be eligible. The definition broadly covers securities traded in the securities markets.

"government" which is used in the definition of eligible security means the Commonwealth, a State or Territory government or a government of or of part of a foreign country (for example a state government of a foreign country).

"listed company" means a company which is officially listed by a stock exchange in Australia or overseas.

"listed unit trust" means a unit trust which is officially listed by a stock exchange in Australia or overseas.

"options" means an option to acquire shares in a company, units in a trust, or government or government authority securities such as bonds or debentures.

"right" means a right to acquire shares in a company, units in a trust, government or government authority securities, or options.

Subsection 26BC(2) provides for the situation where the securities are held in trust by a trustee and the beneficiary has absolute entitlement to the eligible security as against the trustee. In such situations the beneficiary is deemed to be in the shoes of the trustee and any act performed by the trustee will be regarded as an act of the beneficiary. This subsection is similar to section 160V, which applies in the calculation of capital gains and losses.

Subsection 26BC(3) describes the type of securities lending arrangement which qualify for securities lending relief and defines a number of expressions used in the section. Paragraph (a) specifies that in order for the section to apply the arrangement must be in writing and be entered into after the date of introduction. Subparagraph (i) deals with the lending of an eligible security by one taxpayer (the lender) to another taxpayer (the borrower). This subparagraph defines the terms "original disposal time" as the time when the eligible security is lent; and "borrowed security" as the eligible security that is lent. In securities lending arrangements, the borrower actually acquires and the lender disposes of the securities lent, and the drafting of the subparagraph reflects this.

Subparagraph (ii) deals with the return of the borrowed securities. Where at a time not later than 3 months from the original disposal time the lender re-acquires the same security or an identical security then the section applies (subject to further qualification). This subparagraph defines the terms: "re-acquisition time" as the time the borrower returned the security to the lender; and "replacement security" as the security returned, which will be either the same security or an identical security. The borrower actually disposes of and the lender acquires the securities returned in securities lending arrangements, and the drafting of the subparagraph reflects this.

Paragraph (3)(b) requires both borrowers and lenders to be dealing with each other at arm's length if their securities lending arrangements are to qualify for securities lending relief.

Paragraph (3)(c) defines "borrowing period" as the period between the borrowed security being lent and the replacement security being returned. During this period a securities lending arrangement will not qualify for securities lending relief if any of the following events occur -

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The borrowed security is the subject of, or of entitlement to, a distribution whether in property or money subparagraph (i).

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The issuer of the borrowed security issues in respect of it a right or option subparagraph (ii).

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If the security is a right or option, that right or option is exercised subparagraph (iii). (There can be no qualifying securities lending arrangement during which a right or option expires, as in that case it would not be possible to return an identical security).

Paragraph (3)(d) makes it a requirement that any consideration received by the lender from the borrower other than the replacement security should be identified in the written agreement. Such items as the loan fee (be it in interest or a flat payment), indemnity payment for variations in the market value if the securities and any other payments should be clearly identified. All the payments will be taxable under the normal income provisions.

Paragraph (3)(e) requires a lender not to dispose of its rights under the agreement.

Subsection (4) outlines the relief for the lender in a qualifying securities lending arrangement, other than under the capital gains tax provisions.

Paragraphs (4)(a) and (b) exclude the application of subsection 26BC(4) to the capital gains tax provisions and to any amounts received by the lender from the borrower apart from the replacement securities. The lender's position will be determined as if -

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the lender had neither disposed of the borrowed security nor acquired the replacement security paragraph (4)(c);

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the lender had held the borrowed security at all times during the borrowing period paragraph (4)(d); and

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the replacement security will be treated as the borrowed security whether it is or not paragraph (4)(e).

The final result will be that where the lender and borrower have met all the requirements of the section the lender will not be subject to any tax consequences other than those arising from being paid a fee. It is considered that any fee is ordinary income of the lender; the amendments do not change that position.

Subsection 26BC(5) outlines the relief for the borrower in a qualifying securities lending arrangement other than under the capital gains tax provisions. Paragraphs (a) and (b) exclude application of subsection 26BC(5) to the capital gains tax provisions, and to any amounts paid by the borrower to the lender. Basically the borrower's position will be determined as follows. Where the borrowed security was disposed of to a third party (paragraph (5)(c)) then -

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under subparagraph (i) the borrower is treated as having acquired the borrowed security from the lender at its market value when borrowed; and

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under subparagraph (ii) when the borrower returns the replacement security to the lender the borrower is treated as having disposed of the replacement security to the lender for the value at which the borrowed security was acquired.

By deeming the borrower to have acquired the borrowed security and to have returned the replacement security at the same market value the borrower's assessable income over the period of the securities lending arrangement will reflect the difference between the price at which the borrowed security was sold and the price paid for the replacement security.

Where the borrowed security is not sold to a third party then paragraph (5)(d) treats the borrower as having neither acquired the borrowed security nor returned the replacement security. That is the security will be regarded as an actual loan in the borrower's hands. The amendments do not change the treatment of any fee paid by the borrower to the lender.

Subsection 26BC(6) outlines the relief for the lender in a qualifying securities lending arrangement for the purposes of the capital gains tax provisions. It is extended in some respects by the provisions of subsections 26BC(7) and 26BC(8) (see notes below). The disposal by the lender of the borrowed security is not subject to the capital gains tax provisions.

Paragraph (6)(a) provides that where the lender acquired the borrowed security prior to 20 September 1985 (that is, the borrowed security was not liable to capital gains tax on sale) then the replacement security will also be taken to have been acquired before that date for the purposes of Part IIIA.

Paragraph (6)(b) deals with the situation where the lender has acquired the borrowed security on or after 20 September 1985 and so could be liable to tax under the capital gains tax provisions on its disposal. If the lender wishes to dispose of the replacement security received from the borrower then subparagraph (i) ensures that any capital gain on disposal of the replacement security will be the same as if the lender had continuous possession of the borrowed security. That is the lender will receive the same indexed cost base for the replacement security as the borrowed security would have received. The replacement security does not lose any indexation that the borrowed security would have received.

Subparagraph (ii) ensures that any capital loss on disposal of the replacement security will be the same as if the lender still had possession of the original security. That is the lender will receive the same reduced cost base for the replacement security as the borrowed security would have had.

Subsection 26BC(7) applies where the lender disposes of the replacement security received from the borrower less than 12 months before any paired security was acquired by the lender. In that situation the reference to indexed cost base of the borrowed security in paragraph 26BC(6)(b) is to be read as a reference to the cost base to the lender of the borrowed security. For the definition of paired security see the notes below on subsection 26BC(8).

The effect of subsection 26BC(8) is that subsection 26BC(7) will apply however many times a lender enters into qualifying securities lending arrangements between acquiring a security and finally disposing of the same or an identical security.

Paragraph 26BC(8)(a) provides that a borrowed security is a paired security in relation to its replacement security.

Paragraph (8)(b) provides that a paired security of another security is a paired security of any other paired security of that other security.

Subsection 26BC(9) outlines the relief for the borrower in a qualifying securities lending arrangement for the purposes of the capital gains tax provisions. Paragraph (a) deals with the situation where the borrower disposes of the borrowed security to a third party. Under subparagraph (i) the borrower is deemed to have acquired the borrowed security from the lender for its market value at the time the securities lending arrangement was entered into. Under subparagraph (ii), when the borrower returns the replacement security to the lender the borrower is deemed to have disposed of the replacement security for the market value of the borrowed security when the securities lending arrangement was entered into.

Where the borrowed security is not sold to a third party then paragraph (9)(b) treats the borrower as having neither acquired the borrowed security nor disposed of the replacement security. That is the security will be regarded as an actual loan in the borrowers hands.

This treatment is the same as under subsection 26BC(5). Part IIIA applies to a disposal of an asset, whether or not the disposal is on capital account. If an amount is included in assessable income under Part IIIA, subsection 160ZA(4) will reduce or eliminate any capital gain. Accordingly, where the borrower is taxable subject to subsection 26BC(9) then subsection 160ZA(4) will reduce to nil the tax consequences that may arise under subsection 26BC(9) for the borrower. That is, double tax is precluded.

Subsection 26BC(10) confirms that the expressions as used in subsections (6) (7) (8) or (9) of section 26BC are to have the same meaning as contained in Part IIIA the capital gains tax provisions. Expressions such as acquisition and disposal have extended meanings.

Subsections (6), (7), (8) and (9) of new section 26BC are linked to Part IIIA the capital gains tax provisions by subsection 11. These subsections are to be regarded as being part of those provisions.

Subsection 26BC(12) deals with the situation where the lender and borrower have entered a securities lending arrangement but it has not been completed and so might not be a qualifying securities lending arrangement. Where the Commissioner is of the opinion that at a later time the provisions of this section will apply then the Commissioner may apply the provisions of this section as though the securities lending arrangement requirements will be satisfied (paragraph (b)).

Under subsection 26BC(13) where an assessment is made on the basis that the securities lending arrangement requirements will be satisfied (paragraph (a)) and the requirements in fact are not satisfied (paragraph (b)) then the Commissioner may amend the assessment accordingly. This is notwithstanding anything contained in section 170.

Clause 8: Alternative election in case of disposal, death or compulsory destruction of live stock

This clause will extend section 36AAA of the Principal Act to enable profits derived from the disposal of live stock in consequence of an official notification under a law dealing with contamination of land live stock or other property to be applied to reduce the cost of replacement stock acquired during the next five years.

Section 36AAA now provides for forward spreading of profits derived from either -

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the forced disposal of live stock due to loss or destruction of pastures or fodder by fire flood or drought; or

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the compulsory destruction of live stock in compliance with a law for the control and eradication of a disease or from the death of stock from such a disease.

Under this section profits are excluded from assessable income and applied to reduce the cost of replacement stock acquired during that year or any of the five succeeding years (10 years where the live stock die from bovine brucellosis or tuberculosis or are destroyed pursuant to a law for the control or eradication of these diseases). Any profits not so applied by the end of the fifth (or tenth year) are included in the assessable income of that year. The provision has the effect of deferring the payment of tax on such profits until replacement stock acquired or bred are sold in the normal course of business.

Paragraph (a) of clause 8 will insert new subsection 36AAA(1AA) in the Principal Act. The new subsection specifies several conditions which must be satisfied before a taxpayer can make an election in relation to the disposal of live stock in consequence of an official notification under a law dealing with contamination of land, live stock or other property.

The conditions are -

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live stock are assets of a business of primary production carried on in Australia by a taxpayer (including a company), a partnership or a trustee of a trust estate and the live stock are disposed of by sale or otherwise in consequence of an official notification;

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the official notification (see notes in relation to proposed subsection 36AAA(25)) issued under a Commonwealth, State or Territory law which deals with contamination (by a chemical, a metal or otherwise) of land, live stock or other property (paragraph (a));

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the proceeds of the disposal would otherwise be included in the assessable income of the taxpayer, partnership or trust estate of a year or years of income (paragraph (b));

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there is a profit on the disposal (paragraph (c));

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no election was made under section 36AA (which enables the forward spreading of profits) in relation to the profit (paragraph (d)); and

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the Commissioner of Taxation is satisfied that the taxpayer, partnership or trustee has or will apply the proceeds of the disposal wholly or principally in buying live stock, or maintaining breeding stock, to replace the live stock that were disposed of (paragraph (e)).

If all of these conditions are met, then an election can be made by the taxpayer or partnership or the trustee, together with each beneficiary entitled to make an election under section 36AA, that section 36AAA apply in relation to the profit or proceeds of the disposal of the live stock.

Paragraph (b) of clause 8 makes a consequential amendment to subsection 36AAA(2), which provides for the consequences of an election in the circumstances to which the section now applies, to enable that subsection to apply to any election under new subsection 36AAA(1AA).

Paragraph (c) of clause 8 inserts new paragraph (2)(aaa); this paragraph explains the effect of an election to which the circumstances of subsection 36AAA(1AA) will apply. All the proceeds of disposal are to be included in the assessable income of the taxpayer, partnership or trust estate of the year of income to which the election relates and of no other year (subparagraph (2)(aaa)(i)) and the assessable income of that year is to be reduced by the amount of the profit on disposal of the live stock subparagraph (2)(aaa)(ii)).

Consequential changes are proposed by paragraph (d) of clause 8 to paragraphs 36AAA(2)(c) and (d) and subsection 36AAA(4) so that those provisions also apply to a disposal as a consequence of contamination and pursuant to an election under new subsection 36AAA(1AA). Thus, subsection (4), as amended, will enable an election to be made as to the amount to be included in assessable income when live stock which because of contamination have been disposed of are replaced by breeding during the year in which the initial election is made or in any of the next 5 succeeding years of income. Paragraph (2)(c), as proposed to be amended, will require that the amount referred to in the subsection (4) election be included in the assessable income of the year of income to which the election under that subsection relates. Paragraph (2)(d), as amended, will require to be included in assessable income in the fifth year of income the amount, if any, of the reduced profits on the disposal as at the last day of that last year of income.

Paragraph (e) of clause 8 makes amendments of a consequential nature. It inserts a reference to new subsection (1AA) in a number of subsections. The subsections affected make provision for the treatment of reduced profits on disposal in circumstances in which the 5 year period for replacement of live stock is not fully utilised (subsections (5), (6), (7), (9) and (10)) or is not utilised by the recipient of the original profit because of an intervening event (subsections (12) and (13)) or where the reduced profits are exceeded by amounts included in assessable income under the section (subsection (11)). Subsection (16) provides for calculation of the reduced profit.

Paragraph (f) of clause 8 will amend paragraph (13)(a) to exclude proposed paragraph 36AAA(2)(aaa) (see earlier notes on that paragraph) from application to a partnership which makes an election in the particular circumstances provided by subsection (12).

Paragraphs (g) and (h) of clause 8 amend paragraph (13)(d) so that, in the application to a partnership which has made an election under subsection (12) (see earlier notes) of a reference to the 5 years next succeeding the year of income in relation to which an election is made under proposed subsection (1AA), that reference will be to the 5 years next succeeding the election made by the taxpayer or trustee or trustee and beneficiaries which or who is a partner in the partnership.

Section 36AAA is further amended by paragraph (j) of clause 8 which inserts a new paragraph (14)(aaa) which will require that an election under proposed subsection (1AA) is to be made on or before the date of lodgment of a return of a year of income, if all the proceeds of disposal were received in that year of income (subparagraph (i)) or on or before the date of lodgment of the return of the later or latest of the years of income where the proceeds were received in two or more years of income (subparagraph (ii)). The existing provisions in subsection (14), giving the Commissioner discretion to allow further time, would also apply to these two situations.

Paragraph (k) of clause 8 amends subsection 36AAA(17) to clarify that the subsection, when it refers to the disposal of live stock, refers only to a forced disposal under subsection 36AAA(1) and not to a disposal within the terms of new subsection 36AAA(1AA).

Paragraph (m) of clause 8 inserts three new subsections in section 36AAA.

New subsection (19A) defines for the purposes of section 36AAA "the proceeds of the disposal of any live stock" where an election is made under subsection 36AAA(1AA). Such proceeds are the total sum of -

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any amount received by the owner of the live stock as compensation resulting from an official notification (defined in proposed subsection (25)) made under a law of the Commonwealth, a State or a Territory dealing with contamination of land, live stock or other property (paragraph (a)) being compensation for contamination of the live stock (subparagraph (a)(i)) or loss or diminution of the value of the live stock (subparagraph (a)(ii)); and

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any amount received by the owner of the live stock as payment for the live stock (subparagraph (b)(i)) or for the carcases, or any part of the carcases, of the live stock (subparagraph (b)(ii)).

New subsection (19B) provides a definition of "the profit on the disposal of any live stock" where an election is made under subsection 36AAA(1AA). Such profit is the amount remaining after deducting from the proceeds of the disposal the sum of the amount representing the total value of any of the live stock on hand at the beginning of the year in which the live stock were disposed of (paragraph (a)) and -

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the purchase price of live stock acquired by purchase (subparagraph (b)(i)) ; and

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the deemed purchase price of stock acquired otherwise than by purchase and other than natural increase bred in the year of income by the owner of the live stock at the time of disposal (subparagraph (b)(ii)).

New subsection (19C) declares the effect of proposed subsection (19B) for the purpose of determining the profit on disposal of live stock of a particular species included in disposed of live stock. For that purpose a reference in subsection (19B) to live stock is a reference to live stock of the particular species; therefore each species is to be taken separately from each other species in calculating the profit for purposes of the subsection.

Paragraph (n) of clause 8 inserts two new subsections in section 36AAA. Proposed subsection (24) provides that the year of income to which an election under proposed subsection 36AAA(1AA) relates is the year of income in which the live stock were destroyed. Proposed subsection (25) defines "official notification" which is used in the proposed new paragraphs (1AA)(a) and (19A)(a); for the purposes of section 36AAA it is to include, at least, a declaration, direction, instruction or order.

Clause 9: Compensation for death, disposal or compulsory destruction of live stock

This clause will amend section 36AA of the Principal Act to provide an alternative option to that provided by the amendments made by clause 8 (to section 36AAA) in relation to the disposal of live stock in consequence of an official notification under a law dealing with contamination of land, live stock or other property.

Section 36AA presently provides for the spreading over five years of an assessable profit resulting from the death or compulsory destruction of live stock in compliance with legislation for the control and eradication of disease. This clause will amend section 36A to extend the provisions to disposals of live stock as a consequence of contamination.

Paragraph (a) of clause 9 inserts new subsection 36AA (1A) in the Principal Act. It outlines the circumstances to apply before a taxpayer can elect that the section 36AA options apply to the disposal of live stock in consequence of an official notification under a law dealing with contamination of land, live stock or other property.

The new subsection applies (by paragraph (a)) to live stock which are assets of a business of primary production carried on in Australia by a taxpayer. The live stock are to be disposed of, by sale or otherwise; as will be the case for section 36AAA, a disposal in the ordinary course or pattern of trading will not entitle an election under section 36AA. Disposal is to be effected as the result of an official notification which has been given under a law of the Commonwealth, a State or a Territory dealing with contamination of land, live stock or other property. For these purposes, contamination will include contamination by a chemical, a metal or some other substance. Official notification is defined in proposed subsection 36AA(11) - see later notes on that subsection.

A further circumstance, specified by paragraph (b), is that, apart from section 36AA, the proceeds of disposal of the live stock would otherwise be included in the taxpayer's assessable income of a year or years of income. Moreover, by reason of paragraph (c), there is to be a profit arising on the disposal.

If the circumstances described in paragraphs (1A)(a), (b) and (c) apply, the taxpayer has the option to elect under section 36AA to have the profits arising from the disposal to be brought to account in equal instalments over five successive years.

Paragraphs (b) to (h) (inclusive) of clause 9 make amendments of a consequential nature and amend several subsections in section 36AA to reflect the circumstances set out in new subsection (1A).

The subsections which are affected by these amendments deal with the effect on assessable income of making an election (subsection (2)), the making of elections where the live stock are owned by a partnership (subsection (3)) or the trustee of a trust estate (subsection (4)) what happens when the 5 year period of write-off is not fully utilised (subsection (5)) and the procedures for making an election (subsection (6)).

Paragraph (j) of clause 9 will insert new subsections (9), (10) and (11), at the end of section 36AA.

New subsection 36AA(9) defines "the proceeds of the disposal of any live stock" as the sum of -

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any amount received by the owner of the live stock as compensation resulting from an official notification (see notes on proposed subsection 36AA(11) made under a law of the Commonwealth a State or a Territory dealing with contamination of land, live stock or other property (paragraph (a)), as compensation for contamination of the live stock (subparagraph (9)(a)(i)) or loss or diminution of the value of the live stock (subparagraph (a)(ii)); and

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any amount received by the owner of the live stock as payment for the live stock (subparagraph (b)(i) or for the carcasses, or any part of the carcasses, of the live stock (subparagraph (b)(ii).

Proposed subsection 36AA(10) provides the manner in which "profit arising in respect of the disposal of any live stock" is to be calculated. It is the amount remaining after deducting from the proceeds of the disposal the amount representing the total value of live stock, on hand at the beginning the year in which the live stock were disposed of (paragraph (a)) and the amount, outlined in paragraph (b), in respect of live stock not on hand at the beginning of the year of income, which is made up of -

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the purchase price of live stock acquired by purchase (subparagraph (b)(i));

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the deemed purchase price of live stock acquired otherwise then by purchase (excluding natural increase bred in the year of income by the owner of the live stock at the time of disposal), such as by gift (subparagraph (b)(ii)).

Proposed subsection 36AA(11) defines "official notification", an expression used in new paragraphs (1A)(a) and (9)(a). For the purposes of section 36AA an official notification will include, but not be limited to, a declaration, direction, instruction or order.

Clause 10: Gifts pensions etc.

This clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or certain property other than money - made to the funds, authorities and institutions that are listed in the provisions.

The amendment proposed by paragraph (a) of clause 10 will insert five new subparagraphs in the Principal Act. Subparagraph 78(1)(a)(xcvii) will authorise deductions for gifts to The Borneo Memorials Trust Fund while subparagraph 78(1)(a)(xcviii) will do the same for gifts to the Guadalcanal and Solomon Islands War Memorial Foundation.

Subparagraph 78(1)(a)(xcix) provides a deduction for a gift to Australian Vietnam Forces Welcome Home '87 Pty Limited, where the gift is for the purpose of the Australian Vietnam Forces National Memorial project. Similarly, subparagraph 78(1)(a)(ci) authorises a deduction for gifts to the company, Life Education Centre.

The amendment to insert new subparagraph 78(1)(a)(cii) will authorise deductions for gifts made to a non-profit company that conducts life education programs under the auspices of the Life Education Centre. Broadly, these programs are designed to prevent drug abuse among young people.

Before gifts to such a company will qualify for a deduction certain requirements will need to be met. Firstly, the gift must be for the purpose of conducting life education programs. The programs could take place in either a fixed or mobile life education centre (sub-subparagraph 78(1)(a)(cii)(A)).

Another requirement is that such a company is not carried on for the purpose of profit or gain to its individual members (sub-subparagraph 78(1)(a)(cii)(B)).

Finally, sub-subparagraph 78(1)(a)(cii)(C) requires that the company is, by the terms of its constituent document, prohibited from making any distribution whether in money, property or otherwise, to its members.

The terms "company" and "constituent document" are both defined in subsection 6(1) of the Principal Act. A company is defined to include all bodies or associations corporate or unincorporated, but not including partnerships. In relation to a company, subsection 6(1) defines constituent document to mean the memorandum and articles of association of the company, or any rules or other document constituting the company or governing its activities.

By new subsection 78(6AJ) being inserted in the Principal Act by paragraph (b) of clause 10, gifts to The Borneo Memorials Trust Fund and the Guadalcanal and Solomon Islands War Memorial Foundation are not an allowable deduction unless the gift was or is made on or after 10 November 1989 and on or before 30 June 1992.

New subsection 78(6AK) which is also inserted by paragraph (b) of clause 10, provides that a gift to the Australian Vietnam Forces Welcome Home '87 Pty Limited is not an allowable deduction unless the gift was or is made on or after 1 July 1989 and on or before 30 June 1990.

By the operation of subclause 5 of clause 61, proposed subparagraphs 78(1)(a)(ci) and 78(1)(a)(cii) will apply to gifts made on or after 10 November 1989.

Clauses 11 to 15: Unrestricted carry-forward period for taxation losses

Clause 11:

Introductory Note

Clause 11 proposes the insertion of new sections 79E and 79F into the Principal Act to introduce new codes for the deduction of general domestic losses and film losses incurred during the 1989-90 and later years. Unlimited carry-forward will apply to such losses.

Deductions for general domestic losses, other than those incurred in engaging in primary production, and film losses are allowable under sections 80 and 80AAA of the Principal Act. Under sections 80, a taxpayer who incurs a loss in a year of income may, subject to certain conditions carry that loss forward as an allowable deduction against income of any of the succeeding seven years of income. Similarly, section 80AAA provides for the deduction of film losses incurred in an earlier year to be deductible against the film income. Both sections provide that the amount of the loss allowable as a deduction from assessable income is to be reduced by net exempt income (new exempt film income in the case of film losses).

New sections 79E and 79F introduce codes for the deduction of general domestic losses and film losses incurred during the 1989-90 and later years of income. They are to the same effect as sections 80 and 80AAA except that they do not contain any seven year limit on loss deductibility and that they do not contain certain subsections that are no longer appropriate.

Section 79E : General domestic losses of post-1989 year of income

Proposed section 79E provides for the deduction of losses other than film losses and foreign losses incurred during the 1989-90 and later years of income. Primary production losses are general domestic losses and will qualify for deduction under this section.

Subsection 79E(1) sets out the circumstances under which a general domestic loss will arise and provides for the calculation of the amount of the loss. The loss is the excess of the non-loss deductions over assessable income and net exempt income from the non-loss deductions. The terms "post-1989 year of income", "non-loss deductions" and "net exempt income" are defined in new subsection (12) (see later notes).

Subsection 79E(2) overrides subsection (1) and provides for the calculation of the loss where the taxpayer is subject to the current year loss provisions contained in Subdivision B of Division 2A of the Principal Act. This Subdivision applies only where the taxpayer is a company and a disqualifying event is deemed to have occurred under section 50H. In these cases the loss for the purposes of section 79E is calculated by deducting the net exempt income from the current year loss amount. "Current year loss amount" is defined in subsection 12 (see later notes). Although expressed in different terms to subsection 80(1A) the provision is to have an effect similar to that provision.

Subsection 79E(3) is the operative provision of section 79E. It authorises a deduction for a loss incurred by a taxpayer in a prior year of income that has not been allowed as a deduction from the taxpayer's income of prior years. Where a taxpayer does not derive any exempt income in the particular year the loss will be deducted from assessable income (paragraph (a)). Where a taxpayer has derived exempt income in a year in which the loss is allowable, the loss will be deducted from the net exempt income and only the amount remaining will be deducted from the assessable income (paragraph (b)). Paragraph (c) ensures that where a deduction is allowable under section 79E in the same year for two or more losses, the losses will be allowed as deductions in the order in which they were incurred.

Subsection 79E(4) will apply where a taxpayer also incurs a loss for the purposes of proposed section 79F, which provides a deduction for film losses, in a particular year of income. In these circumstances the amount of the loss allowable under proposed subsection (3) will be the excess of the amount of loss calculated under proposed subsection (1) over the amount of the film loss. If the whole of the loss is a film loss then no deduction will be allowable under subsection (3). This provision will have the same effect as subsection 80(2A). However, separate provision for primary production losses is no longer necessary as from the 1989-90 year of income such losses will be general losses.

By subsection 79E(5) domestic losses incurred from the 1989-90 year of income will not be deductible from foreign income unless the taxpayer makes an election under proposed subsection (6). This provision mirrors subsection 80(2B) and will achieve the same purpose of ensuring that a taxpayer does not lose the whole or part of the credit for foreign tax paid which could occur if domestic losses were deductible from foreign income.

Subsection 79E(6) will grant a taxpayer who has derived foreign income during the year the right to elect to deduct the whole or a part of a loss under proposed subsection (3) from any foreign income derived in that year. The deduction is allowable against the foreign income only if the loss is deductible under the normal rules relating to the deduction of losses.

Subsection 79E(7) will provide that an election under subsection (6) made by the taxpayer is to be by a written notice given to the Commissioner of Taxation. The taxpayer will be required to make such an election when the return of income of the relevant year is lodged or within such further period as the Commissioner may allow. These rules are the same as those in subsection 80(2D).

Subsection 79E(8) corresponds to subsection 80(4). It operates where a taxpayer -

•

has become a bankrupt (paragraph (a)); or

•

has not become a bankrupt but has been released from any debts under an Act relating to bankruptcy (paragraph (b));

and will deny deductions under subsection (3) for losses incurred before to the day on which the taxpayer became a bankrupt or was released from debts.

Subsection 79E(9) will modify the provisions of subsection (8) in the same way that subsection 80(4A) modifies subsection 80(4). It will apply where -

•

a taxpayer pays an amount in respect of a debt incurred in a preceding year of income in a current year called "payment year" (paragraph (a)); and

•

in the preceding year (called the "loss year") in which the debt was incurred the taxpayer incurred a loss to which subsection (8) applies (paragraph (b)).

In these circumstances a deduction will be allowable subject to an upper limit imposed by new subsection (10) (see later notes). The deduction allowable under this provision is limited to the amount of the loss of the year of income in which the debt was incurred.

Subsection 79E(10) will impose a limit on the amount of the deductions allowable in a current year under subsection (9) for debts paid in respect of losses incurred by a taxpayer prior to becoming a bankrupt or being released from debts that were taken into account in determining the pre-bankruptcy losses. It is to be noted that an outgoing incurred, but not actually paid, may be an allowable deduction for income tax purposes and may thus be taken into account in determining whether a loss has been incurred in a year of income.

The limit that will be imposed on the total deductions allowable under subsection (9) will ensure that taxpayers who have become bankrupt or have been released from debts are not placed in a more favourable position than other taxpayers. Its effect for post-1989 losses mirrors that of subsection 80(4B) for general losses of earlier years.

The amount of the deduction allowable under subsection (9) may not exceed the amount of the loss of the year in which the debt was incurred less the sum of -

•

any deductions allowed under subsection (9) in assessments of previous years in respect of payments of debts incurred during the year of loss (paragraph (a));

•

deductions allowed under subsection (3) in assessments of previous years in respect of the loss incurred by the taxpayer (paragraph (b)); and

•

the amount of the loss that would have been applied against separate net exempt income derived by the taxpayer in any year if the taxpayer had been entitled to a deduction for the loss under subsection (3) in the payment year or an earlier year (paragraph (c)).

Subsection 79E (11) will apply to deny deductions for losses incurred in the 1989-90 and later years of income where those deductions would have been denied under subsections 80(5), (6) and (7). It will preclude losses arising from deductions, such as depreciations, incurred under certain tax avoidance schemes where the expenditure that gave rise to the deduction was incurred before the enactment of the relevant anti-avoidance legislation.

Subsection 79E(12) defines the following terms for the purposes of section 79E -

"class of income" is a term used in subsection (14) and is to have the same meaning as in section 160AFD. Section 160AFD allows a resident taxpayer to deduct from a class of income from a foreign source in a year of income any overall foreign loss incurred in relation to the same class of income from that same foreign source. Under subsection 160AFD(6) income is divided into three separate classes, these are interest income, offshore banking income and all other income.

"current year loss amount" is defined in relation to a taxpayer whose loss is calculated under subsection (2) because Subdivision B of Division 2A applies to the taxpayer. That subdivision applies only to companies and operates to prevent a net loss incurred by a company during part of an income year under the proprietorship of one set of shareholders, from being offset against the net income derived during another period of the same income year under the proprietorship of a different set of shareholders, unless the company satisfies a "continuing ownership" or "same business" test. The current year loss amount for the purposes of subsection (2) is the sum of the "excess notional loss" and the "excess deductible amount".

The "excess notional loss" is the amount by which the total of the company's notional losses of relevant periods in the income year exceeds its "eligible notional loss" for that year. By virtue of subsection 50D(3) a company has a notional loss in respect of a relevant period to the extent that the allowable deductions of the company for the period exceed the assessable income derived by the company in that period. An eligible notional loss is determined under section 50D. It is a notional loss incurred in a relevant period by a company that satisfies certain tests which allow the loss to be taken into account in calculating the company's taxable income for that year under section 50C. The taxable income of a company is calculated under section 50C rather than section 48 where the current year loss provisions apply. The "excess deductible amount" is the amount by which the deductible amount referred to in subsection 50C(2) exceeds the income amount referred to in that section. The deductible amount is the sum of -

•

the amount of any eligible notional loss of the company (section 50D);

•

any full-year deductions allowable to the company in respect of bad debts under section 51 or section 63 of the Principal Act; and

•

any "partnership deductions" (section 50F) that, by the operation of sub-sections 50F(3), and (4), are allowable in relation to the company in relation to the year of income. 'Partnership deductions' are certain full-year deductions specified in section 50F

The income amount is the sum of -

•

the sum of any notional taxable incomes in respect of relevant periods of the company; and

•

any "full-year amounts" that are to be included in the assessable income of the company (e.g., income from a trust estate in certain circumstances);

"foreign source" is a term used in subsection (14) and is to have the same meaning as in section 160AFD. By virtue of the definition in subsection 160AFD(7) "foreign source" is defined in relation to a taxpayer to mean a business carried on by the taxpayer at or through one or more permanent establishments in a foreign country or any other business, commercial or investment activity carried on by a taxpayer in a foreign country.

"net exempt income" is defined in relation to a taxpayer in terms that correspond to subsection 80(3), as -

•

in the case of an Australian resident the part of the taxpayer's net income derived from all sources that is exempt from Australian tax as is reduced by any overseas taxes payable in respect of the income paragraph (a); and

•

in the case of a non-resident - the net income derived from Australian sources other than income that is not included in assessable income because of section 128D, that is exempt from Australian tax and the amount of film income to which section 26AG applies derived from all sources that is exempt from tax as reduced by any expenses and overseas taxes payable in respect of the income (paragraph (b)).

"non-loss deduction" is defined as an allowable deduction. However, a deduction allowable in respect of a loss under sections 79F, 80, 80AAA and 80AA is excluded. The term is defined for the purpose of calculating the amount of a loss in subsection (1).

"post-1989 year of income" is a year of income commencing on 1 July 1989 or a subsequent year of income. It includes a substituted accounting period adopted in lieu of the year of income commencing on 1 July.

Subsection 79E(13) is an interpretative provision relating to the application of the definition of net exempt income in subsection (12). This provision mirrors subsections 80(3B) and (3C). As a result of this subsection -

•

the net exempt income of a resident taxpayer will not include any net exempt income from petroleum (Division 10AA) unless the income exceeds the unrecouped capital expenditure of the taxpayer determined under Division 10AA, in which case only the amount of the excess will be included in the net exempt income (paragraph (a)); and

•

the net exempt income of a non-resident taxpayer will include film income to which section 26AG applies from all sources that is exempt from tax under section 23H and 23(r) as applied by subsection 26AG(8) (paragraph (b)).

Subsection 79E(14) is an interpretative provision which operates to exclude certain deductions relating to foreign source income from being a non-loss deduction. The amount to be excluded is that by which the taxpayer's income of a class of income from a foreign source in a year of income falls short of the sum of -

•

any deductions allowable from the assessable income of the taxpayer that relate exclusively to the foreign income of that class derived from that source (paragraph (a)); and

•

so much of any other deductions allowable from assessable income (other than apportionable deductions) as, in the opinion of the Commissioner, may appropriately be related to that foreign income (paragraph (b)).

Section 79F : Film losses of post-1989 years of income

Introductory Note

Section 79F provides for the deduction of film losses on an unrestricted basis. It follows the structure of section 80AAA which will apply only to film losses incurred up to the 1988-89 year of income.

Subsection 79F(1) sets out the circumstances in which a taxpayer is to be treated as having incurred a film loss in the 1989-90 and subsequent years of income. A taxpayer will incur a film loss for the purposes of section 79F if -

•

the amount of the film deductions for the year exceeds the sum of the assessable film income and the net exempt film income for the year (paragraph (a)); and

•

the taxpayer incurs an overall loss for the purposes of section 79E in that year (paragraph (b)).

By Subsection 79F(2) a loss incurred in a year of income cannot exceed the overall loss incurred in that year under section 79E.

Subsection 79F(3) provides that where Subdivision B of Division 2A (the current year loss provisions) apply to a taxpayer, the taxpayer will incur a film loss if the current year loss amount exceeds the taxpayer's net exempt film income of the year.

Subsection 79F(3) sets out the circumstances in which a film loss is incurred by a company in a year of income in which the anti-avoidance provisions of Subdivision B of Division 2A relating to current year losses apply to the company. A film loss arises if -

•

the taxpayer's current year loss amount for a year exceeds the taxpayer's net exempt film income for the year (paragraph (a)); and

•

the taxpayer incurs a section 79E loss (paragraph (b)).

Subsection 79F(4) prescribes the method of calculating the amount of a film loss arising under subsection (3). The amount of the film loss cannot exceed the amount of the overall loss incurred under new section 79E.

Subsection 79F(5) provides that in calculating the current year loss amount in subsection (3) the only assessable income and allowable deductions to be taken into account are assessable film income and allowable film deductions. The calculation of the current year loss amount is specified in subsection (12).

Subsection 79F(6) is the operative provision and authorises a deduction in the 1989-90 or a subsequent year of income of a film loss to the extent that the loss has not been allowed as a deduction in a previous year. If a taxpayer does not derive any exempt income in the particular year the loss will be deducted from assessable income (paragraph (a)). Where a taxpayer has derived exempt income in a year in which a loss is allowable, the loss will be deducted from the net exempt income and only the amount remaining will be deducted from assessable income (paragraph (b)).

Where a deduction is allowable under section 79F in the same year for two or more film losses, paragraph (c) ensures that the losses will be allowed as deductions in the order in which they were incurred.

Subsection (7) qualifies the operation of subsection (6) to limit the deduction available in respect of a film loss in a year of income to the amount of film income derived in that year from eligible film investments. For this purpose, paragraph (a) requires that the amount of any film loss deducted from the taxpayer's net exempt income in year of income is not to exceed the amount of the taxpayer's net exempt film income (see notes on subsection (11)) of the income year. Paragraph (b) applies similarly to ensure that the amount of the deduction available in respect of a film loss from the taxpayer's assessable income in a year of income is not to exceed the net assessable film income (see notes on subsection (11)) of that year.

Subsection 79F(8) corresponds to subsection 80AAA(9). It operates where a taxpayer -

•

has become a bankrupt (paragraph (a)); or

•

has not become a bankrupt but has been released from any debts under an Act relating to bankruptcy (paragraph (b));

and will deny deductions under subsection (6) for film losses incurred before the day on which the taxpayer became a bankrupt or was released from debts.

Subsection 79F(9) will modify the provisions of subsection (8) in the same way that subsection 80AAA(10) modifies subsection 80(4). It will apply where -

•

a taxpayer pays an amount in respect of a debt incurred in a preceding year of income (paragraph (a));

•

in the preceding year in which the debt was incurred the taxpayer incurred a loss to which subsection (8) applies (paragraph (b)); and

•

the debt was incurred in deriving or gaining amount that are included in assessable income under section 26AG (paragraph (c)).

In these circumstances a deduction will be allowable subject to an upper limit imposed by new subsection (10) (see later notes). The deduction allowable under this provision is limited to the amount of the loss of the year of income in which the debt was incurred.

Subsection 79F(10) will impose a limit on the amount of the deductions allowable under subsection (9) for debts paid in respect of film losses incurred by a taxpayer before becoming a bankrupt or being released from debts that were taken into account in determining the pre-bankruptcy losses. The amount of the deduction allowable under subsection (9) may not exceed the amount of the film loss of the year in which the debt was incurred less the sum of -

•

any deductions allowed under subsection (9) in assessments of previous years in respect of payments of debts incurred during the year of loss (paragraph (a));

. deductions allowed under subsection (6) in assessments of previous years in respect of the loss incurred by the taxpayer (paragraph (b)); and

•

the amount of the film loss that would have been applied against separate net exempt income derived by the taxpayer in any year if the taxpayer had been entitled to a deduction for the film loss under subsection (6) in the payment year or an earlier year (paragraph (c)).

Subsection 79F(11) will apply to deny deductions for film losses incurred in the 1989-90 and subsequent years of income where the deduction would have been denied under subsection 80AAA(12). It will preclude film losses arising from deductions incurred under certain tax avoidance schemes where the expenditure that gave rise to the deduction was incurred before the enactment of the relevant anti-avoidance legislation.

Subsection 79F(12) defines various terms used in new section 79F -

"assessable film income" of a taxpayer of a year of income is defined as the amount of film proceeds to which section 26AG applies that are assessable to the taxpayer in the year of income.

"current year loss amount" has the same meaning as in section 79E (see notes on subsection 79E(12)).

"exempt film income" of a taxpayer of a year of income is defined as the amount of the film proceeds to which section 26AG applies that are exempt from tax. Thus, the exempt film income is income that is exempt under section 23H and any film proceeds that would otherwise be assessable under section 26AG but which are exempt from tax because they are derived from ex-Australian sources by a non-resident.

"film deductions" of a taxpayer of a year of income are the sum of -

•

the deductions allowable to the taxpayer in the year of income under section 124ZAF and 124ZAFA for capital expenditure in the production of the qualifying film (paragraph (a)); and

•

deductions for any revenue expenses that are deductible against film income in accordance with section 124ZAO (paragraph (b)).

"net assessable film income" of a taxpayer of a year of income is defined as the amount of the assessable film income (see earlier note) of the taxpayer of that year as reduced by the film deductions (see earlier note) of that year of income.

"net exempt film income" of a taxpayer of a year of income is defined as the amount of the exempt film income (see earlier note) of that year reduced by the sum of -

•

any foreign taxes payable in respect of that income (paragraph (a)); and

•

any revenue expenses incurred in the year of income in deriving that exempt film income (paragraph (b)).

"net exempt income" is given the same meaning as that in the new general loss provisions contained in proposed section 79E (see notes on new subsection 79E(12)).

"post-1989 Year of income" is the year of income commencing on 1 July 1989 or a subsequent year of income. It includes substituted accounting periods adopted in lieu of the 1989-90 and later years of income.

Clause 12: General domestic losses of pre-1990 years of income

Clause 12 proposes the amendment of section 80 consequential on the introduction of a new code for the deduction of general losses.

Under section 80 a taxpayer who incurs a loss in a year of income may, subject to certain stipulations, carry that loss forward as an allowable deduction against income of the seven succeeding years of income. A loss is deemed to be incurred by a taxpayer in a year of income when the allowable deductions for that year exceed the sum of any assessable income and the net exempt income derived in the year.

Deductions for losses incurred in the 1988-89 and earlier years will continue to qualify for deduction under section 80 and to be subject to the restriction that if the taxpayer had not derived sufficient assessable and net exempt income to recoup the loss during the seven years following the year in which the loss was incurred the loss is no longer deductible. The last year in which deductions will be allowable under section 80 will be the 1995-96 year of income.

The effect of the amendment proposed by clause 12 is that losses incurred in the 1989-90 and later years of income will not qualify for deduction under section 80.

Clause 13: Film losses of pre-1990 years of income

Clause 13 will effect an amendment to section 80AAA as a consequence of the introduction of a new code for the deduction of film losses.

Under section 80AAA a film loss is incurred in a year of income when film expenses deductible under Division 10BA exceed the amount of any assessable film income to which section 26AG applies. A film loss incurred in a year of income is available for deduction against the assessable film income to which section 26AG applies but only for the next succeeding seven years.

Film losses incurred in the 1988-89 and earlier years of income will continue to qualify for deduction under section 80AAA and any amount not allowed as a deduction at the end of the seven years will be lost. The 1995-96 year of income will be the last year in which deductions for carried forward film losses are allowable under section 80AAA.

The amendment proposed by clause 13 will preclude film losses incurred in the 1989-90 and later years of income from being eligible for deduction under section 80AAA.

Clause 14: Primary production losses of pre-1990 years of income

Clause 14 proposes an amendment to section 80AA that is consequential to the establishment of a new code for the deduction of general losses.

By virtue of section 80AA losses incurred in engaging in primary production are able to be carried forward indefinitely. For this reason primary production losses are excluded from deduction under section 80 and are subject to the special rules contained in section 80AA. Since primary production losses qualify for deduction indefinitely, unlike sections 80 and 80AAA, section 80AA will be operative indefinitely. However, as a result of the introduction of a new code for the deduction of general losses on a unrestricted basis, primary production losses will no longer be deductible under a separate code.

The amendment to section 80AA proposed by clause 14 will have the effect of denying deductions for primary production losses under that section that are incurred during the 1989-90 and subsequent years of income.

Clause 15: Section 80AB - Order in which loss deductions are to be taken into account Section 80AC - Limitations on net exempt income to be taken into account in respect of loss deductions

Clause 15 proposes the repeal of existing sections 80AB and 80AC and the substitution of two revised sections.

Existing section 80AB applies to prescribe the order in which deductions are to be allowable for losses where a taxpayer has incurred more than one class of loss. The classes of losses for which existing section 80AB sets out an order are general losses allowable under subsection 80(2), film losses allowable under subsection 80AAA(7) and primary production losses allowable under subsection 80AA(4). The section provides that a film loss is to be deducted first against the income of a non-loss year, followed by losses allowable under section 80 and lastly, primary production losses.

Proposed section 80AB will provide a new order of deductions to take account of the two new classes of losses. The classes of losses to be taken into account are -

•

general domestic losses of post-1989 years of income deductible under proposed subsection 79E(3) (paragraph (a));

•

film losses of post-1989 years of income deductible under proposed subsection 79F(6) (paragraph (b));

•

general domestic losses of pre-1990 years of income deductible under subsection 80(2) (paragraph (c));

•

film losses of pre-1990 years of income deductible under subsection 80AAA(7) (paragraph (d)); and

•

primary production losses of pre-1990 years of income deductible under subsection 80AA(4) (paragraph (e)).

The order in which these losses are to be deducted against the income of a non-loss year are -

•

pre-1990 film losses allowable under subsection 80AAA(7) will be deducted first (paragraph (f));

•

pre-1990 general domestic losses allowable under subsection 80(2) will be deducted second (paragraph (g));

•

post-1989 film losses allowable under proposed subsection 79F(6) will be deducted third (paragraph (h));

•

pre-1990 primary production losses allowable under subsection 80AA(4) will be deducted fourth paragraph (j)); and

•

post-1989 general domestic losses allowable under subsection 79E(3) will be deducted fifth (paragraph (k)).

The effect of section 80AB will be to ensure that in determining the order of deduction in any year, that losses are deducted in which their deductibility is restricted with the loss with the greatest restriction on its deductibility being deducted first.

Existing subsection 80AC(1) applies to prevent a duplication of the application of the amounts of losses against exempt income derived by a taxpayer who has incurred more than one class of losses. The subsection specifies the order in which general domestic losses, film losses and primary production losses are to be applied against net exempt income.

Proposed subsection 80AC(1) will provide a modified order for the application of net exempt income where the taxpayer incurs more than one class of loss. The net exempt income is required to be applied against the following losses -

•

general domestic losses of post-1989 years of income under proposed paragraph 79F(3)(b) (paragraph (a));

•

film losses of post-1989 years of income under proposed paragraph 79E(6)(b) (paragraph (b));

•

general domestic losses of pre-1990 years of income under paragraph 80(2)(b) (paragraph (c));

•

film losses of pre-1990 years of income under paragraph 80AAA(7)(b) (paragraph (d)); and

•

primary production losses of pre-1990 years of income under subsection 80AA(4)(b) (paragraph (e)).

In the above circumstances the principles to be followed in applying the net exempt income against the various classes of losses are -

•

the extent of the amount necessary to absorb the pre-1990 film loss as required by paragraph 80AAA(7)(b) (paragraph (f));

•

the extent of the amount necessary to absorb the pre-1990 general domestic loss as required by paragraph 80(2)(b) (paragraph (g)).

Any remaining net exempt income is then to be absorbed against other classes of losses in the following order -

•

post-1989 film losses (paragraph 79F(6)(b));

•

pre-1990 primary production losses (paragraph 80AA(4)(b)); and

•

post-1989 general domestic losses (paragraph 79E(3)(b)).

Existing subsection 80AC(2) performs a similar function to subsection 80AC(1) in that it ensures that deductions in respect of debts paid after bankruptcy or release from debts under the Bankruptcy Act are not reduced by the same net income being taken into account in the calculation of deductions allowable for losses under sections 80, 80AAA and 80AA.

Proposed subsection 80AC(2) provides for a modified order in which net exempt income derived by a taxpayer is to be applied against a pre-bankruptcy debt that was paid during the year of income. (Net exempt income has the same meaning as in section 79E or 80; see notes on proposed section 79E). The updated order reflects the proposed introduction of two new classes of losses which may give rise to deductions for debts paid in respect of such losses that were incurred prior to a taxpayer becoming bankrupt or being released from debts under a bankruptcy Act. The effect of the subsection is that in applying the principles specified the net exempt income will be taken into account against the debts paid in a year of income in respect of losses in the following order -

•

debts that relate to pre-1990 film losses under paragraph 80AAA(11)(c) will be taken into account first (paragraph (f));

•

debts that relate to pre-1990 general domestic losses under paragraph 80(4B)(c) second (paragraph (g));

and then in the following order -

•

debts that relate to post-1989 film losses under proposed subsection 79F(10)(c);

•

debts that relate to pre-1990 primary production losses under subsection 80AA(8)(c) fourth;

•

debts that relate to post-1989 general domestic losses subsection 79E(10)(c).

Clauses 16 to 37 : Quarrying

Introductory note

The following clauses will extend the application of Division 10 to include quarrying operations. Broadly Division 10 allows deductions for certain mine development expenditure in equal instalments over the lesser of 10 years or the life of the mine, and outright deductions for exploration and prospecting expenditure.

These deductions are to be available to taxpayers engaged in quarrying operations in respect of capital expenditure incurred after 15 August 1989.

The extension of Division 10 to include quarrying operations will be achieved by restructuring Division 10 into 3 separate subdivisions. Subdivision A will only apply to general mining and include the existing sections 122 through to section 122J. Subdivision B will in effect mirror Subdivision A and only apply to quarrying operations and include proposed sections 122JB through to proposed section 122JF. Subdivision C will include the provisions which are common to both mining and quarrying and include sections 122K through to section 122T of Division 10 and a proposed apportionment section 122NB.

Clauses 16 and 17 : Heading to Division 10 of Part III

Clause 16 will provide a new heading to Division 10 to include a reference to quarrying operations. The new heading will be "Division 10 - Mining and Quarrying".

Clause 17 will restructure Division 10 by grouping the sections dealing with general mining, sections 122 to section 122J in a subdivision called "Subdivision A - General Mining".

Clause 18: Interpretation

This clause proposes a minor amendment to avoid ambiguity arising from a term which is used in both Subdivision A and B. It inserts a definition into subsection 122(1) of the Principal Act, which defines certain terms and phrases used in Subdivision A -

"allowable capital expenditure" which is defined in subdivision A to have the meaning as in section 122A. Broadly this is capital expenditure in carrying on mining operations including expenditure on buildings, other improvements, housing and welfare facilities, the provision of water, access roads, etc.

Clause 19: Deduction of allowable (post 19 July 1982) capital expenditure

This clause proposes a minor technical amendment to section 122DG of the Principal Act to ensure its application is not altered by the extension of Division 10 to quarrying operations. Section 122DG provides a deduction for allowable capital expenditure in proposed Subdivision A - see above at Clause 18.

Specifically, subsection 122DG(6) ensures that taxpayers engaged in mining operations are not denied effective deductions for allowable capital expenditure through the operation of the carry forward loss provisions. Although this Bill will also remove the 7 year limitation on the carry forward of losses, this subsection will enable taxpayers to transfer any allowable capital expenditure incurred on a particular site, which has not been allowed as a deduction, to the purchaser of the right or information.

The amendment will include in subsection 122DG(6) a reference to sections 122JE and JF, which will also exclude allowable capital expenditure and exploration and prospecting expenditure in proposed Subdivision B (clause 22) from the calculation of the remaining income to determine the extent of the deduction available under this section.

Clause 20: Election that Subdivision not apply to plant

This clause will ensure that section 122H of the Principal Act which is to be located in proposed Subdivision A, only applies to taxpayers engaged in general mining operations. The references to "Division" in the heading of the section 122H and the reference to "Division" in subsection 122H(1) will be changed to "Subdivision". Section 122H allows taxpayers engaged in mining operations to elect that the depreciation provisions of the Principal Act apply to exploration and prospecting plant and articles rather than Division 10. A similar election will be provided in Subdivision B for taxpayers engaged in quarrying operations.

Clause 21: Exploration and prospecting expenditure

This clause proposes a minor technical amendment of section 122J of the Principal Act to ensure its application is not altered by the extension of Division 10 to quarrying operations. Section 122J provides a deduction for exploration and prospecting expenditure in proposed Subdivision A.

Broadly section 122J provides an outright deduction against income from any source for expenditure incurred by a taxpayer on exploration or prospecting for minerals obtainable by prescribed mining operations.

As in subsection 122DG(6), discussed at Clause 19, subsection 122J(4B) limits the deductions available under the section to the income remaining after allowing all other deductions. This will enable a taxpayer to transfer any undeducted amount to a purchaser of a mining right or information.

This amendment proposes to extend subsection 122J(4B) to also exclude exploration and prospecting expenditure allowable under proposed section 122JF, see notes on clause 22, from the calculation of the remaining income to determine the extent of the deduction allowable under this section.

Clause 22: "Subdivision B - Quarrying"

Introductory note

This clause proposes to amend Division 10 by inserting a new subdivision, titled "Subdivision B - Quarrying". This new subdivision will contain the proposed sections which relate exclusively to quarrying operations, sections 122JB through to section 122JF.

As previously outlined these sections are very similar and will have the same application as those applying to taxpayers engaged in general mining in the new Subdivision A. Broadly they will -

•

allow certain quarry development expenditure to be deductible in equal instalments over the lesser of the life of the quarry or 20 years;

•

allow an outright deduction against income from any source for exploration and prospecting expenditure incurred in respect of quarry materials;

•

allow a vendor of a mining or prospecting right or information to elect to transfer entitlements to deductions under the Subdivision to the purchaser; and

•

only apply to capital expenditure incurred by the taxpayer on or after 16 August 1989.

Section 122JB - Interpretation

Subsection 122JB(1) defines the following terms and phrases used in new Subdivision B -

"allowable capital expenditure" will have the meaning given to it by section 122JC of this Subdivision. Broadly this includes capital expenditure of a general kind incurred by a quarry owner in carrying on eligible quarrying operations such as site preparation, expenditure on buildings and other improvements, the provision of light, power, water, access roads, communications and the cost of acquiring a quarrying or prospecting right or quarrying or prospecting information.

"concentration" means concentration by a gravity, magnetic, electrostatic or flotation process and encompasses the removal of less valuable parts of rock or other materials by any of the processes mentioned.

"eligible purposes" are purposes for which either -

•

allowable capital expenditure, as specified in section 122JC may be incurred (paragraph (a)); or

•

purposes as defined in section 122JF, which is broadly expenditure incurred on or after 16 August 1989 on exploration or prospecting in Australia for materials obtainable by eligible quarrying operations (paragraph (b)).

"eligible quarrying operations" are quarrying operations carried on by a taxpayer on a quarrying property in Australia for the purpose of extracting quarry materials from their natural site, for the purpose of gaining or producing assessable income. This definition covers actual extractive operations for quarrying operations and expressly excludes prescribed mining operations, as contained in the general mining provisions in Subdivision A.

"housing and welfare" in relation to a taxpayer means residential accommodation and welfare facilities at or adjacent to, the site of a quarrying operation, provided by the taxpayer for the benefit of employees and their dependants. Welfare facilities will include health, educational, recreational or similar facilities, and facilities for the provision of meals by the taxpayer at the quarry site. The definition also includes works carried out in connection with such accommodation or facilities such as the provision of infrastructure such as water, light, power, access roads and communications.

"property" is defined to include a quarrying or prospecting right which is also defined later in this subsection.

"quarry materials" are materials which can or are obtained by quarrying operations, (for example sandstone or granite).

"quarrying or prospecting information" is geological, geophysical or technical information that relates to the possible presence, absence or extent of deposits of quarry materials in an area or that can be of assistance in determining the presence, absence or extent of such deposits in an area, which has been obtained from exploration or prospecting, or quarrying, for quarry materials;

"quarrying or prospecting right" is defined as, an authority, licence, permit or right to quarry or prospect for quarry materials in a particular area in Australia, or a lease of land in Australia by virtue of which the lessee is entitled to quarry or prospect for quarry materials on the land. The definition also includes an interest in such an authority, licence, permit, right or lease.

A quarrying or prospecting right includes buildings or other improvements on the land concerned which are used in connection with a quarrying operation where they are acquired with the quarrying or prospecting right. This is consistent with the definition of "mining or prospecting right" in Subdivision A. However, it should be noted that housing and welfare facilities are not included in a quarrying or prospecting right.

"treatment" is defined to include cleaning, leaching, crushing, grinding, breaking, screening, grading, sizing, or a concentration (see earlier notes) or any other method applied to quarry materials before concentration. In the case of quarry materials not requiring concentration, the term covers any treatment that would be applied before concentration, if concentration were required. Sintering and calcining are expressly not included in the definition of treatment.

Proposed subsection 122JB(2) will ensure that where a taxpayer carries on eligible quarrying operations on two or more quarrying properties, the relevant provisions of the proposed new Subdivision B will apply to each of the taxpayer's properties as if it was the only property on which the taxpayer is engaged in eligible quarrying operations. In effect deductions allowable under the Subdivision in respect of each quarry are determined in accordance with the relevant provisions of this Subdivision.

Paragraph (a) will ensure that only those items which relate exclusively to a particular quarrying property are taken into account for the purposes of this Subdivision.

Paragraph (b) will allow the Commissioner of Taxation to apportion expenditure which does not relate exclusively to a particular quarrying property to a reasonable extent.

Subsection 122JB(3) will ensure that where a provision of Subdivision B specifies an amount for the purposes of a notice, it is that specified amount that is the amount which is used for the purposes of Subdivision B.

Proposed subsection 122JB(4) will provide that the amount specified for the purchase of a quarrying or prospecting right or information in a notice under section 122JD is in total deemed to have been incurred by the purchaser of the right or information. The Commissioner will have the discretion to determine the extent to which the expenditure relates to a particular class, or period in which it was incurred.

Section 122JC - Allowable capital expenditure

Proposed section 122JC specifies the types of capital expenditure which will qualify for deduction under the proposed new section 122JE. A general test which applies to all the categories of capital expenditure which may qualify for deduction is that the expenditure must be incurred by a person who is engaged in, or preparing to engage in quarrying operations in Australia for the purpose of producing assessable income. The section also expressly excludes certain types of capital expenditure.

Paragraph 122JC(1)(a) will include capital expenditure of a general kind incurred by a quarry owner in the process of extracting minerals or metals from their natural site for the purpose of producing assessable income. In addition the paragraph specifically provides for the inclusion in allowable capital expenditure the following types of expenditure -

Subparagraph (i) includes expenditure incurred in preparing a site for quarrying operations, e.g. the clearing of a site, etc.

Subparagraph (ii) includes expenditure on buildings, and other improvements necessary for the carrying on by the taxpayer of quarrying operations, e.g. workshops, offices, storage facilities etc.

Subparagraph (iii) includes expenditure in providing or contributing to the cost of providing water, light or power for use on the quarry site, or access roads or communications to the quarry site, e.g. reservoirs, power plants, telephone lines or capital contributions to a local authority for the provision of water or power supplies.

Paragraph 122JC(1)(b) brings within the scope of allowable capital expenditure, expenditure on buildings for use directly in connection with the operation or maintenance of treatment plant. Treatment plant is plant which is used primarily and principally in the treatment of quarry materials obtained by the taxpayer from quarrying operations. Treatment is a defined term in subsection 122JB(1) and broadly covers all processes applied to quarry materials after extraction. The paragraph will also ensure that the cost of buildings or other improvements that are used directly in connection with the storage of quarry materials, both before and after treatment, in respect of the operation of treatment plant, qualify as allowable capital expenditure.

Paragraph 122JC(1)(c) will include the cost of acquiring a quarrying or prospecting right or quarrying or prospecting information in allowable capital expenditure. The amount included in allowable capital expenditure is to be limited to so much of the cost as is specified in a notice given to the Commissioner under section 122JD (see notes on that section). It is also limited broadly to so much of the relevant capital expenditure (i.e., allowable capital and exploration and prospecting expenditure) of the vendor that has not been allowed as a deduction under this subdivision, plus any amount which has been included in the assessable income of the vendor in respect of the expenditure.

Subsection 122JC(2) will ensure that expenditure on plant and articles as defined in section 54 is excluded from the allowable capital expenditure of the taxpayer.

Subsection 122JC(3) will ensure that expenditure on housing and welfare facilities as defined in subsection 122JB(1) is excluded from the allowable capital expenditure of the taxpayer. Broadly, capital expenditure in respect of residential accommodation, health, educational or recreational facilities will be excluded from deduction under this Subdivision.

Subsection 122JC(4) will specifically exclude certain types of capital expenditure from allowable capital expenditure of the taxpayer.

Paragraph (a) will exclude the cost of ships, railway rolling stock or road vehicles or railway lines, roads, pipelines or other facilities for use wholly or partly for the purpose of transporting quarry materials or any such products. Proposed amendments to Division 10AAA will allow deductions over 20 years in respect of the cost of railway lines, roads, pipelines or other facilities used primarily and principally for transporting quarry materials. However this paragraph does not operate to exclude from allowable capital expenditure the cost of any of these items which are used wholly within the site of quarrying operations.

Paragraph (b) will exclude expenditure on plant, buildings or other improvements for use in connection with, or on any works carried out in connection with, the establishment, operation or use of a port or other facilities for ships. This exclusion will cover such items as townships, wharves, wharf plant, roads, harbour surveys and dredging.

Paragraph (c) will exclude expenditure on an office building that is not situated at or adjacent to the site on which quarrying operations are being carried on by the taxpayer. Thus an office building situated away from the quarry site at say a port or in a city is not eligible for the allowance.

Section 122JD - Purchase of quarrying or prospecting right or information

This section will allow the relevant capital expenditure which was incurred by the vendor of a quarrying or prospecting right or quarrying or prospecting information to be transferred to a purchaser and included in the allowable capital expenditure of the purchaser in accordance with paragraph 122JC(1)(c). However this transfer is only permitted where the vendor and purchaser provide an appropriate notice to the Commissioner of Taxation. The practical effect of the notice will be to transfer to the purchaser of the right or information the vendor's entitlement to only relevant deductions under the Subdivision.

Subsection 122JD(1) permits a purchaser and a vendor of a quarrying or prospecting right or quarrying or prospecting information to give notice to the Commissioner that they have agreed that so much of the amount paid for the right or information as is specified in the notice is to be included in the allowable capital expenditure of the purchaser. Similarly the amount so specified will be used to determine any balancing charge, under section 122K, for the vendor. The purchaser must acquire the right or information for the purpose of carrying on eligible quarrying operations or exploring or prospecting for quarry materials which are obtainable by those operations or be carrying on a business of exploring and prospecting for quarry materials.

Subsection 122JD(2) provides the circumstances in which the amount to be included in the allowable capital expenditure of the purchaser of a right or information may be less than the amount specified in the notice given. This will occur where the amount so specified exceeds the sum of the amounts referred to in paragraphs (a) to (c) of this subsection.

Where the amount which is specified in a notice for the purpose of this section, exceeds the sum of the amounts referred to in paragraphs (a) to (c), this subsection ensures that the amount specified is reduced by that excess, to arrive at the amount which the purchaser can include in allowable capital expenditure.

Paragraph 122JD(2)(a) refers to the amount of capital expenditure (other than expenditure on plant or on exploration or prospecting) incurred by the vendor in relation to the area which is the subject of the right or to which the information relates. The amount to be taken into account for the purposes of the subsection is the amount of the relevant expenditure that would have been included in the allowable capital expenditure of the vendor as at the end of the year of income in which the transaction occurs, if the notice (or a notice in relation to a subsequent sale of a right or information during that year) had not been given to the Commissioner.

Broadly, the amount included will be so much of the allowable capital expenditure of the vendor as was incurred in developing a quarry situated on the area which is the subject of the right or to which the information relates. Expenditure on buildings and improvements, excluding housing and welfare, will not however be taken into account unless the purchaser of the right acquires them, or an interest in them, when the right is purchased - see notes on subsection 122JD(3).

Paragraph 122JD(2)(b) refers to exploration or prospecting expenditure (other than expenditure on plant) which was incurred by the vendor of the right or information that has not been allowed, and is not allowable as a deduction in the year for which the notice is given to the Commissioner or in a prior year. Expenditure covered by this paragraph does not have to relate to exploration or prospecting carried out on the area which is the subject of the right or to which the information relates.

The undeducted cost of exploration or prospecting plant is not taken into account because it may be acquired by any person independently of a transaction involving a mining or prospecting right.

Paragraph 122JD(2)(c) refers to any amount included in the vendor's assessable income under section 122K of Division 10 as a result of the sale of property to which the notice relates. Section 122K provides for the inclusion in, or further deduction from the assessable income of a taxpayer for so much of the sale price of property that represents a recoupment of deductions allowed to or insufficient deductions for the taxpayer in respect of capital expenditure on that property. In effect it provides a balancing charge on the disposal of property under Division 10.

Subsection 122JD(3) will have effect only in isolated cases where a purchaser of a quarrying or prospecting right does not acquire any interest in buildings or improvements situated on the area subject to the right or used in connection with the quarrying operations in that area. In these circumstances the undeducted capital expenditure of the vendor on those improvements will not be taken into account in calculating the part of the cost of the right that may qualify as allowable capital expenditure in the hands of the purchaser of the right. The vendor will retain his entitlements to deductions in respect of that expenditure.

Subsection 122JD(4) will only have effect in a few isolated cases, and will operate to nullify a notice given under this section in respect of a transaction involving the grant, assignment or surrender of a lease in respect of which the person giving the notice has made an election under subsection 88B(5) of the Principal Act.

Section 88B provides taxpayers with an election in relation to mining leases that the general lease provisions of Division 4 should not apply. The election provided by subsection 88B(5) was withdrawn from 10 May 1968 except in relation to certain pre-existing transactions. It should also be noted that a lease granted under a Mining Act is a mining lease for section 88B purposes even though the actual operations were not mining operations.

Where such an election is made the expenditure, to which section 122JD would otherwise apply, may be deductible under Division 4 as a lease premium. The provisions of subsection 122JD(4) will ensure that the premium does not qualify for deduction under this Subdivision as well as Division 4.

Subsection 122JD(5) ensures that a notice under section 122JD is in writing signed by or on behalf of the persons giving the notice. A notice must be lodged with the Commissioner of Taxation not later than two months after the end of the year of income of the purchaser in which the transaction occurred. The Commissioner is authorised to extend the time for lodgment of a notice.

Section 122JE - Deduction of allowable capital expenditure

Introductory Note

New section 122JE will allow a deduction on a straight line basis for allowable capital expenditure incurred on or after 16 August 1989 in respect of eligible quarrying operations. The broad operation of proposed section 122JE is the same as section 122DG of the Principal Act and is best illustrated by way of example.

Example

A taxpayer incurs $2000 as allowable capital expenditure. In that case a deduction equal to one-twentieth of that amount $100, is an allowable deduction in the year of income. In the subsequent years, the deduction is to be calculated by dividing the "unrecouped" amount of that expenditure (i.e., the original $2000 less the $100 deduction allowed in the preceding year) by the number of years remaining for deduction, i.e., nineteen. Thus, the deduction allowable in year two is similarly $100. This process continues until, after twenty years, the original capital expenditure amount has been fully written-off in equal instalments.

In a case where the remaining life of the quarry as at the end of a year of income is less than the dividing factor determined under the above rule, deductions are to be determined by reference to the life of the quarry. If, in the above basic example it were estimated that the remaining life of the quarry at the end of the year of income immediately succeeding the year of expenditure was only two years, the unrecouped expenditure of $1900 would be allowable in two equal instalments of $950 in each of the years succeeding the year of expenditure and the subsequent income year.

In the event that there is insufficient assessable income the undeducted entitlement is carried forward to the next succeeding income year as an amount deductible under section 122JE, subject again to there being sufficient income to absorb the deduction. Thus in effect the entitlement to a deduction can be carried forward indefinitely while eligible quarrying operations are undertaken on that particular site.

If the property in respect of which an amount of allowable capital expenditure was incurred is disposed of, lost or destroyed or its use is otherwise terminated the amount of the expenditure attributable to the property that has not been deducted in a year prior to the year of disposal, etc. is deducted from the amount of the unrecouped expenditure. For this purpose it is assumed that deductions have been allowed in full in preceding years, i.e., that there has been sufficient income to absorb the deductions. In the event that amounts have not, in fact, been deducted because of insufficiency of income, any deduction entitlements for those amounts that would otherwise have been carried forward for deduction in the year of disposal, etc., or a future year of income under the rule outlined in the preceding paragraph will be withdrawn. The broad effect of the arrangement is to prevent any undeducted amounts of allowable capital expenditure that is attributable to property that is disposed of, etc. from being available for deduction in the year of disposal or in a subsequent year.

Similar adjustments will apply in relation to undeducted amounts of allowable capital expenditure that is the subject of a notice lodged under section 122JD.

Against that background, notes on the individual provisions of new subsection 122JE follow.

Subsection 122JE(1) authorises the allowance of deductions for the allowable capital expenditure incurred by a taxpayer on or after 16 August 1989 in a year of income in respect of that year and in respect of subsequent years of income.

Subsection 122JE(2) states that the deduction allowable in respect of a year of income is to be determined using the following formula;

(Unrecouped expenditure)/(Statutory factor)


'Unrecouped expenditure' is so much of the allowable capital expenditure at the end of the year of income that has not been allowed as a deduction which is determined in accordance with subsection 122JE(3).

'Statutory factor' is the lesser of the following numbers -

(a)

the difference between 20 and the number of preceding years of income in respect of which a deduction has been allowed or is allowable in respect of that expenditure, or would be allowable but for the limitation on deductions imposed by subsection 122JE(5); and

(b)

the number of whole years in the estimated life of the quarry or proposed quarry on the property as at the end of the year of income.

Subsection 122JE(3) prescribes the amounts to be taken into account in determining the amount of the allowable capital expenditure that is unrecouped as at the end of a year of income.

This is determined by deducting from the amount of allowable capital expenditure incurred in a year of income amounts that are defined in paragraphs (a) and (b) of this subsection. Those amounts are any part of that allowable capital expenditure that -

•

has been allowed or is allowable as a deduction in a preceding year of income under subsection 122JE(1), or that would have been so allowed but for the limitation on a deduction imposed by subsection 122JE(5) due to an insufficiency of income to absorb the deduction;

•

was incurred on property which has been disposed of, lost or destroyed, or the use of which for eligible purposes has been terminated, and has not been allowed and is not allowable as a deduction in a preceding year of income; and

•

represents so much of any amounts specified in notices given under section 122JD, in respect of which the entitlement to deductions has been transferred to the purchaser of a quarrying or prospecting right or information, and has not been allowed, and is not allowable as a deduction in a preceding year of income.

Subsection 122JE(4) ensures, for the purposes of determining under subsection 122JE(3) the amount to be excluded from the unrecouped amount of an amount of allowable capital expenditure in circumstances where property is disposed of, etc., that deductions arising in a year of income preceding the year of disposal are taken to have been allowed in full. This subsection applies similarly for the purpose of determining the amount of unrecouped expenditure that is attributable to an amount specified in a notice lodged under section 122JD.

Subsection 122JE(5) which is to be read in conjunction with subsection 122JE(6), will ensure that quarry operators obtain deductions for allowable capital expenditure to the extent of their assessable income for the year of income from all sources remaining after deducting all other allowable deductions other than exploration and prospecting expenditure in both Subdivisions A and B and deductions allowable under this section, or section 122DG. This provision mirrors the deduction limiting provision in section 122DG of the Principal Act.

Amendments being proposed by this Bill will remove the seven year restriction on the ability to carry forward losses and allow taxpayers to indefinitely carry forward any entitlements to deductions, see Clause 11. However this subsection will enable taxpayers to transfer any allowable capital expenditure incurred on a particular site, which has not been allowed as a deduction, to the purchaser of the right or information.

Paragraph 122JE(5)(b) provides that where the net income of the taxpayer is insufficient to absorb the amount available to be deducted under this section for 2 or more deductions, each deduction so available is reduced proportionately so that together they equal that remaining amount.

By subsection 122JE(6) a taxpayer will be able to make an election, in any year of income in respect of all allowable capital expenditure which has been disallowed under subsection (5), that subsection (7) is to apply.

Subsection 122JE(7) will ensure that once such an election has been made under subsection 122JE(6), the deduction for allowable capital expenditure under this section is not limited to the amount of net income remaining after allowing all other deductions excluding all exploration and prospecting expenditure, and allowable capital expenditure under this section and section 122DG. In effect it enables a loss to be created for the year of income.

Subsection 122JE(8) ensures that allowable capital expenditure the extent to which an election has not been made in subsection 122JE(7), continues to be limited by subsection 122JE(5) to the amount of assessable income remaining after deducting all other allowable deductions excluding all exploration and prospecting expenditure and allowable capital expenditure under this section and section 122DG.

Subsection 122JE(9) will ensure that the whole or a part of a deduction which is disallowed under subsection 122JE(5) is an allowable deduction under subsection 122JE(1) in the next succeeding year of income, subject again to the limit imposed by subsection 122JE(5) in the succeeding year.

Subsection 122JE(10) will apply to ensure that undeducted allowable capital expenditure incurred in relation to property cannot be carried forward for deduction by virtue of the operation of subsection 122JE(9) where that property is disposed of, lost or destroyed, or the use of the property for eligible purposes has been otherwise terminated. In a case where part of the allowable capital expenditure incurred by the taxpayer in respect of such property has not been deducted because of the application of subsection 122JE(5) and would therefore be deductible in a future year under subsection 122JE(1) by reason of the operation of subsection 122JE(9), this subsection applies to withdraw any deduction entitlement otherwise arising in relation to the year of disposal, etc, or any subsequent year.

Subsection 122JE(11) will apply in a similar manner to subsection 122JE(10) to ensure that allowable capital expenditure incurred by a taxpayer in relation to an area that is subject of a notice lodged under section 122JD that remains undeducted as at the end of the year of income prior to the year in which the transaction to which the notice relates occurred, cannot be carried forward for deduction in the year of the transaction or any subsequent year. As explained earlier, the effect of the section 122JD notice is to transfer any undeducted deduction entitlements to the purchaser of the quarrying or prospecting right or information.

Subsection 122JE(12) will enable property, that has ceased to be used by the taxpayer for eligible quarrying purposes, and is brought back into use for purposes for which allowable capital expenditure may be incurred, to be deductible when it is first used for such purposes. The amount of allowable capital expenditure available to the taxpayer upon the recommencement of use of the property is determined by the Commissioner.

Subsection 122JE(13) allows the Commissioner to determine the estimated life of the quarry or proposed quarry where the taxpayer's estimate is not considered by the Commissioner to be realistic or soundly based.

Section 122JF - Exploration and prospecting expenditure

This section provides for a deduction for expenditure incurred on exploration and prospecting for quarry materials. It is very similar in application as section 122J of the Principal Act. The section will allow an outright deduction for exploration and prospecting expenditure incurred in Australia for quarry materials for the purpose of producing assessable income. The deduction available under the section is limited to the amount of net assessable income remaining after allowing all other deductions excluding deductions under this section, and section 122J. This restriction will allow any unrecouped expenditure to be transferred to a purchaser of a quarrying or prospecting right or information. A company may also elect in respect of exploration and prospecting expenditure of the year of income in which the expenditure is incurred that a loss is created and transferred to a company in the same group. The provisions are discussed in detail below.

Subsection 122JF(1) provides that expenditure incurred on or after 16 August 1989 on exploration or prospecting in Australia for quarry materials for the purpose of producing assessable income will qualify for a deduction in accordance with this section.

Subsection 122JF(2) will limit the deduction which is available under the section to so much of the taxpayer's assessable income from all sources which remains after deducting all other deductions relating to the production of assessable income excluding deductions allowable under this section and section 122J. As outlined previously, further amendments being proposed by this Bill will remove the seven year limit on the ability to carry forward losses, however this restriction will enable taxpayers to transfer the entitlement of exploration and prospecting expenditure to subsequent purchasers of a right or information.

Subsection 122JF(3) allows a taxpayer to elect in respect of exploration and prospecting expenditure incurred in the current year of income, that subsection 122JF(2) does not apply. The effect of this election is to create a loss for the year of income.

Subsection 122JF(4) will apply in circumstances where an election under subsection 122JF(3) has been made and will determine the amount of the deduction allowable in respect of any exploration and prospecting expenditure of a previous year that has not been absorbed by that year's assessable income and that has been carried forward for deduction against income of the current year. By the operation of subsection 122JF(6), any such excess expenditure is deemed to have been incurred by the taxpayer during the first subsequent year of income in which the taxpayer derives assessable income.

Where the current year's income is insufficient to absorb both, previous years expenditure i.e., 'deemed expenditure' and exploration and prospecting expenditure of the current year i.e., 'actual expenditure' paragraph 122JF(4)(d) will apply to deduct each proportionally and therefore limit the amount of actual expenditure which can be transferred to a group company. The proportion of 'deemed expenditure' which is to be deducted in the current year of income is calculated in accordance with the following formula -

(Reduced assessable income * Deemed expenditure)/(Deemed expenditure + Actual expenditure)


.

'Reduced assessable income' is defined as the taxpayer's assessable income less all allowable deductions, other than deductions for exploration and prospecting expenditure allowable under this section and section 122J.

'Deemed expenditure' is defined as the whole dollar amount of deemed expenditure, which is defined in subsection 122JF(5).

'Actual expenditure' is defined as the whole dollar amount of actual expenditure, which is defined in subsection 122JF(5).

After the application of the formula any undeducted balance of any expenditure is carried forward to subsequent years for deduction.

Subsection 122JF(5) specifies what is meant by the following terms "actual expenditure" and "deemed expenditure" for the purposes of subsections 122JF(3) and (4).

Paragraph 122JF(5)(a) outlines what actual expenditure is taken to mean, which is exploration and prospecting expenditure incurred in the year of income, and is thus not deemed expenditure.

Paragraph 122JF(5)(b) outlines what deemed expenditure is taken to mean, which is exploration and prospecting expenditure of a year of income which is undeducted exploration and prospecting expenditure of a previous year that is deemed by subsection 122JF(6) to have been incurred by the taxpayer during the year of income.

Subsection 122JF(6) applies where the exploration or prospecting expenditure incurred exceeds the deduction allowable in respect of the relevant year of income. In such a case, this subsection deems the excess to be incurred in the first subsequent year of income in which the taxpayer derives assessable income. If there is still an excess in that subsequent year, the process is repeated in each following year until the taxpayer has received deductions for the full amount of the expenditure.

Subsection 122JF(7) provides that a deduction is not allowable in accordance with this section in respect of expenditure incurred unless the Commissioner of Taxation is satisfied that during the year of income -

•

the taxpayer carried on or proposed to carry on eligible quarrying operations (see notes on section 122JB(1)); or

•

the taxpayer carried on a business of, or a business that included exploration or prospecting in Australia for materials obtainable by eligible quarrying operations and the expenditure was necessarily incurred in carrying on that business.

Subsection 122JF(8) is a safeguarding provision designed to complement paragraph 23(pa) of the Principal Act and will only apply in limited situations as most prescribed metals and minerals are extracted via mining operations rather than quarrying. However, where quarrying operations are undertaken and an amount of income is exempt under paragraph 23(pa) this subsection will apply. That paragraph exempts from tax income derived by a bona fide prospector from the sale, transfer or assignment of a right to mine for gold or a prescribed metal or mineral in Australia. The prescribed metals and minerals are contained in Income Tax Regulation 4AA.

Subsection 122JF(8) will only apply where, a taxpayer derives an amount of income from the sale, transfer or assignment of rights to mine on a mining tenement that is or has been exempt from income tax by virtue of paragraph 23(pa) and where, in relation to that mining tenement, excess amounts of expenditure referred to in sub-section (6) have not been deemed, and are not required to be deemed, to have been incurred in the year of income or in a prior year of income. This will occur where the taxpayer has derived insufficient assessable income, from all sources, to fully recoup the exploration or prospecting expenditure deduction.

Where the above conditions are satisfied, new subsection 122JF(8) will reduce the taxpayer's entitlement to deductions for future years in respect of the excess amounts of exploration and prospecting expenditure. The amount of the reduction will equal the amount of the income exempt from income tax by virtue of paragraph 23(pa). Effecting the reduction in this manner still enables a taxpayer to deduct any remaining excess exploration or prospecting expenditure relating to the disposed quarrying tenement.

Subsection 122JF(9) is designed to ensure that a vendor of a quarrying or prospecting right or quarrying or prospecting information who transfers an entitlement to deductions for unrecouped expenditure in accordance with section 122JD will not be eligible for a deduction in respect of the amount so transferred that represents undeducted exploration or prospecting expenditure. This subsection will also preclude a subsequent purchaser from becoming entitled to a deduction for such expenditure.

Subsection 122JF(10) allows a taxpayer to elect that this subsection applies in respect of a unit of exploration and prospecting plant and is similar in application as section 122H of Subdivision A. The effect of this election is to exclude the expenditure on the unit of plant, and any subsequent expenditure on the unit of plant, from the operation of this section. The plant then qualifies for depreciation under the general depreciation provisions of the Principal Act.

Subsection 122JF(11) provides that the election in subsection 122JF(10) must be made in the year of income in which the expenditure on the exploration and prospecting plant is first incurred.

Subsection 122JF(12) defines what exploration or prospecting means for the purpose of this section. It means a systematic search for areas containing quarry materials by methods such as, geological mapping, geophysical surveys, search by drilling or by drives, shafts, cross cut, winzes and rises. The definition does not extend to normal quarrying operations which are directed towards the extraction of quarry materials as opposed to the discovery of deposits of quarry materials.

Clause 23: Disposal, loss, destruction or termination of use of property

This clause proposes a number of amendments of a drafting nature to facilitate the operation of the new structure of Division 10. It also proposes a number of minor technical amendments to ensure that section 122K of the Principal Act also applies to deductions allowed in respect of quarrying operations under Subdivision B.

Basically section 122K provides for a balancing charge to be made when property in respect of which expenditure has been allowed or is allowable under Division 10 is disposed of, lost, or destroyed, or its use for general mining purposes has been terminated.

Paragraph (a) of the clause will include a reference to eligible purposes in subsection 122K(1). Subsection 122K(1) provides that the section applies where deductions have been allowed or are allowable under Division 10 or its predecessor, in respect of capital expenditure on property that has been disposed of, lost, or destroyed or its use for prescribed mining purposes has been terminated. This amendment will ensure that the section also applies when property in Subdivision B is disposed of lost or destroyed or its use for eligible purposes has been terminated.

Paragraph (b) of the clause will include the following terms in the definitions in subsection 122K(4). This will ensure that terms defined in Subdivisions A and B have the same meaning in this subdivision.

"eligible purposes" is defined to have the same meaning as in Subdivision B, which is defined earlier in proposed new subsection 122JB(1) at clause 22. Basically it includes purposes for carrying on quarrying operations or exploring and prospecting for quarry materials.

"mining or prospecting right" is defined in this section to have the same meaning as in subsection 122(1) of the Principal Act which is broadly an authority, licence, permit or an interest in such, to mine or prospect for minerals in Australia for the purpose of producing assessable income.

"prescribed purposes" is defined in this section to have the same meaning as in subsection 122(1) of the Principal Act. Broadly it is defined to include purposes for which allowable capital expenditure and exploration and prospecting expenditure may be incurred.

"property" is defined to include both a quarrying and prospecting right and a mining and prospecting right.

"quarryinq or prospecting right" is defined to have the same meaning as in proposed subsection 122JB(1) of new Subdivision B, which is broadly an authority, licence, permit or an interest in such, to quarry or prospect for quarry materials in Australia for the purpose of producing assessable income.

Clause 24: Transactions between persons not at arm's length

This clause also proposes a minor technical amendment to ensure that section 122L also applies to expenditure incurred in Subdivision B, and an amendment of a drafting nature to facilitate the operation of the new format of Division 10.

Section 122L is a safeguarding provision which applies in relation to sales of property where the purchaser and vendor are not dealing with each other at arms length. In these circumstances the Commissioner may determine the value of the property for the purposes of the transaction.

Paragraph (a) of this clause will exclude from paragraph 122L(a) a quarrying or prospecting right. This will ensure that section 122L does not apply in respect of mining or prospecting rights or quarrying or prospecting rights.

Paragraph (b) of this clause defines mining and prospecting right and quarrying and prospecting right for the purpose of this section, as having the same meaning as in Subdivisions A and B respectively.

Clause 25: Deductions not allowable under other provisions

This clause proposes minor technical amendments to ensure that section 122N also applies to Subdivision B.

Section 122N of the Principal Act prevents a double deduction of expenditure which qualifies for deduction under Division 10 and under another provision of the Principal Act. It specifies that the expenditure is only deductible under Division 10. However, subsection 122N(2) overrides this where an election to use the depreciation provisions of the Principal Act in respect of plant or articles has been made.

Paragraphs (a) and (b) will in subsection 122N(2) include references to purposes for which exploration and prospecting expenditure under section 122JF may be incurred after references to "prescribed purposes" and "prescribed purpose". This will ensure that where a taxpayer has made an election in respect of exploration and prospecting plant under section 122JF the depreciation provisions of the Principal Act can apply to that expenditure.

Paragraph (c) will ensure that the term "prescribed purpose" has the same meaning as in subsection 122(1) of the Principal Act which is basically for the purpose of carrying on mining operations in Australia or exploring and prospecting for such minerals for the purpose of producing assessable income.

Paragraph (d) will include in subsection 122N(3) references to the deduction limiting provisions in Subdivision B, i.e., sections 122JE(5) and 122JF(2). This subsection provides that any amount that would have been allowed or allowable as a deduction under Division 10, but for the operation of the deduction limiting provisions, is for the purposes of subsection 122N(1) deemed to have been allowed or allowable as a deduction.

Clause 26: Apportionment of expenditure deductible under both Subdivision A and Subdivision B

This clause inserts a new provision in the Principal Act after section 122N. Proposed section 122NB is a safeguarding provision and will ensure that an item of capital expenditure which is deductible under both the general mining and quarrying subdivisions, is apportioned between the two subdivisions to the extent the Commissioner considers reasonable.

Subsection 122NB(1) will apply where the capital expenditure is allowable capital expenditure within the meaning of section 122DG and section 122JE. This will occur in limited circumstances where the capital expenditure relates both to the production of assessable income for the purpose of carrying on general mining operations and quarrying operations. Where this is the case the Commissioner may apportion the deduction in the manner considered reasonable. This will generally reflect the contribution the allowable capital expenditure has made to each subdivision.

Subsection 122NB(2) will also enable the Commissioner to apportion deductions between Subdivisions A and B to account for the contribution the capital expenditure has made to the respective subdivisions. This subsection will apportion amounts of allowable capital expenditure and exploration and prospecting expenditure which is to be transferred to a purchaser of a right under sections 122B(2) and 122JD(2).

Subsection 122NB(3) will also enable the Commissioner to apportion deductions between Subdivisions A and B to reflect the contribution the capital expenditure has made to the respective subdivisions. This subsection will apportion exploration and prospecting expenditure in sections 122J and 122JF to such an extent.

Clause 27: Re-numbering and re-location of section 122P

This clause also proposes a minor drafting amendment to re-number section 122P of the Principal Act to section 122JA, and to locate it after section 122J of Subdivision A of the Principal Act. This will group all the general mining provisions together in Subdivision A.

Section 122P determines what deductions are allowable under Division 10 where a taxpayer is also conducting operations principally for the purpose of obtaining gold or gold and copper. The section complements paragraph 23(o) of the Principal Act which exempts from income tax income derived prior to 1 January 1991 principally from gold mining operations. As gold mining operations are not carried on for the purpose of producing assessable income deductions in respect of capital expenditure for gold mining are not allowable under Division 10.

Clause 28: Change in interests in property

Clause 28 also proposes minor drafting amendments to section 122R of the Principal Act to facilitate the operation of the new format of Division 10. Section 122R applies where there are transfers of interests in property in respect of which deductions have been allowed under Division 10 including transfers associated with the formation, variation or dissolution of a partnership. Changes in interests in property are also treated as disposals by taxpayers who owned the property prior to the change.

This clause includes in section 122R, proposed subsection 122R(4) which defines certain terms for the purpose of this section.

"mining or prospecting right" is defined to have the same meaning as in subsection 122(1) in Subdivision A, which broadly includes rights, licenses, permits, authorities or interests in such to mine or prospect for minerals in a particular area of Australia.

"quarrying or prospecting right" is defined to have the same meaning as in subsection 122JB(1) in Subdivision B, as discussed in that subsection.

"property" is defined to include both mining and prospecting rights and quarrying and prospecting rights.

Clause 29: Heading to Division 10AAA of Part III

This clause will change the heading of Division 10AAA of the Principal Act to include in its application the transport of quarry materials. The new heading will be "Division 10AAA - Transport of Minerals and Quarry Materials".

Division 10AAA currently allows deductions for capital expenditure incurred on certain facilities used primarily and principally to transport minerals or products of minerals which are mined in Australia for the purpose of earning assessable income. The main features of the Division are -

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deductions are available in respect of the undeducted expenditure incurred on or after 1 July 1961 on, or by way of contribution to, the cost of an eligible railway, road, pipe-line or other transport facility;

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taxpayers are able to elect that the capital expenditure is deducted in equal instalments over a period of 10 years or at the option of the taxpayer 20 years;

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expenditure on earthworks, bridges, tunnels, etc. necessary in the construction of the facility, and certain compensation payments made in connection with that construction including payments for rights to construct the facility will also be included;

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taxpayers are eligible for the special deduction even though not engaged in mining operations which produce the minerals transported;

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however, the cost of transport facilities used wholly within the mine-site that is deductible under Division 10 will not be within the scope of this division.

Clause 30: "Subdivision A - Transport of Certain Minerals"

This clause will provide a new structure for Division 10AAA. The division will be broken into three separate subdivisions. Subdivision A will include the existing sections 123 to section 123BB with some minor drafting amendments. These sections deal with the transport of minerals obtained by general mining operations. Subdivision B will include the proposed sections which basically will be the same as the sections in Subdivision A but will apply to the transport of quarry materials which have been obtained from quarrying operations. However unlike Subdivision A, the expenditure for the transport of quarry materials will be deductible in equal instalments over 20 years. This reflects the longer average life of quarries compared to mines. Subdivision C will include existing sections 123C to section 123F and a proposed apportionment section. These sections will apply to both capital expenditure for the transport of minerals which have been mined and materials which have been quarried. This restructure is consistent with the restructure of Division 10 to include deductions in that division for quarrying operations.

Clause 31: Interpretation

This clause proposes minor drafting amendments to ensure the existing application of section 123 of Division 10AAA is consistent with the new format of Division 10. This clause will include in subsection 123(1) a reference to "Subdivision A of Division 10" in the definition of 'prescribed mining operations' and 'treatment'. Section 123 defines certain terms and phrases for general mining purposes and the amendment will ensure that those terms and phrases are found in the corresponding subdivision in Division 10 that deals with general mining.

Clause 32: Application of Subdivision

This clause also proposes minor drafting amendments to section 123A of the Principal Act to facilitate the operation of the new structure of Division 10AAA. Paragraph (a) will substitute any references to "this Division" with references to "this Subdivision". Paragraph (b) will similarly substitute any references to "This Division" with references to "This Subdivision". These changes will also change the heading of the subdivision to "Application of Subdivision".

Clause 33: Subdivision B - Transport or Quarry Materials

Introductory note

This clause proposes to insert a new subdivision into Division 10AAA called "Subdivision B - Transport of Quarry Materials". The new subdivision will include proposed sections 123BC and 123BD, and will apply on a similar basis as deductions under Subdivision A with the exception that eligible capital expenditure must be deducted over 20 years.

Section 123BC - Interpretation

Proposed section 123BC contains the definitions of terms used in this subdivision. Subsection 123BC(1) defines the following as -

"eligible quarrying operations" which is to have the same meaning as in Subdivision B of Division 10, which was explained in subsection 122JB(1) in clause 22.

"housing and welfare facilities" has the same meaning as that given in Subdivision A of this Division. Basically it includes residential accommodation and welfare facilities provided by the taxpayer, at or adjacent to, the site of extractive mineral operations, for the benefit of employees working on that site and their dependants. Welfare facilities include health, educational, recreational or similar facilities and facilities for the provision of meals at the mine site. The definition also includes any works carried out directly in connection with such accommodation, or facilities such as the provision of water, light, power, access roads and communications.

"prescribed body" has the same meaning as in Subdivision A of this division, and means the Commonwealth, a State, or Territory. The definition extends to a public authority that is constituted under Commonwealth, State or Territory law and is exempt from income tax.

"processed materials" is defined to mean quarry materials that have been subjected to treatment. (Treatment is also a defined term.) Materials resulting from sintering or calcining of a quarry material are also included. Other materials, or materials resulting from other processes are also included, to the extent that they fall within the scope of Subdivision B of Division 10AAA.

"quarry materials" is defined to have the same meaning as in Subdivision B of Division 10, which was explained in subsection 122JB(1) in clause 22.

"treatment" is also defined to have the same meaning as in Subdivision B of Division 10, which was similarly explained in subsection 122JB(1) in clause 22.

Subsection 123BC(2) is designed to include within the scope of the class for which deductions are allowable, certain classes of expenditure which otherwise might not qualify as part of the cost of constructing a transport facility. The items to be specifically included are port facilities or other facilities for ships such as wharves etc.

Subsection 123BC(3) also provides for the inclusion of certain classes of expenditure that might not otherwise qualify as capital expenditure on a railway, road, pipeline or other facility. The subsection specifically includes the following -

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capital expenditure in obtaining a right, whether by a licence, permit or otherwise to construct a transport facility (paragraph (a));

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any compensation paid to a property owner or lessee for any damage or loss caused by such construction (paragraph (b));

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expenditure incurred on earthworks, bridges, tunnels and cuttings necessary for the railway, road, pipeline etc (paragraph (c));

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capital expenditure on railway rolling-stock where the expenditure was incurred by the Commonwealth, a State, a Territory or a public authority constituted under the Commonwealth, State or Territory Act and where the income is exempt from tax (paragraph (d));

The subsection also specifically excludes the following items -

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road vehicles and ships (paragraph (e));

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railway rolling stock unless it qualifies for deduction under paragraph (d) of this subsection (paragraph (f)); and

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housing and welfare facilities including the provision of water, light or power, in relation to port facilities or ships (paragraph (g)).

Section 123BD - Application of Subdivision

This section is very similar to section 123A of Subdivision A and specifies the circumstances in which capital expenditure may qualify for deduction under this subdivision.

Subsection 123BD(1) provides that capital expenditure on transport facilities will be eligible for deduction under section 123BE where the following conditions are satisfied -

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the capital expenditure was incurred on or after 16 August 1989 or by way of contribution on or after 16 August 1989 to capital expenditure; and

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the capital expenditure was on a railway, road, pipeline or other facility as outlined in subsection 123BC(3); and

•

was acquired for use in Australia primarily and principally for the transport of -

•.

materials obtained for any person carrying on eligible quarrying operations; or

•.

processed materials from such operations and;

•.

the transport facility is used in carrying on a business for the purpose of producing assessable income.

Transport wholly within the site of eligible quarrying operations is excluded. The transport of employees and supplies to the quarry will not of itself exclude the expenditure on a railway or road from the subdivision provided the railway or road is constructed for and used primarily and principally for the transport of quarry materials and their products.

Subsection 123BD(2) provides a restriction on the capital expenditure for port facilities or other facilities for ships by ensuring that the capital expenditure is not allowable as a deduction nor has been taken into account when determining allowable deductions for a taxpayer under any other provision of the Principal Act.

As a result capital expenditure on plant that qualifies for deduction by way of depreciation under section 54 of the Principal Act will be excluded from deduction under this subdivision ie expenditure on wharf handling equipment which is within the meaning of plant in section 54. The classes of port development expenditure not excluded are costs of harbour surveys, initial dredging of harbours or channels, site works, land reclamation and similar works and the provision at or to the port of access roads and communications.

Subsection 123BD(3) is a technical measure that ensures that subsection 123E(1) of the Principal Act does not apply in determining the eligibility of capital expenditure in terms of section 123BD(2). Broadly section 123E(1) provides that an amount of expenditure on transport facilities which is eligible for deductions under Division 10AAA is not to be deductible or taken into account in ascertaining deductions under any provision of the Principal Act other than Division 10AAA.

Subsection 123BD(4) provides for a reduction to the amount to which this subdivision applies by excluding any amount of capital expenditure for which the taxpayer has been compensated or is entitled to compensation, where the amount of compensation is not and will not be included in the taxpayer's assessable income.

Subsection 123BD(5) provides the Commissioner with a discretion to determine the extent to which a taxpayer is compensated for capital expenditure. Where the taxpayer has received or becomes entitled to receive an amount to which subsection 123BD(4) applies, but the amount is not specified, the Commissioner may determine the extent of the recoupment for the purposes of subsection 123BD(4).

Section 123BE : Deduction of expenditure

Section 123BE is the operative provision which authorises the allowance of the deduction in equal instalments over 20 years, i.e., 5 per cent per annum, of the capital expenditure qualifying under the proposed section 123BD. This section is very similar in operation to section 123B of the Principal Act.

Subsection 123BE(1) ensures that the deduction is dependant upon the transport facility being used primarily and principally for a purpose referred to section 123BD as outlined previously. If this test is met, 5 per cent or one twentieth of the capital expenditure to which the subdivision applies is allowable in the first year of income in which the facility is so used and in each of the next nineteen succeeding years.

Subsection 123BE(2) provides that a deduction is not allowable under this section where the property the expenditure on which is deductible under this subdivision is disposed of, lost or destroyed or where the property ceases to be used primarily and principally for the transport of materials and products of such materials. In these circumstances, a deduction is not allowable in the year in which the disposal, loss or destruction or cessation of use occurred, or in any succeeding year of income. Where property which has ceased to be used primarily and principally for the transport of materials and products of materials is in future again used for such purposes the deduction may again be allowable according to subsection 123C(6) of the Principal Act.

Clause 34: "Subdivision C - General Provisions"

This clause is designed to insert the heading "Subdivision C - General Provisions" before section 123C of the Principal Act. The clause will also provide for some minor drafting amendments which facilitate the restructure of the division. This subdivision will apply to both the transport of minerals, products of minerals, materials and products of materials. It will include the existing sections 123C, 123D, 123E and 123F and a proposed apportionment provision section 123EA.

Paragraph (a) of the clause will include in section 123C of the Principal Act a reference to section 123BD. Section 123C broadly provides for a balancing adjustment to be made when property, the expenditure on which has been subject to Division 10AAA is disposed of, lost or destroyed or ceases to be used primarily and principally for the transport of minerals or products of minerals, as provided in section 123A.

This amendment will extend the operation of section 123C to also include a balancing adjustment where property, the expenditure on which has been subject to Division 10AAA is disposed of, lost, or destroyed or ceases to be used primarily and principally for the transport of materials or products of materials as provided in section 123BD as previously explained.

Paragraph (b) of this clause amends subsection 123C(6). Subsection 123C(6) provides for the case where property which has ceased to be used primarily and principally for the transport of minerals and products of minerals again comes into use for the purposes outlined in section 123A. In such cases, so much of the expenditure on property as the Commissioner determines shall be deemed to be capital expenditure to which Division 10AAA applies in the year in which the property again comes into use.

The amendment will ensure that the subsection only applies to capital expenditure of Subdivision A.

Paragraph (c) of this clause inserts subsection 123C(7) into the Principal Act. This allows expenditure which was previously incurred in accordance with Subdivision B to again qualify for deduction under Subdivision B where the purposes referred to in section 123BD are recommenced. In effect it reproduces the outcome of subsection 123C(6) but for the transport of quarry materials or quarry products.

Clause 35: Transactions between parties not at arm's length

This clause provides for a minor drafting amendment, it replaces references to "this Division" in section 123D of the Principal Act with references to "Subdivision A or B". Section 123D is designed as a safeguard to the revenue in relation to sales of property to which the division applies where the Commissioner is satisfied that the purchaser and vendor were not dealing with each other at arm's length.

The amendment will ensure that this section applies to transactions in both Subdivision A and B.

Clause 36: Deduction not allowable under other provisions

This clause also provides a minor drafting amendment in relation to the application of section 123E of the Principal Act. Broadly, section 123E prevents double deductions from being allowed in respect of an amount of expenditure on transport facilities which qualifies under Division 10AAA and another provision of the Principal Act. The expenditure is only to be taken into account in accordance with this Division, except where the property ceases to be used primarily and principally for the transport of minerals and such products but is subsequently used for purposes which bring it in the scope of the depreciation provisions of the Principal Act.

The amendment will extend subsection 123E(2) to include the purposes outlined in section 123BD. Broadly they are facilities, primarily and principally for the transport of quarry materials or such products.

Clause 37: Apportionment of expenditure deductible under both Subdivision A and Subdivision B

This clause proposes to include section 123EA after section 123E of the Principal Act. This new section is designed as a safeguarding provision to ensure that the same capital expenditure is not deductible under both Subdivision A and Subdivision B of this division.

Section 123EA provides that, where an amount of capital expenditure qualifies for deduction under Subdivision A, for the transport of minerals or products of minerals, and Subdivision B, for the transport of quarry materials or products of quarry materials, the Commissioner has the discretion to apportion the allowable capital expenditure between the two subdivisions to reflect their contribution to each type of operation.

Clause 38: Declarations

Clause 38 will amend section 124ZADA of the Principal Act to reflect the proposed removal of the requirement that funds be deposited in a film account in the Australian Film Industry Trust Fund where the 100 per cent rate of tax concession applies. The requirement that funds be deposited in a film account is removed by amendments to be made, by clause 39, to section 124ZAFA (see later notes on that clause).

Subsection 124ZADA(1) provides that a person may lodge a declaration with the Commissioner where, in a relevant financial year, capital moneys are expended (under a contract entered into on or after 13 January 1983) by way of contribution to the cost of producing a film and where, prior to that financial year, no capital moneys have been similarly expended on that film. The purpose of the declaration is to provide the Commissioner of Taxation with details of the financial arrangements of the contract.

Paragraph 124ZADA(1)(e) presently requires the declaration to state that a film account has been opened in relation to the film. A film account is described in subsection 124ZAA(1) as an account that has been opened in relation to a film in the Australian Film Industry Trust Fund in the Trust Fund referred to in section 60 of the Audit Act 1901. Paragraph (a) of clause 38 omits existing paragraph 124ZADA(1)(e) and inserts a new paragraph in its place.

New paragraph 124ZADA(1)(e) will require that the declaration state either that a film account (which in the section is called a "relevant film account") has been opened in relation to the film (subparagraph (i)) or that no such account has been opened (subparagraph (ii)).

Paragraph 124ZADA(1)(f) requires details to be given of amounts of money received and expended in relation to the film. The amendments proposed by clause 38 will require different details to be provided. These details will depend upon whether a film account has been opened or not opened and under the proposed new requirements, contained in subparagraphs (ii) and (iii) (replacing subparagraphs 124ZADA(1)(f)(ii) to (vii) (inclusive)), will be in addition to the existing requirement (in subparagraph (i)) for details to be provided of the total amount of contributions received in the relevant financial year up to the date of the declaration.

Where a relevant film account has been opened, details are required of -

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the total moneys paid into the relevant film account (sub-subparagraph (1)(f)(ii)(A));

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the total moneys not paid into the relevant film account (sub-subparagraph (1)(f)(ii)(B));

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the total amount withdrawn from the relevant film account in the period covered by the declaration (sub-subparagraph (1)(f)(ii)(C));

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the amount of the total amount withdrawn from the relevant film account, which was used in the film production (sub-subparagraph (1)(f)(ii)(D)); and

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the amount of the total amount not paid into the relevant film account which was used in the film production (sub-subparagraph (1)(f)(ii)(E)).

Where no film account has been opened details are only required of the total amount that was utilised in producing the film (subparagraph (1)(f)(iii)).

By paragraph (c) of clause 38 paragraph 124ZADA(1)(g) is omitted. That paragraph, which requires the declaration to state that all moneys received after the declaration is made will be paid into the film account, would be inconsistent with the proposed changes to the film account requirements and becomes therefore redundant.

Paragraph (d) of clause 38 will make the operation of paragraph 124ZADA(1)(h) subject to new subparagraph (1)(e)(i) (which deals with the opening of a film account). Paragraph (1)(h) requires the declaration to acknowledge how moneys, received after the date of the declaration, will be dealt with on withdrawal from the film account.

Paragraph (e) of clause 38 proposes a consequential amendment to subsection 124ZADA(4) to remove a reference to paragraph (1)(g) as a consequence of the omission of that paragraph by paragraph (c) of clause 38.

Paragraph (f) of clause 38 inserts a new paragraph (aa) into each of subsections 124ZADA(5) and (9) to make their operation subject to a film account having been opened. Subsection 124ZADA(5) permits an appropriate person to lodge a declaration where the previous declarant dies or ceases to be an appropriate person to make the declaration. Subsection 124ZADA(9) provides that where the further declaration is not lodged by an appropriate person, the original declaration is deemed not to have been lodged.

By paragraph (g) of clause 38 a reference in paragraph 124ZADA(5)(a) to a declaration is a reference to the declaration lodged in relation to the film mentioned in proposed paragraph 124ZADA(5)(aa).

Paragraph (h) of clause 38 will amend subsection 124ZADA(5) to the effect that the requirement to include a statement that moneys received after the date of the substituted declaration be paid into the relevant film account will be removed. By the amendment the declaration will only be required to state that moneys withdrawn from a film account after the date of the substituted declaration will be dealt with in the manner prescribed in Division 10BA or by way of refund to investors.

A transitional provision, concerning declarations or notices lodged or given under subsection 124ZADA(1), (4) or (5) before the commencement of the amendments made by clause 38, is contained in clause 63 - see later notes on that clause.

Paragraph (j) of clause 38 omits subsections 124ZADA(6) and (7). Subsection (6), which describes the term "exempt moneys", is no longer needed as the references to exempt moneys in paragraph 124ZADA(1)(g) and subsection 124ZADA(5) are proposed to be omitted by paragraphs (c) and (h) of clause 38 and subsection (7), which is dependant on subsection (6), becomes redundant.

Paragraph (k) of clause 38 makes a minor change to paragraph 124ZADA(9)(a), as a consequence of the insertion of paragraph (9)(aa) by paragraph (f) of clause 38 - see earlier notes. Paragraph (h) substitutes "the film" for the words "a film".

The amendments proposed by clause 38 will apply in relation to the financial year commencing on 1 July 1987 and all subsequent financial years (see notes on clause 61).

Clause 39: Deductions for capital expenditure under post 12 January 1983 contracts

Subsection 124ZAFA(1) sets out the conditions under which capital expenditure incurred in producing Australian films may qualify for the special rates of deduction of 150 per cent, 133 per cent, 120 per cent and 100 per cent.

Presently subparagraphs (1)(d)(i) and (ii) provide that where moneys (known as contributor's funds) are contributed by a taxpayer (passive investor) by way of contribution to the cost of producing a film the moneys are to be deposited in a film account opened in relation to the film. There is no similar requirement for capital moneys known as producer's funds expended in producing a film.

The purpose of the amendments proposed by clause 39 is to remove the requirement that contributor's funds be deposited in a film account where the rate of deduction of 100 per cent applies. This is achieved by omitting, and reinserting in amended form, those provisions in subsection 124ZAFA(1) which impose the requirement to deposit funds and those other provisions in the subsection which impose the different rates of deduction.

Paragraph (a) of clause 39 omits subparagraphs (1)(d)(i) and (ii). These subparagraphs presently require contributor's funds to be, upon contribution, deposited in a film account opened in relation to the film, where moneys were contributed after 30 June 1983 (subparagraph (d)(i)) and if contributed before 1 July 1983, to be expended before that date in producing a film or on or before that date be paid into a film account opened in relation to the film (subparagraph (d)(ii)).

Paragraph (b) of clause 39 omits paragraphs 124ZAFA(1)(e), (f), (g) and (h). These paragraphs now specify the rates at which deductions may be available in relation to contributor's funds and producer's funds. In their place are inserted eight new paragraphs which consolidate and restate, in a simplified form, those provisions omitted by paragraphs (a) and (b) of the clause.

The effect of the consolidations and restatements is as follows -

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By new paragraph (e) a rate of 150 per cent is available where the contract under which the expenditure was incurred was entered into on or before 23 August 1983 (subparagraph (i)), these expenditures constituted contributor's funds (that is, capital moneys expended by way of contribution to the cost of producing the film) (subparagraph (ii)) contributed before 1 July 1983 (subparagraph (iii)) and were either used in producing the film before 1 July 1983 (sub-subparaqraph (e)(iv)(A)) or, on or before that date, paid into a film account in relation to the film (sub-subparagraph (iv)(B)).

•

Under new paragraph (f) a rate of 150 per cent is available where the contract under which the expenditure was incurred was entered into on or before 23 August 1983 (subparagraph (i)), the expenditure constituted contributor's funds (subparagraph (ii)) contributed after 30 June 1983 (subparagraph (iii)) and, upon contribution, deposited in a film account opened in relation to the film (subparagraph (iv)).

New paragraph (g) provides for a rate of 150 per cent to also be available where the expenditure was incurred under a contract entered into on or before 23 August 1983 (subparagraph (i)) and the expenditure constituted producer's funds (that is capital moneys expended in producing a film) (subparagraph (ii)).

By new paragraph (h) a rate of 133 per cent is available where the expenditure was incurred under a contract entered into on or before 19 September 1985 and after 23 August 1983 (subparagraph (i)), the expenditure was paid by moneys from the contributor's funds (subparagraph (ii)) deposited in a film account opened in relation to the film (subparagraph (iii)).

New paragraph (j) provides for a rate of 133 per cent to be available where the expenditure was incurred under a contract entered into after 23 August 1983 and on or before 19 September 1985 (subparagraph (i)) and the expenditure was paid from the producer's funds (subparagraph (ii)).

By new paragraph (k) a rate of 120 per cent is available where the expenditure was incurred under a contract entered into after 19 September 1985 and before 25 May 1988 (subparagraph (i)), the expenditure was paid from contributor's funds (subparagraph (ii)) deposited in a film account opened in relation to the film (subparagraph (iii)).

A rate of 120 per cent is also provided by paragraph (m) where the contract under which the expenditure was incurred was entered into after 19 September 1985 and before 25 May 1988 (subparagraph (i)) and the expenditure was paid from the producer's funds (subparagraph (ii)).

New paragraph (n) will allow a deduction at a rate of 100 per cent, in relation to both producer's funds and contributor's funds, where the expenditure was incurred under a contract entered into on or after 25 May 1988.

Special transitional provisions contained in Division 5 of Part III of the Taxation Laws Amendment Act (No. 5) 1988 enabled taxpayers in certain limited circumstances and for restricted periods not extending beyond 30 June 1988 to obtain access to deductions at rates exceeding 100 per cent in relation to certain moneys. Those moneys had to be deposited in film accounts in order to qualify for the deductions at the higher rates.

Clause 40: Rebate in respect of certain pensions, benefits etc.

Introductory note

Existing section 160AAA of the Principal Act authorises a rebate of tax where an amount is included in a taxpayer's assessable income, that is -

•

an Australian social security pension, benefit or allowance (other than unemployment, sickness, special benefits or Job Search Allowance) or service pension that is subject to tax in Australia (pensioner rebate - subsection 160AAA(1)); or

•

unemployment, sickness, special benefits or Job Search Allowance paid under Part XIII of the Social Security Act 1947, an allowance paid under the Formal Training Allowance or an allowance paid under certain Commonwealth educational schemes that are subject to tax in Australia (beneficiary rebate - subsection 160AAA(2)).

Clause 40 proposes to repeal the existing section 160AAA and to substitute a new section 160AAA.

The new section 160AAA will provide for the level of the pensioner rebates and beneficiary rebates for the 1989-90 and subsequent income years to be ascertained in accordance with the Income Tax Regulations, which will be amended to set down a method of calculation of the various rebate levels and the associated taxable income thresholds above which the rebates will shade-out.

There will be separate levels of pensioner rebate for -

(a)

married-rate pensioners;

(b)

married pensioners receiving the single-rate of pension because they are unable to live together with their spouse due to illness or infirmity; and

(c)

single-rate pensioners.

The rebates will continue to be available to taxpayers whose assessable income includes an Australian social security pension, benefit or allowance (other than an unemployment, sickness, special benefit or Job Search Allowance) or a service pension.

The levels of the rebates will be set so that -

•

a married pensioner couple will be able to receive the relevant annual level of pension and combined non-pension income of $70 per week ($3,640 per annum) in 1989-90 and 1990-91, before becoming liable for tax. The amount of non-pension income will be subject to indexation in 1991-92 and subsequent income years; and

•

a single-rate pensioner will be able to receive the relevant annual level of pension and non-pension income of $25 per week ($1,300 per annum) in 1989-90, and $40 per week ($2,080) in 1990-91, before becoming liable for tax. The amount of non-pension income will be subject to indexation in 1991-92 and subsequent income years.

The pensioner rebates will shade out at a rate of 12.5 cents for every dollar by which the taxable income of a taxpayer in a year of income exceeds the relevant shade-out threshold.

For married pensioners any unused part of the rebate will be transferred to the marital partner.

In respect to the beneficiary rebates, the regulations will set new levels of rebate and provide for more effective targeting of the rebates to recipients of certain benefits or allowances.

There will be separate levels of beneficiary rebate for the following groups of beneficiaries -

•

single, under 18 years and living at home;

•

single, under 18 years and living away from home;

•

single, aged 18 to 20 years;

•

single, 21 years and over;

•

single, aged 60 to 64 years and in receipt of unemployment benefits for six months or more;

•

married.

The rebates will be available to taxpayers whose assessable income includes social security unemployment, sickness or special benefits, the Job Search Allowance, the Formal Training Allowance or an allowance paid under certain Commonwealth education schemes.

The rebate and associated shade-out threshold for a year of income will be calculated for each group on the basis of the relevant annual level of unemployment benefit for the group in respect of the year, as provided for in the Social Security Act 1947. The rebate so calculated will apply regardless of whether the taxpayer is a recipient of a benefit or allowance under the Social Security Act, the Formal Training Allowance or the specified Commonwealth education schemes.

New section 160AAA of the Principal Act will stipulate that the amendments of the Income Tax Regulations necessary to give effect to the changes to the pensioner and beneficiary rebates can be made retrospectively. Otherwise the provisions of the Acts Interpretation Act 1901 dealing with regulations will apply.

Clause 40 will repeal existing section 160AAA of the Principal Act and substitute a new section 160AAA.

New subsection 160AAA(1) defines two terms. The terms "rebatable benefit" and "rebatable pension" define the type of income that must be included in a taxpayer's assessable income for a year of income if he or she is to receive the benefit of a rebate under section 160AAA in that year.

"rebatable benefit" is defined to mean an amount -

(a)

paid by way of a benefit under Part XIII of the Social Security Act 1947; that is an unemployment, sickness or special benefit or the Job Search Allowance;

(b)

paid by way of a benefit under Part III of the Student Assistance Act 1973; that is the living allowance paid under the scheme known as Austudy;

(c)

paid by way of income derived under -

(i)

the scheme known as the Assistance for Isolated Children Scheme which provides education assistance for children living in isolated areas;

(ii)

the scheme known as the Veterans' Children Education Scheme;

(d)

received under the scheme known as the Aboriginal Study Assistance Scheme; or

(e)

received under the Formal Training Allowance, a scheme to encourage unemployed persons to acquire occupational skills.

"rebatable pension" is defined to mean a pension allowance or benefit of one of the following types -

(a)

service pension (age), wife's service pension or carer's service pension paid under Part III of the Veterans' Entitlements Act 1986;

(b)

age, wives' or carer's pensions paid under Part IV of the Social Security Act 1947, sole parent's pension paid under Part V or widowed person's allowance paid under Part VI of that Act.

New subsection 160AAA(2) authorises the allowance of a rebate of tax of an amount, ascertained in accordance with the Income Tax Regulations, to a taxpayer whose assessable income for a year of income includes an amount of rebatable pension, as defined in subsection 160AAA(1).

New subsection 160AAA(3) authorises the allowance of a rebate of tax of an amount, ascertained in accordance with the Income Tax Regulations, to a taxpayer whose assessable income for a year of income includes an amount of rebatable benefit, as defined in subsection 160AAA(1).

New subsection 160AAA(4) will ensure that where a taxpayer would be entitled in his or her assessment in respect of income for a year of income, to -

•

a pensioner rebate or rebates under subsection (2); and

•

a beneficiary rebate or rebates under subsection (3);

the following rules apply -

•

if the amounts of rebate are the same the taxpayer is entitled to only one of the rebates; and

•

if the amounts of rebate are not the same the taxpayer is entitled to the higher of the rebates.

Amendments of the Income Tax Regulations to provide for the ascertainment of the pensioner and beneficiary rebates will need to apply for the 1989-90 year of income, the year in respect of which the new levels of rebate are to first apply. In subsequent years, any amendments may also need to apply to a time before the date of notification of the regulations as any necessary changes, applying for the whole of a year of income, may not be known until part-way through the year of income.

The effect of section 48 of the Acts Interpretation Act 1901 is that, unless the Parliament provides otherwise, regulations cannot take effect from a date before the date on which the making of the regulations is notified in the Commonwealth of Australia Gazette if the regulations would prejudicially affect a person's rights at the date of notification in the Gazette.

New subsection 160AAA(5) proposes that the general rule in section 48 of the Acts Interpretation Act be overridden. Subsection 160AAA(5) proposes that regulations made for the purposes of section 160AAA, as authorised by subsections (2) and (3), may be expressed to apply in relation to a year of income any part of which occurred before the notification of the regulations.

Clause 41: Foreign losses of previous years

Clause 41 will amend section 160AFD of the Principal Act to provide for the deduction of foreign losses incurred during the 1989-90 and subsequent years of income.

Existing section 160AFD allows a resident taxpayer to deduct from a class of income derived from a foreign source in a year of income any overall foreign loss incurred in relation to the same class of income from that same foreign source.

Subsection 160AFD(1) is the operative provision and provides for the deduction of an overall foreign loss, subject to certain stipulations, only if the loss is incurred in the preceding seven years of income. By paragraph (a) the seven year limitation on the deduction imposed by subsection (1) will be limited to a "pre-1990 year of income" which is any year of income before the 1989-90 year of income.

Paragraph (b) will insert new subsection (1A) into section 160AFD. This subsection provides for the deduction of an overall foreign loss incurred in a post-1989 year of income which is the 1989-90 or a later year of income.

In determining the amount of a post-1989 foreign loss which can be deducted from income in any year of income, the overall foreign loss incurred in respect of a class of income derived from a foreign source (i.e., each separate activity), is to be reduced by any amount of that loss which had been deducted from income of an earlier year of income derived from that activity (paragraph (a)). The amount of the foreign loss from any particular activity which can be deducted in any year of income is limited to the amount of the income of that year from the same activity (paragraph (b)).

Paragraph (c) proposes the replacement of existing subsection (2).

Existing subsection 160AFD(2) applies where a taxpayer's income from a particular activity of a year of income is reduced by foreign losses incurred in two or more years of income. In these cases the losses are taken into account in the order in which they were incurred.

New subsection (2) will provide a new order of deduction to take account of the creation of a new class of foreign losses. It applies where a taxpayer has incurred foreign losses in two or more pre-1990 years, or two or more post-1989 years of income. The principles to be applied in taking the various classes of losses into account are that pre-1990 losses are to be taken into account before post-1989 losses (paragraph (a)) and two or more losses of the same class of loss are to be taken into account in the order in which they were incurred (paragraph (b)). Thus, losses subject to a seven year restriction are to be taken into account before unrestricted losses.

Paragraph (d) will amend subsections (3) and (5) to ensure that post-1989 losses, to be allowable under subsection (1A), are taken into account in calculating the foreign tax credit where a foreign loss is incurred and in calculating the amount of the overall foreign loss.

Paragraph (e) proposes the insertion of two new definitions in subsection (7). The definitions are -

"post-1989 year of income" means the 1989-90 or a subsequent year of income. It includes substituted accounting periods adopted in lieu of those financial years.

"pre-1990 year of income" means a year of income earlier than the 1989-90 year of income.

Clauses 42 to 45 : Dividend Streaming Arrangements

Introductory Note

Clauses 42, 43, and 44 of the Bill will amend the Principal Act to provide for franking debits to arise where certain dividends are paid or bonus shares are issued by a company under a dividend streaming arrangement that allows a shareholder of the company to make a choice or selection. These amendments will give effect to the announcement made in the 1989-90 Budget that the tax advantages associated with dividend selection schemes would be removed in respect of dividends paid after 30 June 1990.

Section 160AQG operates to ensure that dividends paid on the same class of shares are franked to the same extent. By virtue of section 160APE shares are of the same class if they have the same nominal value and the same dividend, voting and return of capital rights. Some companies have sought to circumvent this rule by entering into or carrying out dividend selection schemes which allow shareholders to select the way in which a dividend right attaching to a share is to be satisfied.

These schemes allow companies to use franking credits more efficiently by streaming them to shareholders to whom they are of most benefit. In addition to allowing shareholders to choose between franked and unfranked dividends or the source of dividends, shareholders may also be able to choose bonus shares.

If a company issues bonus shares paid out of a share premium account to certain shareholders instead of paying a dividend, the shareholder does not derive an assessable dividend as these bonus shares are specifically excluded from being a dividend by virtue of paragraph (d) of the definition of "dividend" in subsection 6(1). Moreover, if the bonus shares are issued on the basis of shares acquired prior to 20 September 1985 any capital gain arising on disposal of the shares is not liable for tax under the provisions of Part IIIA (Capital gains and capital losses).

Bonus shares and unfranked or partly franked dividends are appealing to individual shareholders whose income tax liability is insufficient to fully absorb the franking rebate entitlement arising under section 160AQU and to non-residents. Although franked dividends received by non-residents are exempt from dividend withholding tax by the application of paragraph 128B(3)(ga), the imputation credit attaching to the franked dividend in most cases is greater than the amount of dividend withholding tax that would be deducted.

Dividend streaming can also be achieved by the use of stapled stock arrangements which may allow the holders of stapled stock to receive either a franked or an unfranked dividend depending on the company paying the dividend. These arrangements can also be used to stream franked dividends to Australian resident shareholders of a company group and unfranked dividends to non-resident shareholders.

The amendments proposed by the Bill will result in Australian resident companies being treated as having franked all dividends paid on a single class of shares, including those paid by another company (whether domestic or an offshore company) under an arrangement, to the same extent. A company that has paid franked dividends under an arrangement will incur franking debits in respect of unfranked dividends paid by another company.

Clause 42: Interpretation

Clause 42 will amend section 160APA of the Principal Act which contains the definitions that apply for the purposes of Part IIIAA of the Principal Act by inserting the following definitions, each of which is to have its given meaning unless the contrary intention appears -

"arrangement" is given an extended meaning, common to the meaning it has in other provisions of the Principal Act, so as to include any agreement, arrangement, understanding, promise, or undertaking (paragraph (a)), or any scheme, plan, proposal, action or course of action or conduct (paragraph (b)). The term is used in the definition of "dividend streaming arrangement" (see later notes).

"dividend streaming arrangement" is defined in relation to a company as an arrangement that-

•

a company has entered into or carried out any part of (paragraph (a)); and

•

gives power to a shareholder in the company that entered in to or carried out the arrangement or any part of the arrangement to make a choice or a selection. The power of choice may or may not be subject to any condition. A shareholder has power to make a choice or selection even if the power is not exercised or the shareholder is unaware that a choice exists (subparagraph (b)(ii)); and

•

any of the following consequences flow from the shareholder making a choice or selection, or from failing to do so -

•.

the company pays an unfranked or a partly franked dividend (referred to as a "scheme dividend") to the shareholder instead of paying or proposing to pay a dividend that is franked to a greater extent (sub-subparagraph (b)(ii)(A)). Dividend streaming arrangements that exhibit this feature are those that allow shareholders to elect to receive a franked or an unfranked dividend;

•.

the company issues tax-exempt bonus shares (see later notes for definition) instead of paying a franked dividend to the shareholder (sub-subparagraph (b)(2)(B));

•.

a company, other than the one that has entered into or carried out the arrangement pays an unfranked or partly franked dividend to a shareholder who receives that dividend instead of receiving a franked dividend from the company that has entered into or carried out the arrangement (sub-subparagraph (b)(2)(C)). This feature is present in stapled stock arrangements and dividend access or similar schemes under which a company may pay dividends to a shareholder, or any other person or entity on the shareholder's behalf, who receives that dividend instead of a franked dividend. An example of this type of dividend streaming arrangement is one that allows non-resident shareholders in an Australian resident company to receive unfranked dividends paid by a foreign subsidiary or an offshore associated company of the Australian company;

•.

the company that has entered into or carried out the arrangement pays a franked dividend to a shareholder, who has received that dividend instead of an unfranked dividend paid or proposed to be paid by another company (sub-subparagraph (b)(2)(D)). An example of this type of arrangement is where an Australian subsidiary of a foreign company pays a franked dividend to an Australian resident shareholder of the foreign parent or an offshore associated company.

"franking percentage" in relation to a franked dividend means the percentage specified in the declaration made under section 160AQF in relation to a dividend that the dividend is franked to a percentage specified (paragraph (a)). Where the dividend is an unfranked dividend (see later notes) the franking percentage is zero (paragraph (b)). Under section 160AQF, which sets out the requirements for a company to frank the dividends it pays, a company paying a dividend makes a declaration that the dividend is a franked dividend to the extent of a percentage specified in that declaration. The percentage cannot exceed 100%. The term is used in the definition of "dividend streaming arrangement" (see earlier notes) and in proposed section 160AQCB (see later notes).

"partly franked dividend" is used in the definition of "dividend streaming arrangement" and in proposed section 160AQCB. It means any dividend paid by a company to a shareholder which is declared to be franked to an extent less than 100% in accordance with section 160AQF.

"tax-exempt bonus share" is defined to mean a share issued by a company to a shareholder in that company where the share satisfies all the following requirements -

•

the amount or value of the share is debited against an amount standing to the credit of the share premium account of the company (paragraph (a)). A share premium account of a company is defined in subsection 6(1) of the Principal Act as an account to which the company has credited premiums received on shares issued by it. Accounts that include amounts that are not premiums received on the issue of shares or the amount credited cannot be identified as a premium in the company's books of account are excluded from being a share premium account;

•

the paid-up value of the share is not a dividend (also defined under subsection 6(1) of the Principal Act) (paragraph (b)). By virtue of paragraph (d) of the definition of dividend in subsection 6(1), shares issued by a company the value of which is debited to a share premium account of the company is specifically excluded from being a dividend; and

•

the share is either issued as a bonus share (subparagraph (c)(i)) or issued under circumstances mentioned in subsection 6BA(1) of the Principal Act (subparagraph (c)(ii)). These circumstances are, broadly, where the share is issued in satisfaction of a dividend payable on shares already held by the shareholder.

Paragraph (c) of the definition of tax-exempt bonus share reflects the two ways in which bonus shares can be issued. The term is used in the definition of "dividend streaming arrangement" and in proposed section 160AQCB.

"unfranked dividend" is any dividend paid by a company which is not franked to any extent under section 160AQF. Dividends that are not frankable dividends are unfranked dividends. One of the requirements set out in section 160AQF for the franking of a dividend is that a company must be a resident at the time the dividend is paid. Therefore, any dividend paid by a non-resident company will be an unfranked dividend for the purposes of Part IIIAA. The term frankable dividend is defined in section 160APA as dividends within the meaning of section 6(1) and certain liquidator's distributions. Certain dividends are specifically excluded from being frankable. The term "unfranked dividend" is used in the definitions of "dividend streaming arrangement" and "franking percentage" and in proposed section 160AQCB.

Clause 43: Arrangements

Clause 43 proposes the insertion of an interpretative provision that will clarify the meaning of the term "arrangement" (see earlier notes) for the purposes of Part IIIAA. Proposed section 160APAA recognises that an arrangement may involve two or more parties. It specifies that a reference to the carrying out of an arrangement by a person is to be taken as including a reference to the carrying out of an arrangement by a person alone or together with another person or other persons.

Clause 44: Dividend streaming arrangements

Clause 44 will insert section 160AQCB into the Principal Act. This section will be the operative provision under which franking debits for the purposes of Part IIIAA of the Principal Act will arise where certain specified distributions are made after 30 June 1990 under a dividend streaming arrangement.

Subdivision B of Division 2 of Part IIIAA provides that a resident company acquires franking credits where the company has a surplus balance in its franking account of the previous year, receives franked dividends, makes certain tax payments and on the occurrence of certain other events that alter or may alter its tax liability. Franking debits arise under Subdivision C in circumstances such as where a company under franks a dividend, pays a franked dividend or its tax liability is reduced.

A company is able to pay franked dividends to the extent of the surplus in its franking account. Where a company's franking debits for a particular franking year exceed its franking credits for that year and there is a deficit in the franking account at the end of the franking year, a franking deficit tax liability arises under section 160AQJ. The due date for the payment of this tax, specified in section 160ARU, is the last day of the month following the end of the franking year.

Franking deficit tax represents the amount of company tax that needed to have been paid during the year to allow the company to frank its dividends to the extent that it did. Franking deficit tax is not refundable but may be offset against company tax assessments raised at a later date (section 160AQK).

The amendments proposed by clause 44 will cause franking debits to arise when certain distributions are made under dividend selection arrangements after 30 June 1990. If these franking debits result in a deficit balance in a company's franking account at the end of a year, franking deficit tax will be payable.

Subsection 160AQCB(1) proposes that a company will incur a franking debit where -

•

a company (a debit company) pays an unfranked dividend or a partly franked dividend (scheme dividend) to a shareholder after 30 June 1990 (paragraph (a));

•

the scheme dividend is paid under a dividend streaming arrangement entered into or carried out in whole or in part by the debit company, that is the company paying the dividend (subparagraph (b)(1)); and

•

the scheme dividend is paid in substitution for one or more franked dividends (substituted dividends) that the company pays or proposes to pay (subparagraph (b)(ii)). A franked dividend is defined in section 160APA and is a dividend the whole or part of which has been franked in accordance with section 160AQF.

Franking debits will arise under subsection (1) where the dividend streaming arrangement with which the company is associated results in the occurrence of the event specified in sub-subparagraph (b)(iii)(A) of the definition of "dividend streaming arrangement" in section 160APA (proposed by clause 42 - see earlier notes).

The amount of the franking debit arising under subsection (1) will be the amount of the franking debit that would have arisen if the debit company had franked the scheme dividends at the same rate as the substituted dividends.

If the scheme dividend was partly franked the company will have incurred a franking debit under section 160AQB. The franking debit arising under subsection 160AQCB(1) from the scheme dividend being treated as if it were franked to the same extent as the substituted dividends, will be reduced by the franking debit that arose under section 160AQB.

Thus, the amount of the franking debit arising under subsection (1) will be the amount of the scheme dividend multiplied by the substituted franking percentage, that is the franking percentage specified under subsection 160AQF(1) for the substituted dividend, less the franking debit arising under section 160AQB in respect of the scheme dividend.

A franking debit will arise under subsection 160AQCB(2) where -

•

a debit company issues tax-exempt bonus shares (defined in section 160APA as proposed by clause 42 - see earlier notes) that are exempt from tax (the scheme bonus shares) to a shareholder after 30 June 1990 (paragraph (a));

•

the bonus shares are issued under a dividend streaming arrangement entered into or carried out in whole or in part by the company issuing the bonus shares (the debit company) (paragraph (b)(i)); and

•

the bonus shares are issued in substitution for the payment or proposed payment of franked dividends (substituted dividends) (paragraph (b)(ii)).

Franking debits will arise under subsection (2) when the dividend streaming arrangement associated with the debit company, that is the company issuing the scheme bonus shares, results in the occurrence of the event specified in sub-subparagraph (b)(ii)(B) of the definition of "dividend streaming arrangement" in section 160APA (proposed by clause 42 - see earlier notes).

The amount of the franking debit that will arise under subsection (2) will be the amount that would have arisen if the debit company had paid the substituted dividends instead of issuing scheme bonus shares.

Subsection 160AQCB(3) proposes that a franking debit will arise where -

•

a company (described in the subsection as a linked company) pays an unfranked or partly franked dividend (linked dividend) to a shareholder in the linked company after 30 June 1990 (paragraph (a));

•

the linked dividend is paid under a dividend streaming arrangement that was entered into or carried out in whole or in part by another company (the debit company) (subparagraph (b)(i)); and

•

the linked dividend was paid to a shareholder in substitution for one or more franked dividends (the substituted dividends) that are paid or proposed to be paid by the debit company (subparagraph (b)(ii)).

The amount of the franking debit that will arise under subsection (3) to the debit company, that is the company that did not pay the linked dividend, is calculated by multiplying the amount of the linked dividend by the substituted franking percentage. The substituted franking percentage is the franking percentage specified under subsection 160AQF(1) by the debit company for the substituted dividend it paid or proposed to pay.

The shareholder to whom the linked dividend is paid may be acting in a trustee capacity for other shareholders, may receive the linked dividend as a representative of other shareholders or in the shareholder's own right.

An example of a case where franking debits will arise under this subsection is where a resident company (debit company) pays franked dividends to its resident shareholders (substituted dividends) and allows other shareholders to have the dividend rights attaching to their shares satisfied by the payment of dividends (linked dividends) by a foreign subsidiary or by an offshore associated company (linked company).

Franking debits will arise under subsection (3) when the dividend streaming arrangement associated with the debit company, that is the company paying or proposing to pay the substituted dividends, results in the linked company paying the linked dividend which is the event referred to in sub-subparagraph (b)(ii)(C) of the definition of "dividend streaming arrangements" contained in section 160APA (proposed by clause 42 - see earlier notes).

Franking debits will arise under subsection 160AQCB(4) where -

•

a company (the debit company) pays franked dividends (scheme dividends) to a shareholder after 1 July 1990 (paragraph (a));

•

the scheme dividends are paid under a dividend streaming arrangement entered into or carried out in whole or in part by the debit company subparagraph (b)(i)); and

•

the scheme dividends are paid, either wholly or partly, in substitution for the payment or proposed payment of unfranked dividends (substituted dividends) by another company to its shareholders (subparagraph (b)(ii)).

The franking debit that arises to the debit company where subsection (4) applies is the total amount of the unfranked dividends paid or proposed to be paid by the other company that includes the substituted dividends. The amount of the franking debit will be the sum of the following dividends paid or payable by the other company that relate to the franked dividends paid by the debit company -

•

the paid up value of shares issued by the company that are dividends by virtue of paragraph 6(1)(c) of the definition (paragraph (c));

•

the amount of any distribution of money or other property (other than shares in the company) that is a dividend under paragraph (6)(1)(a) of the definition (paragraph (d));

•

the amount credited by the company to shareholders, other than a distribution of money or property or the issue of shares, that is a dividend under paragraph 6(1)(b) of the definition (paragraph (e)).

A franking debit could arise under this section, for example, where an Australian company (debit company) that is a subsidiary or an associate of a foreign company pays a franked dividend (scheme dividend) to Australian shareholders of the foreign company (other company). The franking debit that would arise to the debit company (the Australian company) would be the total amount of the dividends paid by the foreign company that relate to the scheme dividend paid by the debit company.

Dividend streaming arrangements that provide the choice or selection specified in sub-subparagraph (b)(ii)(D) of the definition of "dividend streaming arrangement" contained in section 160APA (proposed by clause 42 - see earlier notes) will result in companies incurring franking debits under this subsection.

By virtue of Division 7A of Part IIIAA corporate unit trusts and public trading trusts that are treated as companies for taxation purposes in accordance with Divisions 6B and 6C of Part III of the Principal Act will incur franking debits under section 160AQCB in the same way as companies.

Subsection 160AQCB(5) is an interpretative provision and will ensure that the franking debits may arise under section 160AQCB where the dividend streaming arrangement was entered into before 30 June 1990. The franking debits would arise in respect of dividends paid after 30 June 1990 under such arrangements.

Clause 45: Combined class of dividends to be equally franked

Clause 45 proposes the insertion of subsection 160AQG(3) into the Principal Act. Section 160AQG applies where dividends are declared and paid on only some of the shares of a particular class. It is designed to prevent the unequal franking of dividends that are part of the same distribution on a single class of shares. The provision operates to treat all the dividends concerned as being franked to the percentage, if any, specified in any franking declaration made for the first of those dividends.

One effect of proposed subsection 160AQCB(1) is that where there is a dividend streaming arrangement and dividends paid on a single class of shares as part of the same distribution are unequally franked, a franking debit will arise. Such dividends paid under the dividend streaming arrangement will continue to be franked only to the extent declared by the company.

Subsection 160AQG(3) will exclude dividends paid under divident streaming arrangements from the operation of section 160AQG. Such dividends will be franked to the extent declared by the company and any franking debits that arise under section 160AQCB will not flow through to shareholders as imputation credits. On the other hand, dividends franked unequally that are not paid under a dividend streaming arrangement will continue to be franked to the extent required by the application of subsections 160AQG(1) and (2).

Clauses 46 to 57 : Tax File Numbers

Introductory Note

The tax file number quotation provisions of the Principal Act in relation to investments apply to persons (investors) who enter into certain transactions with investment bodies after 1 July 1991 or who already have such investments as at that date. A phasing-in period will enable investors with existing investments to quote their file number from 1 July 1990.

The requirement to quote a file number apply to -

•

interest-bearing accounts or deposits with financial institutions;

•

money invested with a government or semi-government body or with a company;

•

money deposited in a legal practitioner's trust account;

•

units in a cash management or property trust; and

•

shares held in a public company.

Where an investment body pays or credits income after 1 July 1991, and a tax file number has not been quoted in respect of the account or investment, the investment body is required to deduct 48.25 per cent from any amount paid or credited. Where an unfranked or partly-franked dividend is paid or payable, the amount to be deducted will be calculated on the basis of the unfranked portion of the dividend.

An investment body who refuses or fails to withhold the amounts prescribed in the circumstances described in the preceding paragraph, or who remits withheld amounts after the time by which they are required to be remitted, will be liable to penalties similar to those that currently apply for non-deduction and late remittance of tax instalment deductions and deductions under the Prescribed Payments System.

Deductions in respect of investment income are not a final tax. A person is required to include the total amount of investment income in his or her income tax return and credit will be allowed for any amounts deducted from that income.

Certain categories of investors are excluded from the requirement to quote a file number in respect of certain investments.

Children under the age of 16 years are not required to quote a file number in respect of investments with -

•

a financial institution;

•

a government body or a corporation;

•

a solicitor; or

•

a property or cash management trust,

provided the income from the investment is payable at a rate less than $420 per annum.

The child's parent or guardian is required to lodge a declaration claiming the exemption with the investment body and the exemption remains in force until the commencement of the calendar year following that in which the child turns 16.

All categories of investments by recipients of a full age, service, widows', wives', carers' or invalid pension or a full special or supporting parents' benefit are also excluded. As with children, a pensioner claiming exemption is required to complete a declaration and lodge it with an investment body. The exemption remains in force until the pensioner ceases to be entitled to any part of a pension and the Commissioner of Taxation advises of the withdrawal of the exemption.

Other persons that are not required to quote a tax file number are -

•

entities not required to lodge income tax returns;

•

recently-arrived visitors to Australia;

•

non-residents; and

•

residents of Norfolk Island and Cocos (Keeling) Islands in respect of salary or wages earned or investments in those Territories.

Clause 46: Interpretation

Visitors recently arrived in Australia are allowed an exemption from quoting a tax file number to investment bodies under section 202ED of the Principal Act. By this Bill this exemption is to be amalgamated with the non-residents' exemption (see notes on clause 54). As a consequence the term "recently-arrived visitors" will no longer be used in Part VA. Accordingly, clause 46 will omit the definition of recently-arrived visitor.

Clause 47: Explanation of terms: investment, investor, investment body

Subsection 202D(1) of the Principal Act sets out in tabular form an explanation of the terms used in the investment provisions of the tax file number arrangements and in doing so provides details of the investments to which the arrangements apply.

Item 3 of subsection 202D(1) provides that a loan to a government body or body corporate by a person other than a financial institution (a bank, building society or credit union) is an investment to which the file number system applies. Accordingly, where a lending or investment institution other than a financial institution lends funds to a government body or body corporate, the institution (the investor) will need to quote its tax file number to the borrower (the investment body) to ensure that amounts are not deducted from the interest repayments.

Financial institutions were excluded from the application of Item 3 as the file number arrangements were not to apply to loan interest repayments. Clause 47 substitutes the reference to loans made by financial institutions with a reference to all loans made in the ordinary course of the business of providing business or consumer finance by a person in that business.

The amendment will result in loans made by financial institutions, merchant banks, finance companies and other money lending institutions and persons which provide business or consumer finance being excluded from the file number arrangements where those loans are made in the ordinary course of that business.

Clause 48: Quotation of tax file numbers in connection with investments

By section 202DB of the Principal Act a person in whose name an investment is made may quote the person's tax file number to the investment body in relation to the investment. Where an investment is in the name of one person on behalf of another person, the person acting in the capacity of a trustee is the investor. In many informal trust relationships, such as domestic arrangements where a parent, grandparent or some other person hold savings accounts on behalf of children, a file number will not usually have been assigned to the person in the capacity of a trustee.

Clause 48 inserts new subsection 202DB(2) to enable the person acting as the nominal trustee to quote his or her individual file number in lieu of a number assigned to the person in the capacity of a trustee of a trust estate. The person holding the investment on behalf of another person will then be taken to have quoted a file number.

Clause 49: Investor excused from quoting a tax file number in certain circumstances

Section 202DD of the Principal Act excuses an investor from quoting a tax file number to an investment body where the investment is made through a securities dealer or solicitor who has already been advised of the investor's file number. Section 202DE (to be amended by clause 50 - see notes on that clause) places obligations on the dealer to inform the investment body of the file number. By the combination of these sections, a securities dealer is obliged to keep records of tax file numbers and to allocate and transfer file numbers for each transaction.

The obligation for securities dealers to maintain records of file numbers and pass them on to investment bodies for every transaction made by a client is to be removed. This change covers all investments entered into through a securities dealer's account and any investment made with a solicitor.

Clause 49 repeals section 202DD and re-enacts subsection 202DD(3) as new section 202DD. By new section 202DD a person who invests through a securities dealer will be able to quote their tax file number to the dealer. The person will then be taken to have quoted a tax file number in respect of the investment - see also notes on clause 50.

Clause 50: Securities dealer to inform the investment body of tax file number

While the obligation for securities dealers to retain records of a client tax file number is to be removed (see notes on clause 49) the obligation to pass on a file number in respect of a single investment where the number is given to the dealer at the time of making that investment is to be retained.

Under subsection 202DC(3) of the Principal Act, a person investing through their securities dealer will be taken to have quoted a tax file number to the relevant investment body if the person has informed his or her securities dealer of their file number.

Section 202DE of the Principal Act provides that where a securities dealer has been informed of a file number by an investor, the dealer is obliged to inform the investment body of the number. Clause 50 modifies section 202DE by substituting "informs" for "has informed" in paragraph (b). This means that only where a file number is supplied in relation to a particular investment will the dealer be obliged to pass it on to the investment body. The dealer will not be required to keep a record of the file number.

Clause 51: Investments held jointly

Subsection 202DG(2) of the Principal Act operates where more than two people hold an investment jointly. In respect of such investments all of the investors are to be taken to have quoted a tax file number if at least two investors quote their file numbers. For the purposes of Division 4 of Part VA, a person is taken to have quoted a file number if an exemption from quoting is claimed under Division 5 of Part VA. To ensure that investors who hold file numbers quote their numbers rather than having investors who have exemptions indicating their exemption, clause 51 inserts new subsections 202DG(2) and 202DG(2A) to provide for quotation as follows -

•

where one investor holds a tax file number and is not eligible to claim an exemption under Part VA, that investor quotes the number and at least one other investor is to be taken to have quoted a file number, i.e., claims an exemption under Division 5 (new paragraph (a)); or

•

where two investors each hold a tax file number and are not eligible to claim exemptions under Part VA, at least those two investors quote their numbers (new paragraph (b)); or

•

where all of the investors are entitled to claim an exemption, at least two investors do so (new paragraph (c)).

New section 202DG(2A) defines an exempt person as a person who is to be taken to have quoted a file number under Division 4 of Part VA. A person is to be taken to have quoted a file number if they comply with the provisions of Division 5 and is in receipt of one of a number of pensions, is an entity not required to lodge tax returns, or is a non-resident or Territory resident.

This new provision ensures that file numbers will be attached as often as possible to investments to maximise the efficiency of the tax file number system.

Clause 52: Repeal of sections 202E and 202ED

The tax file number provisions as they apply to children less than 16 years of age are to be modified by this clause. Children are not to be included in the arrangements unless they are earning a significant amount of income. Section 221YHZC of the Principal Act is to become the operative provision in relation to children (see notes on clause 56) thus ensuring that children earning large amounts of investment income are covered by the file number arrangements.

Section 202E of the Principal Act provides for a declaration to be made by the parent or guardian of a child as to the child's full name and date of birth. The child would then be taken to have quoted a file number. The exemption allows children to continue receiving large amounts of income whilst remaining outside the requirement to quote a file number. The operation of section 221YHZC will preclude this from occurring.

Section 202E also provides that where an investment is held for a child by a parent or guardian, the parent or guardian, in addition to declaring the name and age of the child, quotes his or her own file number. Quotation for investments held on behalf children is to be covered by the amendments made to section 202DB (see notes on clause 48). Section 202E is therefore to be repealed.

Section 202ED of the Principal Act provides that a person recently arrived in Australia will be taken to have quoted a tax file number if the person makes a written declaration to the investment body setting out certain particulars. A recently-arrived visitor is defined in section 202A as a natural person who is a non-resident in Australia and who has been in Australia for a total of less than 6 weeks in the preceding 12 months.

The exemption from the file number arrangements provided for non-residents liable to pay non-resident withholding tax will cover recently-arrived visitors (see notes on clause 54).

Accordingly, section 202ED is to be repealed.

Recently-arrived visitors who make an investment in Australia will be taken to have quoted a file number on providing their residency details to the investment body as the non-residents' withholding tax provisions will then apply.

Clause 53: Non-residents

Section 202EE of the Principal Act provides that non-resident investors who are liable to pay withholding tax in respect of investment income are to be taken to have quoted a tax file number in respect of the investment. Clause 53 repeals section 202EE and inserts a new section 202EE. By new subsection 202EE(1) the exemption will apply to non-residents liable to withholding tax (paragraph (a)). The exemption will also apply to non-residents who, but for certain provisions in subsection 128(3) of Division 11A, would have been liable to non-resident withholding tax (paragraph (b)).

Non-residents whose income is exempted from income tax under certain provisions of section 23 and section 23C of the Principal Act, or whose income consists of a dividend that has been franked in accordance with section 160AQF of the Principal Act are exempt from the withholding tax provisions. As that income is not subject to Australian tax, the file number provision need not apply.

New subsection 202EE(2) will ensure that non-residents who become residents of Australia advise the investment body within a month of becoming a resident. From the time of advising the investment body of residency, the non-resident exemption will cease to apply. Failure to inform the investment body of a change of status to a resident of Australia will constitute an offence punishable on conviction by a maximum penalty of $1000.

Subsection 202EE(3) makes it clear that nothing in new section 202EE affects a person's liability to pay non-resident withholding tax.

Clause 54: Declarations under this Division to be retained in certain circumstances

Section 202EH of the Principal Act requires investment bodies which receive exemption declarations made under Division 5 of Part VA to send the declarations to the office of a Deputy Commissioner of Taxation within 28 days of receipt.

Clause 54 substitutes section 202EH with new section 202EH to provide for -

•

retention of the forms for a specified period where directed by the Commissioner of Taxation (new subsection (1));

•

the direction to retain the forms to be given to the investment body in writing or by notice in the Gazette (new subsection (2)), and

•

the sending of declaration forms to the office of a Deputy Commissioner of Taxation upon request, or providing such information as required by the Commissioner of Taxation as specified (new subsection (3)).

The transmission of information is to be in the manner specified by the Commissioner of Taxation in accordance with section 202G of the Principal Act.

Clause 55: Duties of payers

Clause 55 makes a number of amendments to section 221YHCZ of the Principal Act.

Section 221YHZC is to become the operative provision in relation to the exclusion of children's investment income from the operation of the tax file number arrangements. Section 202E relating to exemption declarations for children is to be repealed (see notes on clause 52).

Under the income tax law, children's property income of $416 or more is taxable. Therefore, for the file number arrangements, investment income of more than $420 in respect of an investment will preclude a child from exclusion from the arrangements.

Under subparagraph 221YHZC(1A)(c)(i), an investment body is obliged to ensure that tax is not deducted from investment income for which a file number has not been quoted if the income is paid at a rate less than $420 per annum (as prescribed by subregulation 54ZEK(1) of the Income Tax Regulations) and the investor is a child under the age of 16.

Paragraph 55(a) amends subparagraph 221YHZC(1A)(c)(i) so that the investment is only required to fulfill the obligation outlined above where the body is aware of the age of the child. The means whereby the investment body becomes aware of the age of the child is to be left to the investor. Many investment bodies are already aware of the date of birth of their investors and may use that information to allow for the $420 threshold.

The income of the child will continue to be "unattributed" (investment income for which a tax file number has not been quoted or an exemption has not been claimed), however, where the investment body is aware of the age of the child, the body will be obliged to ensure that tax is not deducted from income paid at a rate of less than $420 per annum.

Clause 55 also provides for a uniform threshold for the deducting and remitting of tax for accounts with financial institutions (banks, building societies and credit unions). Two thresholds currently exist for the taxing of income earned in respect of such investments.

Subparagraph 221YHZC(1A)(c)(ii) provides that for accounts and deposits with financial institutions in existence prior to 1 July 1991, amounts will only be deducted where unattributed income (income from an investment in respect of which a file number has not been quoted or an exemption has not been claimed) is paid at a rate of more than $120 per annum. For those types of investments opened after 1 July 1991, tax will be deducted from the first $1 if a file number has not been quoted. The income reporting requirements for those investments are also based on those thresholds.

The threshold for deducting and remitting tax and for reporting income in respect of accounts opened after 1 July 1991 is to be increased to $120 per annum. Paragraphs 55(b) and (c) effect the amendment for a uniform threshold of $120 for these investments by omitting sub-subparagraph 221YHZC(1A)(c)(ii)(B) which refers to accounts in existence prior to the beginning of the phasing-in period.

Paragraph 55(d) amends paragraph 221YHZC(1A)(f) to allow investment bodies to give to the Commissioner of Taxation a statement reconciling the total amounts of deductions made by the investment body within 4 months after the end of the financial year. This amendment will bring the reconciliation statement reporting date in line with the furnishing of the annual investment income report under regulation 43C of the Income Tax Regulations.

Paragraphs 55(e) and (f) rectify oversights in the consequential amendments to the penalty provisions of section 221YHZC. Payers failing to comply with the requirements of the section, in relation to both non-resident investors and investors to whom Part VA applies, are subject to penalties.

Clause 56: Deductions from dividends and interest

Section 221YL requires companies who pay dividends to non-residents and borrowers who pay interest to non-residents to deduct non-resident withholding tax from the payments.

However, there may be circumstances where deductions are required to be made from the payments under the tax file number provisions because the income is unattributed. For example, where an investment is held jointly by a non-resident and a resident who chooses not to quote a tax file number, the income would for tax file number purposes be unattributed if a file number has not been quoted or exemption has not been claimed. The payer is obliged to deduct tax from the whole of the income paid at the highest rate.

Clause 56 inserts new subsection 221YL(4AA) to ensure that where a deduction is required to be made under the tax file number arrangements, deduction of non-resident withholding tax does not occur.

Clause 57: Deductions to be forwarded to Commissioner etc.

Paragraph 221YN(1)(b) of the Principal Act requires persons who make deductions from interest or dividends paid to non-residents to provide the Commissioner with a statement with respect to the deductions made within 2 months after the end of the financial year.

Clause 57 amends paragraph 221YN(1)(b) to permit the furnishing of the reconciliation statement within 4 months of the end of the financial year. The amendment brings the date of reporting in line with the annual investment income reporting date under the TFN arrangements.

Clause 58: Interpretation

Introductory note - Medicare levy

Clause 58 proposes to amend section 251R of the Principal Act. Section 251R is part of Part VIIB of the Principal Act dealing with the assessment and collection of Medicare levy.

The amendments will operate to provide relief from half Medicare levy for prescribed persons (that is, persons who would be exempt from the levy but for the existence of a dependant), by treating certain persons not to have been dependants of a prescribed person for the purposes of Part VIIB in certain circumstances.

In particular, the amendments by clause 58 will exempt from Medicare levy a prescribed person presently required to pay one-half of the levy because he or she has a dependant, where either -

(a)

the dependant is liable to pay the levy; or

(b)

the person has a spouse who is liable to pay the levy and the spouse contributes to the maintenance of the dependant.

Also, the amendments will allow a married (or defacto) couple who are both prescribed persons but are presently required to pay one-half of the levy because they have a dependant, to agree to as to which of them is to be exempt from paying the levy.

Subsection 251R(3) of the Principal Act sets out the conditions for a person to be a dependant of another person for the purposes of Part VIIB during any part of a year of income. Paragraph 58(a) of the Bill will amend subsection (3) and make the conditions therein subject to new subsections (6B), (6C) and (6D) so that, in the circumstances specified in those subsections, specified persons are to be taken not to have been dependants, and accordingly previously leviable persons may no longer be liable to half Medicare levy.

Paragraph 58(b) proposes to insert new subsections 251R(6A) - (6J) in the Principal Act.

Subsection 251R((6A) defines the meaning of the term "eligible prescribed person" used in new subsections (6B), (6C) and (6D) to be inserted in section 251R by clause 58. The term is a reference to a person who would in relation to a period be, but for subsections 251U(2) and (3), a prescribed person by virtue of paragraph 251U(1)(a), (b) or (c) of the Principal Act. That is, someone entitled to free medical treatment as a member of the Defence Forces, as a relative of, or a person associated with, such a member or under repatriation legislation and someone entitled to health care as a holder of a Health Care Card, a Pensioner Health Benefits Card or a Health Benefits Card on a non-income-tested basis.

New subsection 251R(6B) modifies the meaning of dependant in subsection 251R(3) of the Principal Act. Broadly, a person is a dependant of a taxpayer for Medicare levy purposes if the person is an Australian resident to whose maintenance the taxpayer contributes, and is the spouse of the taxpayer, a child under 16 or a full-time student child 16 years of age or over but less than 25 years who is a dependent.

By subsection (6B), a person is not to be taken as a dependant of another person (being an "eligible prescribed person" as defined in subsection (6A)) during any part of a year of income if Medicare levy is payable by the first-mentioned person in the year of income.

The effect of subsection (6B) is that a person who qualifies as a prescribed person (as defined in section 251U of the Principal Act) is no longer required to pay half levy in respect of a period in a year of income on account of the operation of subsections 251U(2) and (3) of the Principal Act because he or she has a dependant (as defined in section 251R), where the dependant is liable for levy in that year of income.

Subsection 251R(6C) sets out the conditions necessary for a child (including a student child) not to be taken to have been a dependant of a person (being an eligible prescribed person as defined in subsection (6A)) during a particular period. These conditions are -

(a)

a person was an eligible prescribed person in relation to the period in a year of income;

(b)

the spouse of the person during the period was not an eligible prescribed person during the period;

(c)

Medicare levy was payable by the spouse for the year of income; and

(d)

but for subsection (6C), the child would be a dependant of both during the relevant period.

Under paragraph 251T(a) of the Principal Act, Medicare levy is not payable by a person who is a prescribed person (as defined in section 251U of the Principal Act) during the whole of a year of income. However, subsection 251U(2) requires that every dependant of the prescribed person in respect of a particular period must also be a prescribed person, otherwise the person is required to pay Medicare levy for one-half of the period under subsection 251U(3).

The effect of satisfying the conditions in subsection (6C) is that a child will not be treated as a dependant of the prescribed person for the purposes of section 251U. Also, by new subsection 251R(6B) the spouse will not be treated as a dependant. A prescribed person will not be required therefore to pay Medicare levy in respect of a period because he or she has a dependant child, where his or her spouse is liable to pay full levy and the spouse contributes to the maintenance of the child during the period.

New subsection 251R(6D) sets out the conditions necessary for a child to be taken as a dependant of only one of a married (or defacto) couple who are both eligible prescribed persons (as defined in subsection (6A)) in respect of a particular period. These conditions are -

(a)

a person was an eligible prescribed person in relation to a period in a year of income;

(b)

the person had a spouse during the same period who was also an eligible prescribed person during the whole of the period;

(c)

apart from subsection (6D), levy would be payable by both the person and the spouse on their respective taxable incomes;

(d)

a child was a dependant of both the person and the spouse during the period; and

(e)

the person and the spouse have entered into an agreement (called a "family agreement") that the child is, for Medicare levy purposes, to be treated as a dependant of only one of them.

The effect of satisfying the conditions is that, for one of the eligible prescribed persons, the child will not be treated as a dependant for the purposes of section 251U, and that person will not be required to pay half levy as a consequence of that child. The other person will be required, of course, to pay half levy on account of the dependant child.

An example of such a situation is where two members of the Defence Forces are married to each other and have a dependant child.

Subsection 251R(6E) requires the "family agreement" (referred to in subsection (6D)) to be entered into at or before the time of lodgment of the relevant return of income of the person claiming exemption from half levy or within such further time as the Commissioner allows. It is envisaged that there would be a simple agreement evidenced in writing.

New subsection 251R(6F) requires the "family agreement" to be retained for a period of five years from the date of lodgment of the relevant return of income of the person claiming the exemption. Failure to retain the "family agreement" will mean that subsection (6D) will not apply. It follows that the necessary conditions to allow a child not to be taken as a dependant of one of the prescribed persons will not have been satisfied, and both persons will be liable for half levy.

While it is necessary for the family agreement to be retained it will not be necessary to lodge it with the person's tax return.

Subsection 251R(6G) covers the situation where the "family agreement" has been lost or destroyed. Where the Commissioner is satisfied that the person claiming the exemption has a document that is a copy of the family agreement, or records the matters set out in the family agreement and was in existence when the original was lost or destroyed, then that document will be taken to be a substitute for the family agreement.

Subsection 251R(6H) covers the situation where the "family agreement" has been lost or destroyed in circumstances beyond the control of the person claiming the exemption from half Medicare levy and where no substitute documents exist. In that case the requirement in subsection (6F) to retain the family agreement for five years does not apply from the time the agreement was lost or destroyed.

New subsection 251R(6J) gives the Commissioner of Taxation authority to re-open an income tax assessment at anytime for the purposes of giving effect to subsection (6F), (6G) or (6H).

Clause 59: Consequential amendments - losses

This clause authorises several drafting amendments of the Principal Act that are set out in Schedule 1 of the Bill. These amendments will ensure that other provisions of the Act that relate to sections 80, 80AAA and 80AA will have the same effect for losses incurred in the 1989-90 and later years of income that qualify for deduction under new sections 79E and 79F.

Clause 60: Consequential amendments - quarrying

This clause authorises several drafting amendments that are set out in Schedule 2 of the Bill.

Part 1 of the Schedule provides for two minor drafting changes to facilitate the operation of the new structure of Divisions 10 and 10AAA. An amendment will include the appropriate references to the proposed sections of Subdivision B in the Principal Act where the corresponding references appear for sections in Subdivision A. This is necessary to ensure taxpayers who are engaged in quarrying operations receive similar treatment as taxpayers engaged in mining operations.

A further amendment facilitates the renumbering of section 122P of the Principal Act. Where references to section 122P appear in the Principal Act proposed Part I will alter these references to section 122JA to reflect the renumbering.

Part 2 of the Schedule also proposes minor drafting amendments to reflect the restructure of Division 10 and 10AAA into three separate subdivisions. Wherever references to 'this Division' appear in sections 122, 122A, 122B, 122C, 122DA, 122DC, 122DE, 123, 123B and 123BB, this Part provides that they be changed to 'this Subdivision'.

Clause 61: Application of amendments

This clause contains application provisions relevant to certain of the amendments to be made by the Bill.

By subclause 61(1) the Income Tax Assessment Act 1936 as amended by this Act, is in clause 61 referred to as the amended Act.

Subclause 61(2) specifies that certain amendments made by the Bill apply to assessments in respect of income for the year commencing 1 July 1989 and all subsequent years. The amendments are those made by clause 6 in respect of sporting and service clubs (section 23 of the Principal Act), clause 40 in relation to pensioner and beneficiary rebates (new section 160AAA of the Principal Act) and by clause 58 to Medicare levy (Part VIIB of the Principal Act).

Subclause (3) will ensure that the repeal of paragraph 23(jd) of the Principal Act applies to income derived on or after 1 July 1990. Accordingly, the Australian Wool Testing Authority will be subject to income tax for income derived after 30 June 1990.

By subclause (4) the amendments concerning disposal of contaminated live stock proposed by clauses 8 and 9 are to apply in relation to live stock disposed of on or after 1 July 1987.

By subclause (5) proposed paragraphs 78(1)(a)(ci) and 78(1)(a)(cii) will apply to gifts made on or after 10 November 1989. Subparagraph 78(1)(a)(ci) will specifically list the Life Education Centre in the gift provisions while subparagraph 78(1)(a)(cii) will admit to the gift provisions a company that conducts life education programs under the auspices of the Life Education Centre.

By subclause (6) the amendments concerning funds deposited in a film account proposed by Clause 38 to declarations relating to section 124ZADA of the Principal Act will apply in relation to the financial year commencing on 1 July 1987 and all subsequent financial years.

Clause 62: Transitional - Australian Wool Testing Authority

This clause will modify the application of the depreciation and capital gains tax provisions of the Principal Act to the Australian Wool Testing Authority (AWTA). The clause will ensure that the provisions of sections 57AH and 57AL have no application to plant or articles owned by the AWTA. These sections would automatically apply to certain plant and articles, acquired by the AWTA, for the purposes of determining notional deductions prior to 1 July 1990. The amendments will ensure that these sections do not apply.

Further amendments will ensure that any capital gain or loss determined under Part IIIA of the Principal Act is entirely prospective, and applies only to assets purchased after 19 September 1985 for gains or losses accruing on or after 1 July 1990.

Subclause (1) defines three expressions which are used in this section as follows -

"amended act" means the Income Tax Assessment Act 1936 as amended by this Act;

"AWTA" means the Australian Wool Testing Authority Ltd, which is a company incorporated in the State of Victoria;

"changeover time" means the end of 30 June 1990.

Subclause (2) ensures that terms and phrases which are defined, or have a particular meaning in the capital gains tax provisions in Part IIIA of the Principal Act, have the same meanings in this clause as they do in Part IIIA.

Subclause (3) will ensure that former sections 57AH and 57AL of the Principal Act never applied to a unit of property owned by the AWTA. Those sections were repealed in Taxation Laws Amendment Act (No.4) 1988. Section 57AH previously authorised an accelerated depreciation rate for new items of plant or articles used wholly for agricultural or pastural pursuits. The deduction was allowed over three or five years. Section 57AL allowed a similar deduction on most new and second hand plant acquired after 19 July 1982 and before 25 May 1988 over either three or five years.

The effect of subclause 3 will be that the accelerated depreciation provisions are not used in calculating notional depreciation deductions under section 61 of the Principal Act in respect of plant owned by the AWTA.

Subclauses (4), (5), (6) and (7) will ensure that Part IIIA of the Principal Act applies only to the gain or loss which accrues after 1 July 1990 in respect of assets acquired by the AWTA after 19 September 1985. In effect this ensures that any capital gain or loss is entirely prospective. This treatment is also consistent with the treatment accorded other exempt bodies which became taxable.

Subclause (4) ensures that subclauses (5) to (7) only apply where the capital gain and loss provisions of Part IIIA of the amended Act apply. This occurs in respect of all assets to which Part IIIA applies which the AWTA acquired after 19 September 1985 and disposed of after 30 June 1990.

Subclause (5) outlines the way in which capital gains are to be calculated on assets which are acquired after 19 September 1985 by the AWTA and disposed of after 30 June 1990, where the market value of the asset is greater than its indexed cost base. The 30 June 1990 is the day before the AWTA becomes liable to income tax. Where the market value of the asset is greater than its indexed cost base at the end of 30 June 1990 the following paragraphs apply.

Paragraph (a) of Clause 5 deems the AWTA to have disposed of the asset at the end of 30 June 1990 for a consideration equal to the indexed cost base. This has the effect of assuming that the AWTA disposed of the asset without giving rise to any capital gains tax consequences.

Paragraph (b) deems the AWTA to have immediately re-acquired the asset for a consideration being equal to the market value of the asset at the end of 30 June 1990. This paragraph removes any capital gain which has accrued between the period when the asset was purchased and to the end of 30 June 1990, making any subsequent gain entirely prospective.

Paragraph (c) ensures that any references in subsection 160Z(3) of the amended Act to the date that an asset was acquired by the AWTA is taken as a reference to the actual date on which it was acquired and not the end of 30 June 1990.

Subclause (6) will apply where a disposal has occurred to which the capital gains tax provisions apply and the disposal was to a third party and occurred within 12 months of the original acquisition by the AWTA. In such situations, the references in subclause (5) to the indexed cost base, will be references to the cost base. Consistent with the existing capital gains tax provisions this ensures that indexation is denied on relevant assets which are disposed of within 12 months of acquisition.

Subclause (7) outlines the way in which capital losses for Part IIIA purposes will be determined for the AWTA. Where the market value of an asset at the end of 30 June 1990 is less than the reduced cost base of the asset at that date, the following paragraphs apply.

By paragraph (a) the AWTA will be taken to have disposed of the asset at the end of 30 June 1990 for a consideration equal to the reduced cost base. This in effect assumes that the AWTA disposed of the asset without giving rise to any capital gains tax consequences.

The effect of paragraph (b) is that the AWTA will have immediately re-acquired the asset for a consideration equal to the market value of the asset at the end of 30 June 1990. Any capital loss for the purpose of Part IIIA of the Principal Act incurred by the AWTA through a subsequent disposal will be based on the market value of the asset at the end 30 June 1990, making any subsequent loss entirely prospective.

Clause 63: Transitional - declarations and notices under section 124ZADA of the Principal Act

Clause 63, which will not amend the Principal Act, provides a transitional provision as a consequence of the amendments to be effected by Clause 38.

Clause 38 proposes amendments to section 124ZADA of the Principal Act consequential upon removal, by clause 39, of the requirement to deposit certain funds in a film account in the Australian Film Industry Trust Fund. Section 124ZADA provides for the lodging, with the Commissioner of Taxation, of a declaration as a prerequisite of qualifying for the film industry tax concession. Clause 38 will amend subsection 124ZADA(1) which details the contents of the declaration, subsection 124ZADA(4), which empowers the Commissioner to notify a person that the person is not an appropriate person to make a declaration and subsection 124ZADA(5), which deals with the lodging of further declarations.

Subclause (1) of clause 63 defines, for the purposes of the section, the term "amended Act" as meaning the Principal Act as amended by this Act.

Subclause (2) of Clause 63 will apply to declarations lodged or notices given under subsections 124ZADA (1), (4), or (5) of the Principal Act, before the commencement of the clause, which relate to the financial year commencing on 1 July 1987 or a subsequent financial year. By clause 63, such a declaration or notice operates and is to be taken to have operated, as if it had been lodged or given under the amended Act. There will therefore be no need for a further declaration to be lodged under subsection 124ZADA(1) where one was lodged before this section commenced, in relation to the financial year commencing 1 July 1987 or a later year, unless the Commissioner invokes the powers under subsection 124ZADA(4). A notice given under this subsection will not need to be given again, as a consequence of the amended requirements and a further declaration under subsection (5), which has already been provided in relation to a relevant financial year, will not need to be made again and lodged to reflect the changed information requirements.

Clause 64: Transitional - tax concessions for film investments

This clause makes special provisions which affect the application of Division 5 of Part III of the Taxation Laws Amendment Act (No. 5) 1988 ("the 1988 Act"). That Division contained special transitional provisions which enabled taxpayers in certain limited circumstances to obtain access to rates of deduction, for investment in qualifying Australian films, which exceeded the rate of 100 per cent inserted in the Principal Act by amendments, made by Division 2 of Part III of the 1988 Act, to section 124ZAFA of the Principal Act.

Paragraph (a) of clause 64 provides that, for the purposes of the application of Division 5 of the 1988 Act, the amendments of section 124ZAFA made by clause 39 are to be treated as if they had commenced immediately before the commencement of the Division. In addition, paragraph (b) of clause 64 provides that amendments made by paragraphs 23(a) and (b) of the 1988 Act (which reduced the rate of deduction under section 124ZAFA to 100 per cent for moneys expended under a contract entered into on or after 25 May 1988) are, for the purposes of the application of Division 5 of the 1988 Act, to be disregarded.

The provisions of this clause ensure that, in applying Division 5 of the 1988 Act, references to 100 per cent of the taxpayer's money being deductible under section 124ZAFA are to read as if the requirement to deposit moneys in a film account had been abolished, for money deductible at that rate, before the commencement of Division 5 of the 1988 Act.

Put simply, moneys are not required to be deposited in a film account where the rate of deduction applicable to those moneys is 100 per cent.

Clause 65: Amendment of assessments

Clause 65 of the Bill authorises the Commissioner of Taxation to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purpose of giving effect to amendments proposed by the Bill.

PART 4 - AMENDMENT OF THE SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) ACT 1935

Clause 66: Principal Act

This clause facilitates reference to the Sales Tax (Exemptions and Classifications) Act 1935 which, in this Part, is referred to as "the Principal Act".

Clause 67: Amendment of First Schedule

Paragraph (a) of this clause will insert new item 21A into the First Schedule to the Principal Act to exempt from sales tax precious or semi-precious stones -

(a)

which are derived directly from mining operations carried on outside Australia (paragraph (a) of item 21A); and

(b)

are uncut gemstones imported or subsequently sold or applied to own use while still in rough form, that is, the stones have not been subjected to any process or treatment altering their form, nature or condition (paragraph (b) of item 21A).

Paragraph (b) of clause 67 inserts new item 108B into the First Schedule of the Principal Act.

Sub-item (1) of new item 108B will provide an exemption for all coins, including gold coins, imported into Australia that are lawfully current in a foreign country.

"Lawfully current" is the term used in the Crimes (Currency) Act 1981 to describe legal tender. The term "foreign country" is defined in paragraph 22(1)(f) of the Acts Interpretation Act 1901 to mean any country (whether or not an independent sovereign state) outside Australia and the external Territories.

Without limiting the meaning given to foreign country by the Acts Interpretation Act, sub-item (2) makes it clear that, for the purposes of new item 108B, the reference to a foreign country includes a territory, dependency or colony of a country other than Australia.

Clause 68: Application of Amendments

By this clause the amendments made by Part 4 will apply to transactions, acts or operations effected or done on or after 28 days after the amending Act receives the Royal Assent.