House of Representatives

Explanatory Memorandum

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

General outline

The main features of each of the two principal matters that are the subject of the Income Tax Assessment Amendment Bill (No.2) 1981 are as follows:

Taxation of payments made under a return to work agreement (Clauses 3, 5 and 6)

The Bill will give effect to the proposal announced on 11 August 1981 that payments similar to those made last year on the settlement of the industrial dispute on the Loy Yang power station project - payments designed to induce employees to return to work - be made subject to income tax and liable to pay-as-you-earn tax instalment deductions.

Broadly, the Bill proposes that any payment made to a taxpayer under an agreement entered into after 11 August 1981 for a purpose of having the taxpayer resume performing work or rendering services will be included in the taxpayer's assessable income.

The Bill will also provide for the deduction of PAYE tax instalments from such payments made after the end of the month in which this legislation receives the Royal Assent.

Employees' housing (Clause 4)

The income tax law is also to be amended so as to provide a more concessional basis for determining for income tax assessment purposes the value of the taxable benefit in respect of free or subsidised accommodation provided by an employer to an employee who:

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does not reside or work in, or adjacent to, an urban centre; or

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put very broadly, is required to reside within close proximity to the work place.

The new measure will mean that the amount of the benefit to be included in an employee's assessable income is to be limited to 10 per cent of the market rental value of the accommodation provided by the employer, less the amount of any rent paid by the employee.

The Bill will specify that cities and towns with a population of 12,000 or more will be regarded as urban centres. An area ''adjacent" to an urban centre will be an area within 100 km of the centre of a town or city with a population of more than 130,000 or within 40 km of a town with a population of more than 12,000. The population figures to be used for this purpose are those published by the Australian Bureau of Statistics as a result of the 1976 Census.

The new concession will only be available on the basis of these "remoteness" tests if it is customary in the industry in which the taxpayer is employed for employers to provide free or subsidised housing for their employees and if, in the case of the particular taxpayer, it is necessary for his or her employer to provide such accommodation for employees for any of the following reasons:

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the nature of the employer's business is such that employees are liable to frequent movement from one residential location to another;

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in the area in which the employee is employed there is not sufficient suitable residential accommodation otherwise available; or

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because of the custom in the employer's industry to provide free or subsidised housing for employees.

Where a taxpayer resides in, or adjacent to, an urban centre, i.e., other than in a "remote" area, he or she may also be entitled to the new concession if all of the following conditions are satisfied:

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the employer's industry is one in which it is customary to provide subsidised housing for employees at or in close proximity to the work place;

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the employee had no alternative to occupying the accommodation provided because suitable alternative accommodation was not available at or in close proximity to the work place on reasonable terms and conditions or the employee was required by the employer to live at or near the work place and to be on call;

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the conditions under which the employee occupies the accommodation are onerous because of its proximity to the work place; and

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the employer of the taxpayer provided accommodation connected with the taxpayer's work place for at least six employees.

These measures are proposed to have effect in assessments in respect of the 1977-78 income year and subsequent years. The market rental value of the subsidised accommodation is to be first determined in relation to the 1977-78 income year or, where the employee commenced to occupy the accommodation in a year after 1977-78, in relation to that later year. In subsequent years, the market rental value will be indexed in accordance with movements in the rent sub-group of the Consumer Price Index.

The Commissioner of Taxation will have power under the provisions to treat a person who resides or works in, or in an area adjacent to, an urban centre as residing or working outside that area if persons residing or working near to that person are regarded as being remote.

There are to be safeguards against abuse of the concession so as to counter any arrangements that may be entered into for the purpose of obtaining the benefit of the concession.

The Bill will also provide the Commissioner with the authority to amend assessments made before the provisions come into operation so as to effect any reduction in the value of assessable housing benefits that is available under the new measures.

The provisions of the Bill are explained in more detail in the notes that follow.

Notes on Clauses

Clause 1: Short title etc

By sub-clause (1) of this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act (No.2) 1981.

Sub-clause (2) will facilitate references to the Income Tax Assessment Act 1936 which, in the Bill, is referred to as the "Principal Act".

Clause 2: Commencement

By this clause the amending Act will come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent. This will facilitate practical application of provisions in the Bill that have the effect of reducing the assessable value of employer - provided housing benefits in certain circumstances (see clause 4).

Clause 3: Certain items of assessable income

This clause proposes the insertion of a new provision in the Principal Act to ensure that amounts that, in substance, are paid to induce a person to resume work will be included in the recipient's assessable income for tax purposes, regardless of how the payments are described or paid, or by whom they are paid.

Ordinarily, payments made by an employer to an employee to take up or resume work qualify as assessable income. This amendment is designed to ensure that such payments are not free of tax because, for example, they are designated as representing compensation for hardship suffered as a consequence of dismissal or are not paid by the employer concerned.

Paragraph (e) of section 26 of the Principal Act includes in assessable income the value to a taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him.

Sub-clause (1) proposes the insertion of new paragraph (eb) in section 26 of the Principal Act which, broadly, will specifically include as assessable income any amount paid to a taxpayer under an agreement, arrangement or understanding entered into for a purpose of achieving the result that the taxpayer would, or but for special circumstances would, resume performing work or rendering services. Such an amount is to be included in the taxpayer's assessable income whether or not it is paid by the taxpayer's employer or former employer or by the person to whom he renders or rendered services. It will not matter whether or not an agreement, arrangement or understanding pursuant to which the amounts were paid is formal or informal or express or implied whether or not it is enforceable, or intended to be enforceable, by legal proceedings.

Payments that are made in consequence of retirement from or termination of employment, and not to induce a taxpayer to resume work, will continue to be assessable as to 5 per cent under paragraph (d) of section 26.

Sub-clause (2) will mean that new paragraph 26(eb) applies to amounts paid under agreements, arrangements or understandings entered into after 11 August 1981, the date on which the proposed amendments were announced.

Sub-clause (3) will ensure that the Commissioner of Taxation has authority to re-open an income tax assessment made before this Bill becomes law if that should be necessary to include in assessable income amounts to which new paragraph 26(eb) applies.

Clause 4: Employees' housing

Sub-clause (1) of clause 4 will insert a new section - section 26AAAB - in the Principal Act which will, where certain conditions are satisfied, limit the benefit assessable, in terms of paragraph 26(e), in respect of residential accommodation provided free or at subsidised rents by an employer to an employee. Broadly stated, the concession will be restricted to employees who live and work in locations remote from major centres of population or who are required by their employer to live within close proximity to their workplaces. The amount to be included in the assessable income of an employee entitled to the concession will be limited to 10 per cent of the market rental value of the accommodation less any rent paid by the employee in respect of that accommodation.

Under paragraph 26(e) of the Principal Act, the value to a taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums given in respect of or in relation directly or indirectly to any employment or services rendered is to be included in the person's assessable income. Where an employee is provided with residential accommodation in respect of his or her employment at either no cost or at a cost less than the value of the accommodation, the value to the employee of the benefit so derived forms part of his or her assessable income in terms of paragraph 26(e).

Under section 26AAAA of the present law, the Commissioner of Taxation is required to take all relevant factors into account in assessing for income tax purposes the value of housing accommodation provided to an employee. These factors specifically include the availability or otherwise of suitable alternative accommodation; the remoteness of the location at which the accommodation is situated; whether it is customary for employers in the particular industry to provide employees with free or subsidised accommodation; whether the accommodation provided is of a higher standard or larger size than required by the employee; and whether there are any onerous conditions attaching to the occupation of the accommodation.

New section 26AAAB will require that, where specified conditions are satisfied, the amount to be included in assessable income in respect of employer - provided housing is to be limited to 10 per cent of the market rental value of the accommodation, less any rent paid by the employee.

Sub-section (1) of section 26AAAB sets out two alternative groups of conditions, either of which, if satisfied in relation to a housing benefit granted to an employee, will entitle the employee to the benefits of the new concession. Sub-section (1) also provides the basis for determining the reduced amount to be included in the assessable income of an employee who is eligible for the concession.

The first group of conditions is contained in paragraph (a) of sub-section (1). The conditions set out in this paragraph, all of which must be satisfied in order for an employee to be eligible for the concession, are related to housing benefits granted to employees who reside in areas remote from major centres of population.

Sub-paragraph (a)(i) contains the first condition to be satisfied, namely, that the residential accommodation provided to the employee is not situated in or adjacent to an eligible urban area. An eligible urban area is to be defined in sub-section (10) to be one which had a population greater than 12,000 people as at the date of the 1976 Commonwealth census. Whether a particular location is to be regarded as "adjacent" to an eligible urban area is also dealt with in that later sub-section.

The second condition, set out in sub-paragraph (a)(ii),is that the employee's place of work is not located in or adjacent to an eligible urban area.

By sub-paragraph (a)(iii), a third condition is that it is customary in the industry in which the employee works that employers provide free or subsidised housing for their employees.

Sub-paragraph (a)(iv) requires it to be the case that it was necessary for the employer of the taxpayer to provide housing for employees for any of three reasons. These are that:-

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because of the nature of the employer's business, employees were liable to be moved from one place to another;

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there was insufficient suitable housing for the employees at or near the place of employment; or

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it was customary in the employer's industry to provide housing for employees.

Sub-paragraph (a)(v) is designed to counter any attempted exploitation of the concession and stipulates that the accommodation is not supplied under arrangements entered into between persons not dealing with each other at arm's length in relation to the arrangement or entered into for the primary purpose of obtaining the benefit of the concession provided by the section.

The second group of conditions set out in paragraph (b) of sub-section (1), relate to housing benefits provided to employees who do not reside and work in a remote area but who are required by their employers to reside at or in close proximity to their places of work. Again it will be necessary for all of these conditions to be satisfied before an employee will be eligible for the concessional basis of assessing the value of his or her housing benefit.

Sub-paragraph (b)(i) contains the first condition which is that, in the industry in which the taxpayer is employed, it is customary for employers to provide free or subsidised housing for employees at or in close proximity to the workplace.

The second condition, set out in sub-paragraph (b)(ii), is that the taxpayer had no reasonable alternative to occupying the accommodation provided by his or her employer because either -

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suitable accommodation was not available on reasonable terms and conditions at or in close proximity to the workplace; or

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the taxpayer was required by his employer to reside at or in close proximity to the workplace and to be on call for duty.

Sub-paragraph (b)(iii) stipulates that the conditions under which the employer-provided housing is occupied by the taxpayer must be onerous because of the close proximity of the housing to the workplace.

The fourth condition, contained in sub-paragraph (b)(iv) is that the taxpayer's employer provides housing for at least 5 other employees who are employed at, or in association with, the taxpayer's workplace.

Sub-paragraph (b)(v) is to the same effect as sub-paragraph (a)(v) discussed earlier. It makes a condition for eligibility for the concessional tax treatment that the housing was not provided in pursuance of an arrangement entered into between persons not dealing with each other at arm's length in relation to the agreement or entered into for the primary purpose of obtaining the benefit of the new concession.

If all of the conditions set out in paragraph (a) or, alternatively, all of those set out in paragraph (b), are satisfied in relation to housing benefits given to an employee by his or her employer, the amount to be included in the assessable income of the employee is to be calculated on the basis of the formula contained in sub-section (1). The formula means that one-tenth of the annual rental value of the accommodation, less the amount of any rent paid by the employee for the accommodation, is to be deemed to be the value to the employee of the benefit received for the purposes of paragraph 26(e). The formula also caters for the situation where the taxpayer is provided with accommodation for only part of the year. It requires that the amount otherwise assessable for a full year be apportioned in accordance with the number of days in the year in which the accommodation was provided to the employee.

Sub-section (2) gives the Commissioner of Taxation power, where circumstances warrant it, to treat a person who resides or works in an area adjacent to an eligible urban area (as defined in sub-section (10)), as residing or working outside that area if persons who live or work near to that person, are outside that area. This power is to meet situations where near neighbours would otherwise be treated differently as to whether they qualify for the concession under the "remoteness" tests because they live or work just on opposite sides of the dividing mark.

Sub-section (3) sets out the basis for determining the annual rental value of accommodation for the purpose of calculating the assessable benefit under sub-section (1).

Paragraph (a) of sub-section (3) meets cases where the year of income is a "base year" as determined by sub-section (4). Where the income year is a base year and the taxpayer occupied the relevant accommodation for the whole year, sub-paragraph (i) of paragraph (a) sets the annual rental value at the amount of the market value of the right to occupy the accommodation for the year. Where the taxpayer occupied the accommodation for only a part of the year, the formula in sub-paragraph (ii) operates so that the market value of the accommodation for that part of the year is extended to determine what the value would have been had the accommodation been occupied by the taxpayer for the whole of the year. It is necessary to determine a full-year annual rental value because the annual rental value in subsequent years is to be adjusted by reference to movements in the rent sub-group of the Consumer Price Index.

Paragraph (b) operates to determine the annual rental value of employer-provided accommodation in years subsequent to the base year of income. In any year of income after the base year the annual rental value is to be the amount obtained by multiplying the annual rental value of the accommodation for the previous year by an indexation factor derived from the Consumer Price Index.

Sub-section (4) determines whether a year of income is to be a base year of income for the purposes of subsequent Consumer Price Index adjustments.

By paragraph (a) of sub-section (4), the year of income that commenced on 1 July 1977 is to be a base year where the relevant accommodation was occupied during that year. The effect of this paragraph is to enable the concessional basis of assessment to apply from the commencement of the 1977-78 income year in appropriate cases.

Paragraph (b) means that the year of income will be taken as a base year of income if the new section did not apply in relation to the taxpayer for the previous year. This paragraph will have application, for example, if the accommodation in question is constructed after the year of income that commenced on 1 July 1977 or if the taxpayer did not begin to occupy the accommodation until after that year.

Paragraph (c) enables the Commissioner of Taxation to treat any year of income as a base year if the annual rental value that would otherwise be determined for that year on the basis of indexation adjustments does not reflect any substantial increase or decrease in the rental value of the accommodation which has been brought about by improvements to the accommodation, by the addition or removal of facilities or by any damage caused to the accommodation subsequent to the determination of the annual rental value for the base year.

Sub-section (5) prescribes the method of determining the indexation factor referred to in sub-section (3). It is to be ascertained as at the date on which the index number is first published for the March quarter preceding the year of income. The factor is to be the number ascertained by dividing the sum of the rent sub-group numbers of the Consumer Price Index for each quarter of the twelve months ended 31 March that precedes the commencement of the relevant year of income by the sum of the corresponding numbers for each quarter of the twelve months ending on the previous 31 March.

Under sub-section (6) the index number first published for each quarter of any income year is to be used in the calculation in sub-section (5). Any index number published in substitution for a previously published index number is to be disregarded for the purposes of the section.

Sub-section (7) requires that, if at any time the Australian Statistician changes the reference base for the rent sub-group of the Consumer Price Index, the indexation factor calculated after that time is to be determined by reference only to index numbers published in terms of the new base.

Sub-section (8) specifies a basis for rounding to three decimal places the factor calculated in accordance with sub-section (5).

Sub-section (9) specifies that, where the provisions of section 26AAAB apply to a taxpayer in relation to an income year, section 26AAAA will not apply. Section 26AAAA requires the Commissioner of Taxation to take all relevant factors into account for the purpose of determining the value to be included in the assessable income of an employee in respect of employer provided subsidised accommodation. Section 26AAAA will remain operative in relation to any employee who does not qualify for the application of section 26AAAB.

Sub-section (10) defines the meaning of a number of expressions used in the new section.

Paragraph (a) of sub-section (10) defines the term "eligible urban area" as an urban centre which had a population of 12,000 or more as at the date of the 1976 Commonwealth census.

Paragraph (b) establishes a basis for determining whether accommodation provided for an employee is to be regarded as being "adjacent" to an eligible urban area. By virtue of the conditions, contained in paragraph (a) of sub-section (1), which govern the eligibility of an employee for the application of section 26AAAB, an employee will not qualify if, in terms of paragraph (1)(a), he or she lives or works in an eligible urban area or adjacent to an eligible urban area.

By paragraph (b), a location will be regarded as being adjacent to an eligible urban area if it is situated less than 40 kilometres by the shortest practicable surface route from the centre point of an eligible urban area with a 1976 census population of more than 12,000 people or if it is less than 100 kilometres from the centre of an area with a 1976 census population in excess of 130,000.

Paragraph (c) specifies, in effect, that in any case where there is insufficient evidence of the market rental value of employer-provided housing, the Commissioner of Taxation may determine a value that is fair and reasonable.

Sub-section (11) specifies that the location in an eligible urban area from which distances are usually measured is to be regarded as the centre point from which distances are to be measured for purposes of applying the tests of "remoteness" contained in the section.

Paragraph (a) of sub-section (11) deals with the situation where there is only one place in an eligible urban area from which distances are usually measured. Where there are two or more locations within an eligible urban area from which distances are usually measured, (e.g. where the area encompasses two or more towns) paragraph (b) specifies that the location in the principal part of the eligible urban area is to be regarded as the centre point.

Sub-section (12) defines a number of terms used in new section 26AAAB:

"agreement" is expressed to mean any formal or informal agreement, arrangement or understanding, whether expressed or implied and whether or not enforceable by legal proceedings.

"census population" is the term used to refer to the population of an urban centre as determined by the Australian Statistician in the census taken on 30 June 1976.

"index number" means the quarterly index number for the rent sub-group of the Consumer Price Index. The index number which will be applied to adjust the annual rental value of employer-provided housing is to be the number published for the capital city of the State in which the accommodation is situated.

"surface route", which is to form the basis for measuring the distance of a location from the centre point of an eligible urban area, is defined to mean a route other than an air route.

"urban centre" is defined as an area which is described as an urban centre or bounded locality in the published results of the 1976 census.

By sub-section (13) the Northern Territory will be deemed to be part of South Australia and the Australian Capital Territory will be deemed to be part of New South Wales for the purposes of sub-section (3) and, as such, the index numbers published for the capital cities of those States will also operate as the index numbers applicable to employee housing provided in the Territories mentioned.

Sub-clauses (2) and (3) of clause 4 are measures which will not amend the Principal Act.

By sub-clause (2) the basis of assessing employee housing benefits authorised by new section 26AAAB is to apply in respect of qualifying accommodation provided to employees during the 1977-78 income year and subsequent years.

Sub-clause (3) will enable the Commissioner of Taxation to amend at any time any income tax assessment made before the commencement of section 26AAAB, for the purpose of applying the provisions of the section to qualifying employee housing, e.g. where housing provided prior to the commencement of the amending Act had been brought to account for assessment purposes.

Clause 5: Interpretation

As part of the PAYE system, section 221C of the Principal Act requires an employer to deduct tax instalments, at rates prescribed in the income tax regulations, from payments of "salary or wages", as defined in section 221A.

Sub-clause (1) of clause 5 will amend the definition of "salary or wages" in sub-section (1) of section 221A to specifically include within the scope of that definition amounts, paid to induce a taxpayer to resume work, that are amounts to which new paragraph 26(eb) (proposed by clause 3 of this Bill) applies. This will mean that such payments by employers will be subject to PAYE deductions in accordance with section 221C. By sub-clause (2), the amendment to the definition of "salary or wages" is to apply to, and PAYE deductions are to be made from, amounts paid after the end of the month in which the Bill receives the Royal Assent.

Clause 6: Deductions by employer from salary or wages

This clause proposes the insertion of new provisions, sub-sections (1AC) and (2B), in section 221C of the Principal Act, relating to the prescribing, by regulation, of the rates at which PAYE deductions are to be made from amounts brought within the meaning of "salary or wages" by sub-clause 5(1) - that is, amounts to which new paragraph 26(eb) (proposed by clause 3 of this Bill) is to apply.

Sub-section (1) of section 221C provides that the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive or are entitled to receive in respect of a week or part of a week. Those rates of deductions would not be appropriate for application to the payments to which new paragraph 26(eb) will apply, since they will not be paid in respect of any specific period and could, in fact, be equal to many weeks' salary or wages. Accordingly, new sub-section (1AC) will provide that the regulations may prescribe special rates of deductions in respect of payments of amounts to which paragraph 26(eb) applies - equal to the standard rate of tax (32 per cent for 1981-82) - and new sub-section (2B) will deem the employee to have received the payments in respect of a week.