House of Representatives

Taxation Laws Amendment Bill (No. 4) 1989

Taxation Laws Amendment Act (No. 4) 1989

Explanatory Memorandum

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

GENERAL OUTLINE

This Bill will amend:

the Income Assessment Act 1936 -

·.
to modify the present arrangements for the concessional taxation treatment of research and development expenditure (proposals announced on 20 November 1987, in the Economic Statement of 25 May 1988, and in the Statement on Science and Technology of 8 May 1989) and, in particular:

-
to extend, from 30 June 1991 to 30 June 1993, the present 150 per cent research and development deductions scheme, and to 30 June 1995 at a reduced rate of 125 per cent;
-
to authorise a taxation deduction for an eligible company that becomes entitled to, or receives, a recoupment or receives a grant, in relation to its expenditure on a research and development project;
-
to allow a company that has incurred qualifying plant expenditure in relation to a unit of plant to permit another person to use that plant for research and development activities without affecting the company's deduction entitlements;
-
to give partnerships of eligible companies access to deductions for research and development expenditure;
-
to extend to public trading trusts access to deductions for research and development expenditure;
-
to authorise deductions akin to depreciation for expenditure on certain buildings used for carrying on research and development activities;
-
to clarify the meaning of the definitions of 'pilot plant' and 'plant' in the research and development provisions;
-
to terminate, from 30 June 1995, the special 100 per cent write-off for expenditure on scientific research;

·.
to modify the basis for calculating franking credits when a company tax assessment for the 1988-89 income year is served during the period 19 January 1989 to 30 June 1989 inclusive, instead of after the latter date (proposal announced on 18 January 1989);
·.
to provide an exemption from income tax for the pay and allowances earned by Defence Force personnel while allotted for duty in Namibia (proposal announced on 6 March 1989);
·.
to amend the capital gains and capital losses provisions so that where a taxpayer grants an eligible long term lease or sublease of land after 16 November 1988, the taxpayer may elect to have the provisions apply to the transaction on the basis that the grant of the lease or sublease is a disposal of the underlying freehold or leasehold interest in the land;
·.
to allow a deduction for expenditure incurred in the 1988-89 and subsequent income years in contesting an election for membership, or in being elected as a member, of the Legislative Assembly for the Australian Capital Territory;
·.
to repeal, with effect from 1 July 1991, the 100 percent deduction available for certain subscription monies paid in respect of initial shares in licensed Management and Investment Companies (1988 May Economic Statement announcement);
·.
to extend the exemption from the substantiation requirements relating to eligible transport payments so that substantiation of claims for allowable deductions against transport allowance payments will not be required where the claim is not more than the amount of the allowance that would have been payable as at 29 October 1986 (proposal announced on 28 April 1989);
·.
to require taxpayers who specify information in car records to retain those records for a period comparable with the period for which documentary evidence such as log books, odometer records and receipts must be retained;
·
to require an employer to keep a copy of an employment declaration made by an employee for a period of twelve months after the close of the financial year during which the declaration ceases to have effect;
·.
to ensure that a person's tax file number is included on a group certificate or tax check sheet issued in respect of an eligible termination payment;
·.
make other minor technical amendments;

·
the Sales Tax (Exemptions and Classifications) Act 1935 -

·.
to exempt from sales tax certain shipping containers of a kind for repeated use in containerised sea cargo transportation systems (proposal announced on 25 January 1989);

·
the Taxation Administration Act 1953 -

·.
to permit the Commissioner of Taxation, in certain circumstances, to apply to a court of summary jurisdiction to have a conviction or order set aside for a prescribed taxation offence and the matter reheard;

·
the Industry Research and Development Act 1986 -

·.
to empower the Industry Research and Development Board to certify conclusively to the Commissioner of Taxation as to whether activities by or on behalf of a person amount to the carrying on of research and development.

FINANCIAL IMPACT

The estimated revenue cost of allowing a deduction for research and development expenditure where a grant or recoupment is received or for which there is an entitlement to recoupment is $7m in 1988-89, $4m in 1989-90, $5m in each of 1990-91 and 1991-92, and $2m in 1992-93.

The changes in relation to plant and pilot plant used for research and development will have no impact on revenue.

The nature of the amendments which will allow partnerships of eligible companies and trustees of public trading trusts access to research and development deductions and which will facilitate the sharing of plant used for research and development are such that no estimate of the revenue effect can be made.

The cost of the changes in relation to depreciation on buildings used for research and development is estimated not to exceed $1m in any year.

Extending the current research and development concession to 30 June 1993 and reducing the deduction in the following two years is estimated to cost $200m in each of the 1992-93 and 1993-94 years and $120m in each of the 1994-95 and 1995-96 years.

The change to the imputation of company tax arrangements is estimated to save $1.3 million in 1989-90.

Exempting the pay and allowances of Defence Force personnel allotted for duty in Namibia is estimated to cost $2.75 million in a full year.

The nature of the proposed amendment of the capital gains and capital losses provisions for long term leases of land is such that a reliable estimate of the potential revenue effect cannot be made.

The cost to revenue of the amendment in respect of ACT election expenses is estimated to be $100,000 in 1989-90.

Termination of the deduction for eligible capital subscriptions to licensed Management and Investment Companies is estimated to produce revenue savings of $2 million in 1991-92 and $20 million per annum in subsequent years.

Modification of the substantiation rules for transport allowance payments is estimated to cost less than $100,000 per annum for 1988-89 and subsequent years.

The revenue cost of exempting from sales tax certain shipping containers is negligible.

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

MAIN FEATURES

The main features of this Bill are as follows:

Expenditure on scientific research (Clause 6)

The Bill will give effect to the announcement in the May 1988 Economic Statement that the special write-off for expenditure on scientific research available under section 73A of the Assessment Act would be terminated for expenditure incurred after 30 June 1995.

Expenditure on research and development activities (Clauses 7, 8, 16 to 22, 33 and 34)

The Bill will give effect to the announcement on 8 May 1989 that the tax concession for research and development (R & D) expenditure available under section 73B of the Assessment Act would be extended. The concession, in the form of a 150 per cent deduction for expenditure on qualifying R & D activities, was to end on 30 June 1991. It will now be available for expenditure incurred before 1 July 1993, and a reduced deduction of 125 per cent of R & D expenditure will be available for expenditure incurred for a further two years until 30 June 1995.

The Bill will also implement a proposal announced on 20 November 1987. At present, receipt of a grant or recoupment from the Commonwealth, or a State or Territory Government, or from a Government authority, automatically prevents an eligible company from obtaining a deduction under section 73B of the Assessment Act in relation to R & D expenditure on that project. This is the case no matter how small the receipt etc. or for what purpose, and irrespective of the amount of R & D expenditure incurred on that project.

The proposed amendments will ensure that a claim for a deduction for R & D expenditure in a year will not be disallowed by reason of a grant or recoupment which relates to the project for which the expenditure was incurred. To produce some parity between grant-funded projects and projects funded only by the tax incentive, deductions otherwise allowable will be reduced through a process of clawback.

The main features of the proposed clawback arrangements (which apply on a project basis) are:

·
only grants or recoupments relating to expenditure incurred on or after 21 November 1987 will trigger the clawback mechanism (expenditure incurred before that date in respect of which a grant or recoupment is received or receivable will continue to be non-deductible);
·
generally, relevant expenditure to which clawback has been applied will be eligible for a deduction at a rate of 100 per cent;
·
other relevant expenditure, to which clawback has not been applied or to which it will not apply, will be eligible for a deduction of up to 150 per cent when expended in the period ending on 30 June 1993 (or ending on 30 June 1995 in the case of qualifying plant expenditure) and for a deduction of up to 125 per cent when expended in the subsequent period ending on 30 June 1995 (or ending on 30 June 1997 in the case of qualifying plant expenditure);
·
where R & D expenditure is incurred on a project both before and after 21 November 1987, the initial clawback amount is to be offset first against aggregate expenditure incurred between project commencement and 21 November 1987, and then successively against expenditure incurred year by year after that date;
·
where R & D expenditure on a project is wholly incurred on or after 21 November 1987, clawback is to be applied successively to relevant expenditure incurred in the year or years of receipt of the grant(s) or recoupment(s), with any excess being carried back progressively through earlier years, and any remainder being carried forward to succeeding years;
·
where two or more eligible companies are jointly registered in relation to an R & D project under the Industry Research and Development Act 1986, a grant or recoupment received by any one of those companies is to be treated in the same way as a grant or recoupment received by an eligible company operating independently;
·
where eligible companies are in a partnership, a grant or recoupment to the partnership is to be treated as if it were to an eligible company.

In calculating the amount of deduction available to an eligible company when clawback has been applied -

·
expenditure to which clawback has been applied will attract a deduction at a rate of 100 per cent;
·
other relevant expenditure will attract the rate of deduction applicable to that expenditure.
·
if the clawback amount relates to different kinds of expenditure, the Commissioner of Taxation is to apportion that clawback amount so as to minimise any reduction in the deduction allowable to the company; and
·
when a grant or recoupment is not, and will not be, included in the assessable income of the company, the deduction otherwise allowable is to be reduced by an amount not exceeding the amount of the grant or recoupment.

Research and development buildings

The Bill will give effect to the May 1988 Economic Statement announcement that new buildings used for R & D activities will be eligible for the write-off available under Division 10D of the Assessment Act in the same way as income producing buildings. The write-off will apply to buildings (including extensions, alterations or improvements) construction of which started after 21 November 1987 and that are used for the purposes of carrying on R & D activities. Buildings that previously qualified for the write-off under Division 10D - i.e., as income producing buildings and that, after 21 November 1987, are used for R & D activities will continue to be eligible for that write-off. Generally, the term R & D activities will have the same meaning as in section 73B of the Assessment Act.

Consistent with arrangements in place in relation to section 73B claims, the Industry Research and Development Act 1986 will be amended by this Bill so that the Commissioner of Taxation will be able to seek determinations from the Industry Research and Development Board as to whether the activities of all classes of taxpayers (and not just companies) amount to R & D activities.

Shared use of plant

Qualifying expenditure on items of plant used for R & D purposes is presently deductible - generally at the special rate of 150 per cent - over three years, i.e., 50 per cent of the qualifying expenditure on the plant is deductible in each year, for three years. These provisions apply only if the plant is for use by or on behalf of the company exclusively for the purpose of carrying on R & D activities.

The Bill will permit an eligible company to allow another person to use its R & D plant without loss of its entitlement to the accelerated write-off allowances. The other person will not have to be an eligible company, but will be required to use the plant only for R & D purposes thought not necessarily the same activities as those of the owner.

If the owner is entitled to receive consideration (such as lease fees) for making the plant available, the owner's entitlement to the accelerated write-off allowances for the plant will be reduced by an amount equal to one-half of that consideration. Reflecting this mechanism, the owner will continue to be eligible for the accelerated write-off allowances available for R & D plant (but not other forms of depreciation) for the period of shared use.

Where plant ceases to be used by an owner exclusively for R & D purposes during the three year write-off period, there is normally no entitlement to the accelerated write-off allowances either in the year of cessation or in any later year. This will not apply in the case of shared use of plant as contemplated by the foregoing amendment. Nor will there be any minimum or maximum period of use by the other person.

Special rules apply where R & D plant is disposed of, lost or destroyed. The application of these special rules will not be affected by the fact that the plant was being used by another person when the disposal, loss or destruction occurred.

Extension of the concession to partnerships of companies

The Bill will ensure that partners in a partnership of otherwise eligible companies will not be denied the special deduction for expenditure on R & D activities. This will remove a doubt that has been expressed over the present law to the effect that such companies are not eligible for the deduction on the basis that it is the partnership, rather than the partner companies, which incurs the expenditure.

The concept of a 'partnership' for this purpose will not be limited to more common concepts of a partnership; the fact that the companies are not carrying on a business with a view to profit will not preclude acceptance that a partnership exists for the purposes of the amendment.

Extension of the concession to public trading trusts

The income tax law was changed in 1985 to tax as companies unit trusts that are 'public trading trusts' within the meaning of Division 6C of Part III of the Assessment Act.

The Bill will extend the special deduction for R & D expenditure to all public trading trusts in respect of such expenditure incurred by them on or after 1 July 1988.

Clarification of definitions of 'plant' and 'pilot plant'

The Bill will clarify the meaning of 'plant' in the R & D tax concession provisions by replacing the existing wording of the definition. It will also make a complementary technical adjustment to the definition of 'pilot plant'. The changes will make it clear that pilot plant is plant that qualifies for the three year write-off authorised by the R & D provisions.

Transitional imputation arrangements (Clauses 2 and 31)

This Bill will give effect to the modification of the imputation of company tax arrangements announced on 18 January 1989 for the calculation of franking credits arising from company tax assessments for the 1988-89 year of income that are served after 18 January 1989 and before 1 July 1989. This modification is a consequence of the reduction in the company tax rate from 49 per cent to 39 per cent first applicable for the 1989-90 year of tax in which tax is levied on company income derived in the 1988-89 year of income.

Under the existing law a franking credit that arises on the day an original tax assessment, or an amended assessment increasing its tax liability, is served on a company, is calculated by reference to the general company tax rate for the year of tax to which the year of income relates. Thus, the franking credit that arises on the issue of a company tax assessment for income of the 1988-89 year of income is calculated at the company tax rate for the 1989-90 year of tax which is 39 per cent. If a company that ceases operating before 30 June 1989 lodges its income tax return and receives its assessment for that year before 1 July 1989, the existing law requires the franking credits to be calculated at the 39 per cent rate. On the other hand, under the existing law, franking credits that arise during the company's 1988-89 franking year and which could be applied to pay franked dividends during the 1988-89 financial year of the recipient, would entitle individual shareholders to franking rebates calculated on the basis of the 49 per cent tax rate that still applies in that year to the assessment of company income of the 1987-88 income year.

To avoid this inappropriate outcome, the Bill specifies that the applicable general company tax rate to be used in calculating the franking credits or debits that arise from the service of original or amended company assessments for the 1988-89 year of income after 18 January 1989 and before 1 July 1989 will be 49 per cent. The arrangement is to apply to company tax assessments served after 18 January 1989, the date on which the arrangements were announced.

Exemption of pay and allowances of members of Defence Force personnel serving in Namibia (Clause 4)

An exemption from income tax is being provided for the pay and allowances earned by Defence Force personnel while allotted for duty in Namibia as part of the United Nations Transitional Assistance Group. The exemption will apply from 18 February 1989 when the Defence Force Group commenced to leave Australia.

Under the existing law an exemption from income tax is provided for the pay and allowances of Defence Force personnel during a period of special service. Special service is service given while allotted for duty in a special area outside Australia. A condition for the declaration of an area as a special area is the existence of a state of disturbance in or affecting that area. The amendment proposed will allow Namibia to be prescribed as a special area.

Long term leases (Clauses 15, 17 and 24)

This Bill will give effect to the proposal announced on 16 November 1988 to amend the capital gains provisions applicable to certain long term leases or subleases of land.

Under the existing capital gains provisions, the grant of a lease (or sublease) of property is taken to constitute the disposal of an asset, being the lease, for a consideration equal to the premium paid or payable for the grant of the lease. Only expenditure incurred by the grantor in respect of the grant of the lease is included in the cost base of the asset deemed to have been disposed of. The effect is to treat most of the premium as a capital gain.

The proposed amendment will allow a taxpayer who grants a long term lease or sublease of land after 16 November 1988, to elect to have the capital gains and capital losses provisions apply to the transaction on the basis that the grant of the lease or sublease is a disposal of the underlying asset held by the taxpayer, i.e., the freehold or leasehold interest in the area of land to which the lease or sublease relates.

The election will be available only where the lease or sublease of land is granted for more than 50 years on terms that are substantially the same as those applying to the owner of the underlying freehold or leasehold interest in the land.

Broadly, the effect of the election will be that where a taxpayer acquired the freehold or leasehold interest in the land before 20 September 1985, the grant of a long term lease or sublease will not result in a capital gain or a capital loss. An exception will be where a major capital improvement made after 19 September 1985 is treated as a separate asset for capital gains tax purposes. For a taxpayer who acquired the freehold or leasehold interest after 19 September 1985, a capital gain or capital loss may arise. However, the expenditure incurred in acquiring that interest will be taken into account in calculating the capital gain or capital loss.

Where by this amendment, the grant of a lease or sublease is treated as a disposal of the underlying freehold or leasehold interest in the land, then for the purposes of determining any capital gain or capital loss, the consideration for the disposal will be deemed to be the greater of the market value of the underlying interest or the premium received for the grant of the lease or sublease.

Where the lease or sublease includes a lease or sublease of buildings or other improvements of a capital nature (other than depreciable property) that are taken to be separate assets for capital gains tax purposes, those assets will be taken to be disposed of separately to the freehold or leasehold interest. Where the lessor or sublessor was entitled to deductions in respect of building depreciation allowances under Division 10C or Division 10D, entitlement to the deductions will be transferred to the lessee or sublessee during the subsistence of the lease or sublease.

While the amendment treats the grant of the lease or sublease for capital gains tax purposes as a disposal of the underlying freehold or leasehold interest in the land, the lessor or sublessor actually retains that interest. The lessor or sublessor may subsequently dispose of the interest, subject to the lease or sublease. To take account of this, the lessor or sublessor will be taken to have reacquired the freehold or leasehold interest immediately after the deemed disposal for no consideration.

Election Expenses (Clauses 9 and 10)

A deduction is being authorised for expenditure incurred in seeking election, whether successful or not, to the Legislative Assembly for the Australian Capital Territory. The deduction is to apply for expenses incurred in the 1988-89 and subsequent income years.

This Bill will also remove the deduction presently available for expenses of up to $1,000 in seeking election to the former Australian Capital Territory House of Assembly.

Under the existing law two sections of the Income Tax Assessment Act 1936 operate to allow a deduction from assessable income for candidates' election expenses. Section 74 is available for candidates to the Commonwealth or State Parliaments and the Legislative Assembly of the Northern Territory. Section 74A provides a deduction of up to $1,000 per election for expenses incurred in seeking election to a local government body or to the former Australian Capital Territory House of Assembly.

Management and Investment Companies (Clause 11)

The Bill will give effect to proposals announced in the 1988 May Economic Statement to withdraw the deduction for eligible capital subscriptions to certain licensed Management and Investment Companies, with effect from 1 July 1991.

Under the existing law, a deduction is available to the initial subscriber to shares for subscription monies - that is, application, allotment and call monies and any share premiums - generally where they are paid after 13 September 1983 and applied by the company to the paid-up value of the shares or the share premium account. The deduction is allowable in the year in which the subscription monies are paid provided the company currently holds a licence granted by the Management and Investment Companies Licensing Board. In addition, subscriptions made before the grant of a licence may be eligible for deduction if the Management and Investment Companies Licensing Board notifies the Commissioner of Taxation that, in its opinion, the subscriptions were made in anticipation of, or to ensure that the company would be eligible for, the grant of a licence.

Claw-back provisions in the present law reduce any deduction allowed or allowable where either the shares are sold or disposed of or the company's licence has been revoked or has expired within 4 years of the last payment of subscription monies.

The effect of the amendment will be to terminate deductions for subscription monies paid after 30 June 1991 for shares in licensed Management and Investment Companies. The amendment will also deny a deduction for any subscription monies paid on or before 30 June 1991 in anticipation of the granting of a licence where that licence is granted after 30 June 1991. The existing claw-back arrangements will continue to apply.

Transport allowance payments (Clauses 12 and 29)

Under the existing law, the income tax substantiation rules will not apply to claims within the limits of allowances paid to employees for fares, car expenses or other transport costs incurred in the course of performing their employment duties, provided the allowance is payable pursuant to an industrial award and the award has not increased since 29 October 1986. Broadly, if the award increases after that date or the amount of a claim is in excess of the allowance, then the employee must substantiate his or her entire claim for deductions against that allowance.

The amendment proposed in this Bill will modify these rules so that employees in receipt of a travel allowance (paid pursuant to an award in place on 29 October 1986), will no longer be required to substantiate a claim for deductions against that allowance even if the award has increased since 29 October 1986 provided the employee does not claim in excess of the allowance that would have been payable using the award as it stood on 29 October 1986.

Taxpayers wishing to claim a deduction in excess of the allowance payable as at 29 October 1986 will be required to substantiate their entire claim for deductions (not just the excess of any claim above the 29 October 1986 amount).

The proposed amendment is to apply to expenses incurred on or after 1 July 1988. The proposed amendment does not apply to 'car expense payment reimbursements'. These payments, which are broadly reimbursements of car expenses calculated by reference to the distance travelled in performing the duties of employment, will continue to be dealt with under the existing law.

Log book year of income (clauses 13 and 29)

The Taxation Laws Amendment Act (No.4) 1988 amended the existing law so that certain matters relating to claims for income tax deductions for car expenses could be specified in car records held by the taxpayer rather than needing to be lodged with the Commissioner of Taxation in completed income tax returns.

A reference to a specification in a taxpayer's income tax return that should have been amended so as to be a reference to a specification made in the taxpayer's car records was omitted from the amending legislation. A technical amendment in this Bill rectifies that matter.

Retention and production of documents (Clauses 14, 29 and 30)

The existing law requires taxpayers claiming income tax deductions for car expenses to specify certain matters (such as the period for which the log book was maintained, or details of replacement cars) in car records. The rules relating to car records were inserted by the Taxation Laws Amendment Act (No.4) 1988.

Amendments in this Bill will require taxpayers who specify matters in car records to retain those records for a specified period.

The proposed amendments will apply to the year of income commencing on 1 July 1989 and subsequent years. Taxpayers who have lost or destroyed their car records prior to the date of introduction of this Bill will not be disadvantaged, they will be able to use a copy of those records or a substitute record, as if it were the original car records.

Tax File Numbers (Clauses 26, 27 and 28)

This Bill will amend the tax file number provisions of the law to extend the period for which an employer is to retain a copy of an employment declaration by an employee. The retention period is to be the conclusion of the financial year next following the financial year during which an employment declaration ceases to have effect. The existing law requires retention until the close of the financial year during which the employment declaration ceases to have effect.

Amendments made by this Bill will also ensure that where a tax file number has been quoted in respect of eligible termination payments the file number is to be included on the group certificate or tax check sheet issued in respect of that payment.

Setting aside etc. of conviction or order on application of Commissioner (Clauses 38 and 39)

The prosecution provisions of the existing law are to be amended to enable the Commissioner of Taxation to apply to a court of summary jurisdiction to have a conviction or order set aside for a prescribed taxation offence. Broadly, a prescribed taxation offence is an offence against a taxation law that is punishable by a fine and not by imprisonment.

The power to apply to a court to have a conviction or order set aside and the matter reheard will be restricted to situations where the defendant was not present at the original proceedings before the court.

The Commissioner will be empowered to apply to a court for a rehearing at any time after the original conviction of the defendant.

The court will be provided with a wide discretion to cover the variety of circumstances that may make it desirable for a case to be reopened. This will include matters that may arise after the original conviction, e.g., financial hardship.

Shipping Containers (Clauses 35, 36 and 37)

The First Schedule of the Sales Tax (Exemptions and Classification) Act 1935 will be amended by this Bill to exempt shipping containers of a kind used in an international containerised cargo transport system, being containers that, first, are for repeated use on ships to transport cargo overseas, second, are designed to be loaded from one mode of transport to another without the contents being re-packed and, third, have a minimum capacity of 14 cubic metres. In the proposed exemption item the relevant containers are referred to as 'receptacles' so as to distinguish them from containers coming within within the existing definition of 'container' in the First Schedule.

A shipping container as described above that is manufactured in, or imported into, Australia will be exempt from tax provided it is to be used repeatedly on ships to transport cargo by sea. A shipping container of this kind that is purchased for use for another purpose, e.g., as a building site shed, in road transport or as refrigeration plant, will not be exempt from tax unless it has previously gone into use or consumption in Australia. (By virtue of the definition of 'goods' in the Sales Tax Assessment Act (No. 1) 1930 containers, including those being exempted by this amendment, are not deemed to have gone into use or consumption in Australia until the goods they contain have been removed.)

A shipping container that has not previously gone into use or consumption in Australia is imported and qualifies for exemption, but is found to be no longer suitable for use on ships because it has been damaged or is worn out, will not be subject to tax when it is disposed of.

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.4) 1989.

Clause 2: Commencement

Subject to subclauses 2(2) and (3), 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 transitional imputation arrangements for companies receiving early assessments for the 1988-89 year of income, contained in clause 31 of the Bill are to be taken to have commenced on 19 January 1989.

PART 2 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 3: 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 4: Exemption of pay and allowances of members of Defence Force serving in special areas

Section 23AC of the Principal Act provides an exemption from income tax for the pay and allowances earned by Defence Force personnel during their service in a special area.

The main purpose of the amendments made by clause 4 of the Bill is to extend the exemption to such personnel during their service in Namibia as a member of the United Nations Transitional Assistance Group.

Subsection 23AC(3) of the Principal Act specifies the time when the period of service of a Defence Force member, being the service in respect of which the income tax exemption is given, starts and finishes. Broadly stated, the exemption of pay and allowances by section 23AC commences when a Defence Force member leaves Australia for service in the special area and ordinarily concludes when the member returns to Australia. However, paragraph (3)(c) continues the period of a member's service in a special area during a time of hospital treatment where it is in consequence of illness contracted or injuries sustained during the service, wherever the treatment is given.

The amendment by paragraph (a) of clause 4 of the Bill to paragraph 23AC(3)(c) is of a drafting nature and takes into account that Defence Force members first left Australia for Namibia on 18 February 1989.

Subsection 23AC(4) provides that an area outside Australia may be prescribed as a special area because of a state of disturbance in or affecting a nominated country.

Paragraph (b) of clause 4 proposes to omit subsection 23AC(4) of the Principal Act and to substitute a new subsection (4).

The effect of this change will be twofold. First, it will remove the authority that allows the areas of Vietnam (Southern Zone) or Borneo to be prescribed as a special area for the purposes of section 23AC. Those areas are not now operational areas for Defence Force personnel.

Secondly, the change will authorise the making of a regulation to prescribe an area outside Australia as a special area for the purposes of section 23AC by reason of a state of disturbance in or affecting Namibia.

Authority will be given for the regulation to provide for an area related to Namibia to become a special area on and from 18 February 1989, the date the first members of the Defence Force left Australia en route to Namibia.

By subclause 29(2) of the Bill the amendments made by this clause apply to special service by Defence Force members on or after 18 February 1989.

Clause 5: Interpretation

Clause 5 of the Bill will amend section 27A of the Principal Act to bring the definition of approved deposit fund into line with other parts of the Principal Act. The amendment reflects the fact that approved deposit funds are now supervised by the Insurance and Superannuation Commission (ISC) rather than the Australian Taxation Office. The amendments made by clause 5 will take effect from the time when the Taxation Laws Amendment Act (No.4) 1989 receives the Royal Assent.

The term 'approved deposit fund' is presently defined in subsection 27A(1) of the Principal Act. A number of other terms are defined in subsection 27A(1) solely for the purposes of the definition of approved deposit fund. For instance, the definition of 'approved purposes' sets down the purposes for which an approved deposit fund may be established and maintained, while the definition of 'approved rules' lists conditions that must be part of the rules of an approved deposit fund.

The various terms in subsection 27A(1) of the Principal Act are now duplicated in the Occupational Superannuation Standards Act 1987 (OSSA), which provides for the ISC to supervise approved deposit funds with effect from the income year 1986-87. The amendments made by clause 5 ensure that all references to approved deposit funds in the income tax law will be based on the OSSA definition of that term.

Paragraph (a) of clause 5 will omit the present definitions of approved deposit fund and approved trustee in subsection 27A(1) and insert new definitions in their place. The new definitions give those terms the same meanings they have in the OSSA. Paragraph (b) of the new definition of 'approved deposit fund' also preserves the existing meaning of that term in respect of funds established before the commencement of the Taxation Laws Amendment Act (No. 4) 1989. That is because the present definition is slightly different to the OSSA definition. The income tax law definition requires that, to be an approved deposit fund, a trust fund must satisfy certain conditions at the time when it is established. The OSSA definition requires compliance with the same conditions but at the relevant time or times when the ISC seeks to determine a particular fund's status, e.g., when the ISC needs to determine whether a certificate of compliance with the approved deposit fund standards should be given to a fund.

Paragraph (b) of the clause will omit definitions of terms in subsection 27A(1) that are defined solely for the purposes of the existing definition of approved deposit fund which is being omitted by paragraph (a) of the clause.

Paragraph (c) of clause 5 will omit subsections 27A(2) and (15) of the Principal Act consequent on the removal of the present definition of approved deposit fund. Subsection 27A(2) allows a trust fund to be treated as an indefinitely continuing fund for the purpose of the existing definition of approved deposit fund. Subsection 27A(15) allows the Commissioner of Taxation to treat a fund as an approved deposit fund even though it failed one or more of the conditions ordinarily required to be met by a fund when it is established. Both of these subsections will become redundant following the amendment to the definition of approved deposit fund.

Clauses 6-8: Expenditure on Research and Development

Introductory Note

Special provisions relating to the allowance of deductions for expenditure on research and development (R & D) activities are contained in sections 73A and 73B of the Principal Act.

The major provision is section 73B. Under it, Australian companies that, after 1 July 1985, incur expenditure on R & D activities that does not qualify for any direct government assistance are eligible for a deduction of up to 150 per cent of the qualifying expenditure. In broad terms, R & D activities comprise systematic, investigative or experimental activities undertaken in Australia and involving innovative or technical risk for the purpose of acquiring new knowledge or creating new products. The other major concessions under section 73B are the accelerated write-off arrangements for expenditure on plant and equipment used exclusively for R & D activities and, subject to certain time restrictions, on buildings similarly used for such activities.

Although they are available to any taxpayer (i.e., not just companies), the incentives allowed for scientific research expenditure under section 73A of the Principal Act are more limited than the R & D provisions of section 73B outlined above. In addition to a deduction for payments to approved research institutes, section 73A authorises deductions for certain capital expenditures on scientific research, for depreciation of qualifying plant on an accelerated basis and, subject to time restrictions, for certain buildings on a similar basis.

As indicated in a series of announcements, these provisions of the income tax law are to be modified in a number of ways. The announcements, and the major changes each one indicated would be made, are set out below.

Following a technical review of the R & D concession, it was announced on 21 November 1987 that the relevant provisions of the income tax law would be amended in several ways, primarily to prevent possible abuse of the concession and to make it more effective in achieving its objectives of encouraging greater investment in R & D by Australian industry. Some of the changes announced have already been given legislative effect; of the remaining changes the major ones dealt with in this Bill will:

·
replace the present rules under which a company may lose R & D deductions where a government grant or recoupment is received in relation to the relevant expenditure;
·
enable a unit of plant owned by an eligible company to be used by or shared with another person without terminating the owner's entitlement to a deduction;
·
extend eligibility for the present concession to partnerships, the members of which are eligible companies and/or certain research agencies; and
·
clarify the meanings of the terms "plant" and "pilot plant" used for purposes of the R & D concession.

In the 1988 May Economic Statement it was announced that 150 per cent tax deductions for R & D would be terminated for expenditure incurred after 30 June 1991, and that subsequent expenditure would be deductible at 100 per cent. It was also announced that, from that time as well, expenditure on plant and equipment for R & D activities would be deductible in accordance with normal depreciation rules (including the 20 per cent loading), and that expenditure on R & D buildings contracted for, or commenced to be constructed, after 20 November 1987, would be deductible on the same basis as income producing buildings, i.e., written off over 40 years at 2 1/2 per cent per annum. Subsequently, it was announced in the May 1989 Science Statement that the 150 per cent tax deduction would be extended for a period of two years (to 30 June 1993), after which it would reduce to 125 per cent for a further period of two years (to 30 June 1995).

The Bill will give effect to the extended application and other changes indicated in these announcements. It will not, however, give effect to the "100 per cent" deduction scheme that is to apply to R & D expenditure incurred after 30 June 1995 the details of which are yet to be finalised.

The majority of these changes will be given effect by clauses 6, 7 and 8 of the Bill the notes on which follow. The new arrangements for writing off expenditure on buildings used for R & D purposes are dealt with in clauses 16 to 22 of the Bill that are explained later in this memorandum.

Clause 6: Expenditure on scientific research

Clause 6 will amend section 73A of the Principal Act to terminate its application to expenditure incurred on scientific research after 30 June 1995.

As mentioned in the introductory note, although section 73A applies to any taxpayer, the deductions it authorises are limited to:

·
payments to approved research institutes;
·
certain capital expenditures on scientific research;
·
depreciation at the rate of 33 1/3 per cent per year for plant used by the taxpayer for scientific research only; and
·
a three year write-off for certain buildings used solely for purposes of scientific research.

These provisions are to continue to operate until 30 June 1995 after which they will be subsumed in the "100 per cent deduction" regime that is to apply to R & D expenditure incurred after that date. Reflecting this, new subsection 73A(9) that is to be inserted in the Principal Act by this clause will terminate the application of section 73A in relation to payments made, or expenditure incurred, after 30 June 1995.

Clause 7: Expenditure on research and development activities

This clause will make several amendments to the R & D provisions contained in section 73B of the Principal Act. Together with the additional measures proposed by clause 8 of the Bill (see later notes on that clause), these changes will generally provide more generous treatment of R & D expenditure.

Paragraph (a) of clause 7 will insert a new subsection - subsection 73B(1AA) - in the Principal Act to make section 73B of that Act subject to the operation of two new sections that are also to be inserted in the Principal Act. Those new sections liberalise the treatment of R & D expenditure where a government grant or recoupment is received. They are explained in detail in the notes on clause 8 of the Bill.

The "aggregate research and development amount", which is defined in subsection 73B(1) of the Principal Act as the sum of each of the amounts of expenditure that may qualify for deduction under section 73B in a year of income, is used in determining the relevant rate of deduction (of between 100 per cent and 150 per cent) to be applied in calculating the amount of an eligible company's tax deduction for R & D expenditure. Paragraphs (b) and (c) of clause 7 will extend this definition - by the insertion of a new paragraph (d) - to include an additional component in the aggregate amount as a consequence of proposed amendments to Division 10D of the Principal Act. Under these amendments (which are explained in detail in the later notes on clauses 16 to 22 of the Bill), taxpayers will be able to write off qualifying capital expenditure on buildings used for the purposes of carrying on R & D activities.

Paragraph (d) of clause 7 will amend the definition of "deduction acceleration factor" in subsection 73B(1) of the Principal Act. This term describes the factor by which qualifying expenditure on R & D activities is to be multiplied to determine the amount of deductions allowable under section 73B. The amendments do not alter the operation of the section, but are necessary to take account of the two year extension to 30 June 1993 of the present 150 per cent R & D concession, and the 125 per cent concession that is to apply for a further two years until 30 June 1995.

Reflecting these extended arrangements, paragraph (a) of the definition of "deduction acceleration factor" restates the definition in subsection 73B(1) in its present form. Where the "aggregate research and development amount" (a term defined in subsection 73B(1) to mean, broadly, R & D expenditure for the year plus one-third of qualifying plant and building expenditure for the year) is in the range $20,001 to $49,999, the deduction acceleration factor is ascertained in accordance with the formula

((11A) - (100,000)) / (6A)

-
where A is the aggregate research and development amount expressed in whole dollars (subparagraph (a)(i) of the definition).

Where the aggregate research and development amount is $50,000 or more and the full 150 per cent deduction is allowable, the deduction acceleration factor is 1.5 (subparagraph (a)(ii)).

Paragraph (b) of the definition is to the same effect as paragraph (a) described above, but specifies the lower factor that will apply in the 1993-94 or later income year when the reduced R & D deduction rate of 125 per cent will apply. Where the aggregate research and development amount ranges from $20,001 to $49,999 in one of those later years, the deduction acceleration factor is to be ascertained in accordance with the formula -

((17A) - (100,000)) / (12A)

-
with A again being the aggregate research and development amount expressed in whole dollars (subparagraph (b)(i)). For example, if the aggregate research and development amount for an eligible company in a year of income is $45,000. The deduction acceleration factor would be -

((17 * 45,000) - 100,000) / (12 * 45,000)

- that is 1.2315 (rounded to four decimal places).
If the aggregate research and development amount is $50,000 or more in one of those later years, the deduction acceleration factor is 1.25 (subparagraph (b)(ii)).

By paragraph (e) of clause 7 the definition of "deduction period" in subsection 73B(1) of the Principal Act will be amended to reflect the extension of the term of the R & D concession. Broadly, the deduction period is the period during which expenditure must be incurred to qualify for the section 73B concession. That period commenced on 1 July 1985 and will now end on 30 June 1995.

Clause 7 will also clarify the meaning of the existing definitions of "plant" and "pilot plant" in section 73B of the Principal Act. To this end, paragraph (f) of clause 7 proposes a technical amendment required to complement the express inclusion of "pilot plant" in the new definition of "plant" proposed by paragraph (g) of this clause. The change makes it clear that pilot plant is itself plant (and not for example simply a model of plant), and is therefore eligible for the three year write-off accorded by section 73B to R & D plant.

As noted above there has been uncertainty expressed about whether "pilot plant" was within the definition of "plant" - the amendment proposed by paragraph (g) of clause 7 makes it clear that it is. It does this, first by re-enacting the existing definition of "plant" but on a broader basis to clarify that the term means all property or things that are considered to be plant and articles under subsection 54(1) of the Principal Act, whether or not that property or those things actually qualify for depreciation under section 54. The revised R & D definition of plant also specifically includes those items listed in subsection 54(2) of the Principal Act so that they are brought within the meaning of plant for depreciation purposes and which may also be used for R & D activities. Finally, the new definition of plant includes a specific reference to "pilot plant".

Clause 7 will modify the rule that an eligible company can claim the accelerated write-off allowances for R & D plant only if the plant is for use by the company exclusively for the purpose of the carrying on of R & D activities by or on behalf of the company. From 21 November 1987, eligible companies will be able to permit another person to use such plant for R & D purposes while remaining eligible to claim the accelerated write-off allowances.

The definition of "plant expenditure" in subsection 73B(1) contains an exclusive use requirement that is relevant primarily to the operation of existing subsection 73B(15), which authorises accelerated write-off allowances for expenditure on R & D plant. Subsection 73B(31), which authorises the Commissioner of Taxation to reduce a deduction allowable under the R & D concession where expenditure giving rise to the deduction is excessive as a result of a non-arm's length dealing, contains in paragraph (a), the same exclusive use test in relation to R & D plant.

New subsection 73B(1C) - to be inserted in the Principal Act by paragraph (h) of this clause - effectively modifies these exclusive use tests. It ensures that the fact that an eligible company has, on or after 21 November 1987, entered into an agreement with another person for the use by or on behalf of that person of plant exclusively for R & D activities will not of itself prevent the company from satisfying the exclusive use tests of the definition of "plant expenditure" in subsection 73B(1) and of paragraph 73B(31)(a) in relation to non-arm's length dealings. For these purposes, it will not be necessary for the other person to be an "eligible company", or for the R & D activities of the other person be the same as those of the owner of the plant.

Paragraph (j) of clause 7 will amend subsection 73B(3) of the Principal Act, which at present excludes from the scope of the R & D concession all companies acting in the capacity of trustee or nominee. By this amendment, the concession will be extended to unit trusts that are "public trading trusts" (within the meaning of existing Division 6C of Part III of the Principal Act) in respect of expenditure on R & D activities incurred by such trusts on or after 1 July 1988. (Broadly speaking, a unit trust is a public trading trust if it is operating a trade or business, and its units are listed on a stock exchange, are held by 50 or more persons or are available for investment by the public. Under division 6C a public trading trust is taxed as if it were a company.)

Paragraph (k) of clause 7 will insert two new subsections - subsections 73B(3A) and (3B) - in the Principal Act to ensure that partners in a partnership of otherwise eligible companies will be eligible for the R & D concession for qualifying expenditure incurred on or after 21 November 1987. For subsection 73B(3A) to operate, it will be necessary for the following conditions to be met -

·
at least one partner was an "eligible company" when the expenditure was incurred by the partnership (paragraph (a)); and
·
when the expenditure was incurred, each other partner was either an eligible company or a body corporate that was (or is taken to have been) registered by the Industry Research and Development Board under section 39F of the Industry Research and Development Act 1986 (the IR & D Act) as a research agency for the class of R & D activities on which the expenditure was incurred (paragraph (b)).

New subsection 73B(3B) will make it clear that, for the purposes of determining whether there is a partnership to which subsection 73B(3A) applies, R & D activities are to be treated as the carrying on of a business with a view to profit. Where a partnership exists for purposes of the R & D concession it will be dealt with on the same basis as any other partnership in accordance with Division 5 of Part III of the Principal Act.

Paragraph (m) of clause 7 will effect another amendment - to subsection 73B(4) of the Principal Act as a consequence of the extension of the period of operation of section 73B of the Principal Act. Broadly, for plant and building expenditure to become qualifying expenditure, a company must have commenced to use the plant or building exclusively for R & D activities before 1 July 1991. By this amendment the reference to that date in subsection 73B(4) is to be changed to 1 July 1995 - the extended termination date for the R & D concession.

By paragraph (n) of clause 7, two new subsections - subsections 73B(5AA) and 73B(5AB) - will be inserted in the Principal Act. These subsections will modify the application of existing paragraph 73B(5)(b) of that Act which applies where an owner of R & D plant ceases to use it exclusively for R & D purposes during one of the three years of income over which accelerated write-off allowances would otherwise be available. In such circumstances, entitlement to those allowances is lost both for that year and for any later year.

By new subsection 73B(5AA), which is subject to the new subsection 73B(5AB) discussed below, an eligible company is not to be taken, for the purpose of paragraph 73B(5)(b), to have ceased using a unit of plant exclusively for R & D purposes merely because, on or after 21 November 1987, another person used the plant exclusively for R & D purposes with the company's consent. In this way, the plant owner's entitlements will be preserved provided the plant continues to be used for R & D activities. It will not be necessary for the other person to be an "eligible company", or for that person's R & D activities to be the same as those of the owner of the plant.

New subsection 73B(5AB) complements new subsection 73B(5AA) by ensuring that the concession provided by the latter subsection applies only if the sole reason for the company's failure to use the unit of plant during the whole or a part of the year of income for R & D purposes was the use of the plant for R & D purposes by the other person.

Existing subsection 73B(8) of the Principal Act disqualifies from the R & D concession expenditure incurred by an eligible company on R & D activities where the company receives a grant or recoupment in respect of any of that expenditure. The new treatment of companies receiving a grant or recoupment is dealt with in section 73C that is to be inserted in the Principal Act by clause 8 of the Bill - see later notes on that clause.

Paragraph (p) of clause 7 will insert new subsection 73B(9A) in the Principal Act to complement new subsection 73B(3A) described earlier. Under the existing law subsection 73B(9) ensures that a deduction is not allowable under the R & D provisions for expenditure incurred by an eligible company for the purpose of carrying on R & D activities on behalf of another person. New subsection 73B(9A) will modify the application of subsection 73B(9) so that it does not operate to exclude expenditure incurred on or after 21 November 1987 on behalf of a partnership, by a partner in the partnership, provided the partner incurred the expenditure in that capacity.

By paragraph (q) of clause 7 subsection 73B(13) of the Principal Act is to be replaced to take into account the extension of the R & D concession and the lower rate of 125 per cent that is to apply for its last two years of application.

Where an eligible company incurs expenditure in a year of income in having R & D activities performed on its behalf by an approved research institute (before 30 June 1988), by a registered research agency (after 20 November 1987) or through funding by the Coal Research Trust Account, that "contracted expenditure" (as defined in subsection 73B(1)) is, by virtue of the modified subsection 73B(13), to be deductible at the relevant increased rate whatever the level of that expenditure - from the assessable income of that year. The relevant rates are to be:

·
for the year of income ending 30 June 1993 and earlier years - 150 per cent; and
·
for the years of income ending 30 June 1994 and 30 June 1995 - 125 per cent.

Paragraph (r) of clause 7 will insert new subsection 73B(15A) in the Principal Act. The new subsection is to apply where an eligible company has received, or has become entitled to receive, any consideration for the use of a unit of plant by another person in the circumstances set out in new subsection 73B(SAA) of the Principal Act - refer to the earlier notes on that subsection which is being inserted in the Principal Act by paragraph (n) of this clause. In these circumstances, a deduction otherwise allowable under subsection 73B(15) of the Principal Act for accelerated write-off allowances over three years for expenditure on R & D plant is to be reduced by one-half of the total amount or value of the consideration received.

Amendments to be made to subsection 73B(16) of the Principal Act by paragraphs (s), (t) and (u) of clause 7 are a further consequence of the extension of the period for which the 150 per cent R & D tax concession is to operate. Subsection 73B(16) facilitates the allowance of increased deductions, over three years, for qualifying plant expenditure that is incurred in the final two years (now to 30 June 1995) of the operation of the R & D tax deduction scheme (paragraph 73B(15)(a)), and in respect of adjustments to be made on the disposal, loss or destruction of plant (paragraph 73B(23)(e)) or pilot plant (paragraph 73B(24)(e)). The effect of the proposed amendments is to extend all the specified dates by four years.

To enable the increased deductions in the income years commencing 1 July 1995 and 1 July 1996 to be calculated, it is necessary (for the purposes of determining the deduction acceleration factor) to ascertain a notional aggregate R & D amount in relation to the company in relation to those income years. The amendments achieve this by treating the reference to 30 June 1995 in the definition of "deduction period" in subsection 73B(1) (see notes on paragraph (d) of this clause) as a reference to 30 June 1997, and the reference to 1 July 1995 in subsection 73B(4) (see notes on paragraph (m) of this clause) as a reference to 1 July 1997.

Paragraph (w) of clause 7 will insert a new subsection - subsection 73B(24A) - in the Principal Act. Its purpose is to ensure that the application of the special rules where R & D plant is disposed of, lost or destroyed is not affected because the company has made the plant available to another person exclusively for R & D purposes. To this end, the new subsection specifies that the company will not fail the exclusive use tests set out in paragraphs 73B(23)(c) and 73B(24)(c) of the Principal Act merely because another person used the unit of plant as mentioned in subsection 73B(5AA) (paragraph (a)); or because the company failed to use the unit of plant for the reason mentioned in subsection 73B(5AB) (paragraph (b)).

Clause 8: Recouped expenditure on research and development activities

This clause will insert two new sections - sections 73C and 73D - in the Principal Act. They will effectively replace the present subsection 73B(8), which is to be omitted by paragraph (o) of clause 7 (see earlier notes on that clause), with a new and more generous treatment of research and development (R & D) expenditure that attracts a grant or a recoupment. Very broadly, the new sections will modify the existing rule under which there is a total loss of R & D deductions otherwise allowable in relation to R & D project expenditure if a grant or recoupment is received in relation to the project. Under the new rules, receipt of a grant or recoupment causes some or all of the rates of deduction to be reduced - generally from 150 per cent to 100 per cent of the expenditure - instead of the deduction being totally eliminated.

Section 73C - Recouped expenditure on research and development activities

New subsection 73C(1) is to the effect that, for interpretation purposes, section 73C is to be read and construed as if it were part of section 73B. That section details the operation of the R & D expenditure tax concession, including the rates of deduction applicable to expenditure of various types.

New paragraph 73C(2)(a) specifies that for the new section to apply there must be:

·
an eligible company (i.e., a body corporate incorporated under a Commonwealth, State or Territory law, or a partnership of eligible companies as proposed by new subsection 73B(3A) - see earlier notes on clause 7); and
·
expenditure (called "relevant expenditure") by the company on R & D activities during the deduction period (which commenced on 1 July 1985 and is proposed, by the amendment in paragraph (e) of clause 7 discussed previously, to end on 30 June 1995); and
·
R & D activities forming part or all of a particular project - and not ranging across more than one project - carried on by or on behalf of the company.

By new paragraph 73C(2)(b) a further condition is to be met before the section applies. The condition is that, either before or after the commencement of the section, there is receipt of, or entitlement to receive, a recoupment or a grant, by the company in respect of some or all of the relevant expenditure, from or by the Commonwealth, a State or a Territory government, or a government authority.

Subsection 73C(3) institutes the new clawback mechanism to apply to grants and recoupments that relate to relevant expenditure. That mechanism involves the reduction of deductions, otherwise allowable for R & D expenditure, taking into account the size of the grant or recoupment. The detailed clawback rules are explained in the following notes and examples.

Paragraph 73C(3)(a) subjects R & D expenditure to the application of clawback under the section. Paragraph 73C(3)(b) defines the "initial clawback amount" - which is relevant to the clawback rules described below - as an amount equal to twice the amount(s) received by way of grant or received, or entitled to be received, by way of recoupment by the company.

Example 1

If a company has incurred relevant expenditure, as described in paragraph 73C(2)(a), and receives a recoupment of that expenditure to the extent of $80,000 in a year, the "initial clawback amount" will be $160,000. If, in a later year, the company receives a further recoupment or grant of $30,000, the initial clawback amount, recalculated, will become $220,000, i.e.,

($80,000 * 2) + ($30,000 * 2)

.

Subsection 73C(4) sets out the present and proposed situation regarding expenditure incurred before 21 November 1987 - that being the date of effect of the announced new scheme regarding treatment of R & D expenditure subject of a grant or recoupment by a company. Expenditure incurred before that date was previously ineligible for deduction and that is still to be the case. However, in applying the rules regarding clawback that are detailed below, the amount of expenditure incurred before 21 November 1987 is to have the initial clawback amount notionally applied to it for the purpose of determining the amount and rate of deduction available to a company in respect of expenditure incurred on or after that date.

New subsection 73C(5) is a drafting measure that stipulates that the remaining subsections of section 73C apply only where expenditure on R & D activities forming part of a particular project ("relevant expenditure") was incurred wholly or in part on or after 21 November 1987.

Subsection 73C(6) deals with the case where, in relation to a project, "relevant expenditure" is incurred both before and on or after 21 November 1987, and a grant or a recoupment is received (or a company has become entitled to a recoupment) on or after 21 November 1987. By paragraph 73C(6)(a) clawback is to apply, when the initial clawback amount equals or is less than the relevant expenditure, to so much of that expenditure as was incurred before 21 November 1987.

Example 2

Assume a company incurs expenditure before 21 November 1987 of $450,000, and receives a grant after that date of $150,000.

The initial clawback amount of $300,000 (i.e., the amount of the grant multiplied by two) is exceeded by the pre-21 November 1987 expenditure; all expenditure after that date will thus be eligible for a deduction at the appropriate rate(s) allowed by section 73B (assuming that appropriate R & D expenditure thresholds have been met). However, any deductions previously allowed for the pre-21 November 1987 expenditure will be disallowed in accordance with subsection 73C(4) because of receipt of the grant.

Paragraph 73C(6)(b) will apply where the initial clawback amount has been notionally applied to expenditure incurred before 21 November 1987 (subparagraph 73C(6)(b)(i)), with the result that there is an "excess clawback amount" remaining to be dealt with under the subsection.

If, in the preceding example, the grant had been $280,000, the initial clawback amount of $560,000 would exceed pre-21 November 1987 expenditure (of $450,000) by $110,000; this excess clawback amount would then be applied to relevant expenditure which, because it was incurred on or after 21 November 1987, is eligible for deduction under section 73B. In new subsection 73C(6) this expenditure is called "deductible relevant expenditure".

Deductible relevant expenditure incurred on or after 21 November 1987 is subject to the application of clawback on a year-by-year basis. If the excess clawback amount is greater than or equal to deductible relevant expenditure, subparagraph 73C(6)(b)(ii) provides that all of that expenditure is to be clawed back. This process might extend beyond one year of income with assessments being amended as necessary from year to year. The effect of this total clawback is to make that expenditure deductible at a rate of 100 per cent (by operation of either subsection 73C(8) or (9) which are explained later in these notes). Where the excess clawback amount equals or exceeds the deductible relevant expenditure no further calculation of clawback will be necessary (unless a further grant or recoupment is received).

Where the excess clawback amount is less than deductible relevant expenditure -

·
clawback applies to such part of the expenditure as does not exceed the excess clawback amount (subparagraph 73C(6)(b)(iii)); and
·
the rules provided in subparagraph 73C(6)(b)(iv), apply to determine the part(s) of expenditure which may attract a deduction (at the appropriate rate).

The rules in subparagraph 73C(6)(b)(iv) set out the sequence of application of clawback where the excess clawback amount is less than deductible relevant expenditure and where that expenditure has been incurred over one or more years of income and on or after 21 November 1987. In summary, the sequence is clawback against the deductible relevant expenditure incurred in the earliest income year and then (if necessary) successively against such expenditure incurred in subsequent year(s), the excess clawback amount having been reduced by the amount clawed back in the previous year(s) (sub-subparagraphs (6)(b)(iv)(A) and (B)).

Example 3

An R & D project commences in 1986 and expenditure of $800,000 is incurred in the period before 21 November 1987. In the remainder of the 1987-88 financial year, a further amount of $300,000 is spent. In the 1988-89 year, the company spends $100,000. A grant of $560,000 is received in February 1988.

Calculation of clawback
  $
Initial clawback amount (subsection 73C(3)) 1,120,000
less expenditure pre-21 November 1987 (subparagraph 73C(6)(b)(i)) 800,000
Excess clawback amount (sub-subparagraph 73C(6)(b)(iv)(A)) 320,000
less deductible relevant expenditure November 1987-June 1988 300,000
Excess clawback amount to be applied 1988-89 20,000

When the sequence in the last year of application results in the excess clawback amount being equal to deductible relevant expenditure, subparagraph 73C(6)(b)(ii) will operate to end the clawback process (see the earlier notes on that subparagraph).

Where, in relation to the year of calculation, deductible relevant expenditure exceeds the excess clawback amount and comprises two or more kinds of expenditure (and because those expenditures attract differing rates of deduction under section 73B), an apportionment is to be carried out (sub-subparagraph 73C(6)(b)(iv)(C)). By way of illustration of differing rates, the 150 per cent concession applies to qualifying plant expenditure that is spread over three years, whereas R & D expenditure for, say, salaries is deductible at up to 150 per cent of the full cost in the year in which the expenditure is incurred. The purpose of apportionment is to minimise the reduction in the deduction available to the claimant company.

For instance, in example 3, if the excess clawback amount in the year 1988-89 of $20,000 represented the cost of acquiring a further unit of plant, so that qualifying plant expenditure was $20,000, the remaining $80,000 of the company's expenditure in 1988-89 of $100,000 having been on salaries, apportionment would focus first on that qualifying plant expenditure because it attracts a lesser rate of deduction than does expenditure on salaries. All of the qualifying plant expenditure would be taken up by the excess clawback amount, resulting in a deduction for the company in relation to that expenditure at the rate of 100 per cent (but over three years at an annual rate of $6,666) rather than the rate of 150 per cent. The balance of the expenditure (on salaries) not having been subjected to clawback, would attract the higher 150 per cent rate applicable in that year, thus minimising the reduction in the deduction required by the provision.

If there is only one kind of expenditure involved, apportionment is not needed.

The sequence provided in subsection 73C(6) will apply irrespective of when the grant or recoupment is received. The initial clawback amount (comprising all grants and/or recoupments) is applied to pre-21 November 1987 expenditure, and the excess clawback amount is then applied in chronological order to all later expenditure.

Subsection 73C(7) specifies a different set of rules that apply where, in relation to an R & D project, relevant expenditure is incurred wholly on or after 21 November 1987. With some modifications to sequence, however, it generally follows the process outlined in subsection 73C(6). The major difference is that subsection (7) proceeds on the basis that all relevant expenditure incurred by a company on its R & D project, and to which clawback may apply, will be deductible. This contrasts with subsection (6) under which relevant expenditure incurred before 21 November 1987 can never be deductible if a grant or recoupment is received.

Paragraph 73C(7)(a) is similar in operation to subparagraph 73C(6)(b)(ii) except that, at the point of its application, a "surplus" of clawback amount has yet to be identified. The initial clawback amount, applied to relevant expenditure (all of which will have been incurred on or after 21 November 1987), will produce the result that, either -

·
the amount is greater than or equal to relevant expenditure, in which case, by paragraph 73C(7)(a), all of the expenditure is clawed back, and the R & D deduction under section 73B of the Principal Act may be calculated; or
·
the amount is less than relevant expenditure, in which case, by paragraph 73C(7)(b), clawback applies to such part of the relevant expenditure as does not exceed the initial clawback amount, and the application rules in paragraph 73C(7)(c) then apply.

In applying clawback to relevant expenditure under the procedure detailed in subparagraph 73C(7)(c)(i), the initial clawback amount is applied and reduced, as required by subparagraph 73C(7)(c)(iii) until the point where relevant expenditure equals or exceeds the initial clawback amount. The order is as follows:

·
clawback starts in the year of receipt of the grant or recoupment; if there is more than one such year, the earliest is taken first followed by the other(s) chronologically (sub-subparagraph 73C(7)(c)(i)(A));
·
if necessary, clawback then looks to the year before the year of receipt, (or before the earliest year of receipt, as the case may be) and then to each previous year in reverse chronological order (sub-subparagraph 73C(7)(c)(i)(B));
·
finally, if necessary, clawback applies working forward from the year it was last applied under the sequence so far described, until expenditure exceeds or equals the initial clawback amount (sub-subparagraph 73C(7)(c)(i)(C)).

The order of clawback provided for by sub-subparagraph 73C(7)(c)(i)(A) to (C) is illustrated in the following example.

Example 4

An R & D project starts in the year 1989-90 and is concluded in 1995-96. In each of the years 1991-92 and 1994-95, a grant is received.

A deduction calculation will be made as to the first grant in the year of its receipt. Thus, depending on the amount of the grant, the initial clawback amount would be applied to expenditure incurred in 1991-92 and, then, to the extent needed, 1990-91, 1989-90 after which is would be carried forward to 1992- 93 and later years as necessary. On receipt of the second grant, a recalculation would be required. The initial clawback amount, now comprising both grants (multiplied by two), would be applied, as needed, to expenditure in the sequence: 1991-92 (the first grant year), 1994-95 (the second grant year) and then 1990-91 and 1989-90, before being carried forward to the 1992-93, 1993-94, 1995-96 years.

If no grant or recoupment is received until after the last year of income in which relevant expenditure is incurred, the sequence becomes (by subparagraph 73C(7)(c)(ii)), first, the latest year in which a deduction was allowed (or is allowable) and then previous years working backwards chronologically, year by year.

Example 5

A grant is received in 1992-93. The latest year in which a deduction was allowed was 1990-91, expenditure incurred in 1991-92 being insufficient to sustain a claim under section 73B. The initial clawback amount is to be applied to the relevant expenditure incurred in 1990-91 and, if needed, carried back progressively until the year is reached when expenditure equals or exceeds the initial clawback amount.

Subparagraph 73C(7)(c)(iii) requires that the initial clawback amount be reduced progressively as clawback occurs.

When the clawback process is complete, subparagraph 73C(7)(c)(iv) requires that there be a process of apportionment, similar to that outlined in relation to sub-subparagraph 73C(6)(b)(iv)(C) (see the earlier notes on that sub-subparagraph). This apportionment process is not necessary if there is only one kind of expenditure.

Subsection 73C(8) will have the effect of modifying the deduction authorised by revised subsection 73B(13) (to be inserted in the Principal Act by clause 7 of the Bill (see earlier notes on that clause)) where clawback applies to "contracted expenditure" a term defined in existing subsection 73B(1) to mean expenditure incurred to the Coal Research Trust Account to an approved research institute (until 30 June 1988) or, on and after 20 November 1987, to a research agency registered under the Industry Research and Development Act 1986. By the revised subsection 73B(13) the rates of deduction for qualifying expenditure are, effectively, 150 per cent until 30 June 1993 and 125 per cent thereafter. Where clawback applies to this expenditure, subsection 73C(8) will operate to restrict the deduction to 100 per cent of the relevant expenditure.

Subsection 73C(9) specifies that, where clawback applies to expenditure, a deduction acceleration factor does not apply and the rate of deduction will be limited to 100 per cent of that expenditure. This subsection is to apply to all expenditure other than expenditure to which subsection 73C(8) applies.

Subsection 73C(10) will make it clear that, apart from the modification to the rate of deduction applying to R & D expenditure by the operation of subsections (8) and (9) described above, the clawback processes in the section have no substantive effect on section 73B of the Principal Act. In other words, their role is to identify amounts of expenditure which are to be subjected to a reduced rate of deduction of 100 per cent (in lieu of some higher rate otherwise applicable) and, conversely, to identify that expenditure which will retain a rate of deduction exceeding 100 per cent.

Section 73D - Reduction of deductions

A further section - section 73D - to be inserted in the Principal Act by this clause, relates to a situation similar to section 73C, described above, where an eligible company has incurred expenditure on R & D activities and has received, or become entitled to receive, a recoupment or has received a grant. Section 73D is designed to deal with a case where the grant or recoupment is not assessable to the recipient company. In such a case, section 73D would operate to limit the financial advantage otherwise accruing to the recipient company. That advantage could arise through the combination of a non-assessable grant and a deduction under section 73B of the Principal Act, and stands in contrast to the normal situation where the section 73B deductions are offset by an assessable grant.

By subsection 73D(1), the section is to be applied as if it were part of section 73B of the Principal Act.

Under subsection 73D(2) the section 73B deduction which would be allowable to a company that incurs R & D expenditure on or after 21 November 1987 (paragraph (a)), and that has received a non-assessable grant or recoupment (paragraph (b)), is to be calculated by :

·
applying the clawback process detailed in new section 73C; and
·
deducting from the result an amount equal to, or equal to the total of, the amounts of grants or recoupments received.

Subsection 73D(3) is to the practical effect that the deduction of the amount described in paragraph 73D(2)(b) is to be made in the order specified in the sequence of years described in subparagraphs 73D(3)(a)(i) to (iii). These subparagraphs are modelled on, and are to the same general effect as, subparagraph 73C(7)(c)(i) (refer to the earlier notes on that subparagraph and to Example 4).

Example 6

Expenditure of $100,000 is incurred by a company on salaries on R & D activities in a year. In the same year, a non-assessable grant of $50,000 is received by the company. Subsection 73C(7) is applied. Because the initial clawback amount of $100,000 is equal to the relevant expenditure, the rate of deduction available is 100 per cent (by application of subsection 73C(9)). The deduction is then to be reduced, by application of subsection 73D(2) and subparagraph 73D(3)(a)(i), by the amount of the non-assessable grant of $50,000. The company's deduction is, therefore -

(($100,000) * (100 per cent) - ($50,000) = ($50,000)

.

Where a non-assessable grant or recoupment is received after the last year of income in which R & D expenditure was incurred on a project, paragraph 73D(3)(b) specifies a method of treatment of the deduction similar to that applicable to the initial clawback amount in subparagraph 73C(7)(c)(ii) (refer to the earlier notes on that subparagraph and to example 5).

Clause 9: Election expenses of candidates for Parliament

Section 74 of the Principal Act presently operates to allow a deduction from assessable income for election expenses of candidates to the Commonwealth or State Parliaments and the Legislative Assembly of the Northern Territory.

Clause 9 of the Bill will amend section 74 of the Principal Act to allow a deduction for expenditure incurred in contesting an election for membership, or in being elected as a member, of the Legislative Assembly for the Australian Capital Territory.

The amendment to section 74 of the Principal Act proposed by this clause will apply, by the operation of subclause 29(4) of the Bill, in assessments of the 1988-89 and subsequent income years.

Clause 10: Election expenses of candidates for local governments

Clause 10 of the Bill will amend the definition of 'eligible election expenditure' in subsection 74A(1) of the Principal Act to remove the reference therein to the Australian Capital Territory House of Assembly. The House of Assembly no longer exists, and expenditure in respect of election to the new Legislative Assembly of the Australian Capital Territory is to be allowed under section 74 of the Principal Act (see notes on clause 9).

The amendment to section 74A of the Principal Act proposed by this clause will apply, by the operation of subclause 29(5) of the Bill, to expenditure incurred after the day on which this Bill receives Royal Assent.

Clause 11: Money paid before 1 July 1991 on shares in Management and Investment Companies

This clause will amend section 77F of the Principal Act to terminate deductions for eligible subscription monies paid to licensed Management and Investment Companies after 30 June 1991. The deduction will also be denied where eligible subscription monies are paid before 1 July 1991 in anticipation of the grant of a licence, or to ensure that a licence is granted, if that licence is not granted before 1 July 1991. The amendment will not alter the existing provisions for withdrawing wholly - or in part on a pro-rata basis - the deductions allowed or allowable where the shares are disposed of, or the company's licence is revoked or has expired within 2 to 4 years of the last payment on the shares.

Paragraph (a) inserts into paragraph 77F(2)(b) of the Principal Act the date - 1 July 1991 - before which eligible subscription monies must be paid to qualify for a deduction under section 77F.

Paragraphs (b) and (c) together insert a new paragraph (paragraph (aa)) into subsection 77F(15) of the Principal Act. That subsection allows eligible subscription monies that are paid in anticipation of the granting of a licence, or paid to ensure that a licence is granted to be treated as though they were paid after the licence is granted, and so qualify for deduction. The deduction is allowed for the year in which the licence is granted.

New paragraph 77F(15)(aa) will require the licence to be granted before 1 July 1991 if eligible subscription monies, paid in anticipation of the grant of a licence, or to ensure that a licence is granted, are to qualify for deduction.

Clause 12: Interpretation

Under the present law claims within the limits of certain transport allowances are excluded from the requirements contained in the law that claims for deductions be supportable by documentary evidence of the amounts spent (the substantiation requirements). The exclusion only operates where those payments are paid under an industrial award and are not higher in amount than was payable under the award as at 29 October 1986.

Subsection 82KT(1A) of the Principal Act outlines circumstances under which an increase in amount of a transport allowance or car expense reimbursement does not attract the substantiation requirements. Broadly, a claim against an allowance remains outside the substantiation requirements where an increase in the amount payable under an award is the result of an application for increase made on or before 29 October 1986.

Clause 12 amends subsection 82KT(1A) of the Principal Act so as to permit taxpayers in receipt of transport allowance payments and other transport costs (not being reimbursement of car expenses based on the distance travelled) to remain excluded from the substantiation requirements in respect to claims against that allowance, if the allowance increases after 29 October 1986 - but the claim does not exceed the amount payable under that award as at that date.

Paragraphs (a), (b) and (c) of clause 12 are drafting measures which facilitate the proposed amendments.

Paragraph (d) of clause 12 inserts new paragraph (d) into subsection 82KT(1A) of the Principal Act. The proposed new paragraph provides that where the amount payable to an employee as a transport allowance payment (a term defined in section 82KT(1) of the Principal Act) increases after 29 October 1986 (other than as a result of an application to alter the award made on or before 29 October 1986) then the additional amount will not be treated as being excluded from the substantiation requirements (subparagraph (i)). The amount of the allowance prior to any increase after 29 October 1986 will remain excluded from the substantiation requirements.

The amount of the excess over the amount payable as at 29 October 1986 is not to be taken into account when determining if the total amount paid to an employee, in respect of the travel to which the allowance or reimbursement relates, exceeds the amount that would have been payable if the industrial award as it existed on 29 October 1986 had not been altered (subparagraph(ii)).

Clause 13: Log book year of income

This clause proposes to amend sub-subparagraph 82KTG(g)(iii)(A) of the Principal Act so as to replace a reference to 'his or her return' with a reference to 'the taxpayer's car records'.

The proposed amendment corrects an omission in the Taxation Laws Amendment Act (No.4) 1988. That Act replaced the requirement that taxpayers claiming car expenses must specify certain matters in their income tax return, with a requirement that those matters could be specified in car records held by the taxpayer. Sub-subparagraph 82KTG(g)(iii)(A) of the Principal Act was not amended and continued to refer to specifications in a taxpayer's return. The amendment proposed by this clause rectifies that matter.

Clause 14: Retention, and production, of documents

Section 82KZA of the Principal Act contains the rules that require documentary evidence of expenses to be retained for a specified period, and to be produced to the Commissioner of Taxation when required in order to satisfy the substantiation requirements contained in the Principal Act.

Clause 14 proposes to amend section 82KZA so as to require taxpayers who have specified matters in car records to retain those records for a specified time.

By paragraph (a) of clause 14, paragraphs (1)(b), (3)(e), (5)(b) and (7)(a) of section 82KZA of the Principal Act are to have the words 'car records' added before 'log book records' in each instance.

The effect of the amendments proposed by paragraph (a) are :

·
the amendment to paragraph 82KZA(1)(b) requires car records to be retained for the retention period. Broadly, the retention period commences when the expense is incurred and ends 7 years after the date of lodgment of the return of income for the year in which the expense was incurred. Where the expense relates to salary or wages income the retention period is reduced to 3 1/2 years. Failure to retain the car records for the appropriate time would generally result in the taxpayer being denied a deduction for the expense to which the car records relate;
·
the amendment to paragraph 82KZA(3)(e) will deny a taxpayer a deduction for car expenses if he or she fails to comply with a notice to produce those records within a specified time. Subsection 82KZA(2) authorises the Commissioner of Taxation to require a taxpayer to produce documents substantiating expenses within a specified time. The amendment will result in car records being treated in the same way as log books and odometre records. The amendment will apply to notices served after 1 July 1989 (refer to the notes on clause 29). In addition, special safeguarding provisions apply where the loss or destruction of car records occurred prior to the introduction into the Parliament of this Bill (refer to the notes on clause 30);
·
the amendments proposed to paragraphs 5(b) and 7(a) of section 82KZA will allow car records that are lost or destroyed (despite the taxpayer taking reasonable steps to prevent the loss) to be replaced with a copy or substitute document. Alternatively, if no copy or substitute is available the requirement to retain car records would not apply after the loss.

Subsection 82KZA(7B), inserted by paragraph (b) of clause 14, has the effect of extending the 3 1/2 or 7 year retention period if car records relating to a particular year continue to contain information relevant to the calculation of later year of income.

Car records will be required to be retained for 3 1/2 years (or 7 years if the car is used in the relevant year to gain non salary and wage income) from the date on which the return of income for that year is lodged with the Commissioner of Taxation (paragraph (a)).

The period for which car records relating to a particular year of income must be retained will be extended if:

·
the current year is not a log book year of income (subparagraph (b)(i)); and

·.
the year of income in which the car records were kept is the year of income in which the last log book was kept (sub-subparagraph (b)(ii)(A)) or,
·.
the year of income in which the car records were kept was a year after the last log book year but before the current year of income (sub-subparagraph (b)(ii)(B)).

Clause 15: Interpretation

Sections 124ZC and 124ZE of Division 10C of the Principal Act determine the deductions allowable to a person who is taken to be the owner of a building for the purposes of the Division in respect of capital expenditure incurred on the construction of buildings used to provide short-term accommodation for travellers.

By clause 15, where there is a deemed disposal of the building under proposed section 160ZSA (clause 24), subsection 124ZA(25) will operate in a complementary way to transfer any entitlement to deductions in respect of the building under Division 10C.

Paragraphs (a) and (b) establish the circumstances in which the subsection applies. By paragraph (a) the person must be taken by virtue of section 160ZSA to have disposed of an asset, being a building or a part of a building (subparagraph (a)(i)), the whole or a part of an estate in fee simple (subparagraph (a)(ii)) or the whole or a part of a lease or sublease of land (subparagraph (a)(iii)). Paragraph (b) requires that, immediately before the grant of the new lease mentioned in section 160ZSA, the person be the owner for the purposes of Division 10C (because of a previous application of this subsection or otherwise) of:

·
if subparagraph (a)(i) applies - the building or the part of the building; or
·
if subparagraph (a)(ii) or (a)(iii) applies - any building or the part of any building in the area to which the whole or the part of the estate in fee simple or the lease or sublease taken to be disposed of relates.

Where the conditions outlined above are satisfied, paragraph (c) treats the holder of the new lease under section 160ZSA as the owner of the building or the part of the building mentioned in paragraph (b) above during the subsistence of the new lease.

Paragraph (d) ensures that no other person is taken to be the owner of the building or that part of the building during the subsistence of the new lease.

The reference in paragraph (b) to the person being the owner for the purposes of Division 10C whether because of the previous application of the subsection or otherwise, ensures that if the holder of the new lease referred to in paragraph (c) subsequently grants an eligible long term lease and as a result is taken to have disposed of the building or the part of the building because of section 160ZSA, entitlement to relevant deductions relating to the building or the part of the building will flow to the new sublessee.

The operation of subsection (25) is restricted so as not to apply for the purposes of existing paragraph 124ZA(5)(a). That paragraph provides that a taxpayer will be taken to have dealt with an apartment part of an eligible apartment building in the prescribed manner, if the apartment part contains an apartment, unit or flat that was used for short-term traveller accommodation and the taxpayer owns or leases at least nine other apartments, units or flats for traveller accommodation.

This restriction on the operation of subsection (25) ensures that apartments, units or flats owned by a taxpayer but leased by the holder of a new lease, will be capable of being taken into account for the purposes of paragraph (5)(a) in determining the total number of apartments, units or flats owned by the taxpayer and used for short-term traveller accommodation.

Clauses 16-22: Deductions for capital expenditure on certain buildings

Introductory note

The Bill will implement the change, announced in the May 1988 Economic Statement, to allow deductions, for capital expenditure incurred by taxpayers on buildings, if their construction started on or after 21 November 1987 and they are used for the purposes of carrying on research and development (R & D) activities. Other changes in relation to deductions for R & D expenditure are discussed in earlier notes on clauses 6 to 8 of the Bill.

These changes will be given effect by extending the scope of Division 10D of the Principal Act to R & D Buildings. Insofar as it is relevant Division 10D authorises a deduction at the rate of 2 1/2 per cent of the full cost of construction of a building (including extensions, alterations or improvements to buildings) that is used during the whole of the year of income for producing assessable income. Generally, the person who first owns the building, incurs the construction costs and uses the building for income-producing purposes is eligible for the deduction. Where ownership of a building changes hands, entitlement to deductions generally passes to the new owner. In certain circumstances, a lessee who incurs construction costs and uses the building for income-producing purposes can be eligible for the deduction.

These clauses will adopt the provisions of Division 10D to authorise deductions where construction of a new building commences on or after 21 November 1987 and it is used for the purposes of carrying on R & D activities. Where Division 10D deductions are already available in respect of a building and, on or after 21 November 1987, it is used for the purposes of carrying on R & D activities, Division 10D deductions will continue to be available in relation to that building.

Clause 16: Heading to Division 10D of Part III

This clause will amend the heading to Division 10D to reflect the broadening of its scope to encompass buildings used for research and development activities.

Clause 17: Interpretation

Paragraph (a) of this clause proposes the insertion of a new definition in subsection 124ZF(1) of the Principal Act, the subsection which sets out the definitions that apply for the purposes of Division 10D of that Act.

Unless the contrary intention appears, "research and development activities" are to mean :

·
in the case of companies, activities that are research and development activities for the purposes of section 73B (paragraph (a));
·
for all other taxpayers, activities that would be research and development activities for the purposes of section 73B if those other taxpayers were eligible companies (paragraph (b));

provided that, in all cases, the activities are carried on in connection with a business carried on by the taxpayer for the purpose of gaining or producing assessable income. (The term "research and development activities" is extensively defined in section 73B of the Principal Act.)

Paragraph (b) of clause 17 will amend subsection 124ZF(3) of the Principal Act. Broadly, in determining whether a deduction is allowable under Division 10D, two conditions must be satisfied. The first is that there is an amount of qualifying expenditure in respect of a building (or part of the building) - this is determined under section 124ZG. The second is that the expenditure is made for the period that the owner uses that building in the prescribed manner. A building or part of a building is taken to be used in the prescribed manner if it is used for the purposes of producing assessable income.

The change to be made by paragraph (b) will ensure that a building is to be taken to be used in the prescribed manner if it is used, on or after 21 November 1987, for the purposes of carrying on R & D activities.

Because of the amendments proposed by clause 24 of this Bill, paragraph (c) of clause 17 will insert a new subsection 124ZF(16).

Sections 124ZH and 124ZK of Division 10D of the Principal Act determine the deductions allowable to a person who is taken to be the owner of a building for the purposes of the Division in respect of qualifying capital expenditure incurred on the construction of certain buildings. By clause 24, where there is a deemed disposal of the building under proposed section 160ZSA, subsection 124ZF(16) will operate to transfer the 'ownership' of the building for the purposes of any entitlement to deductions under Division 10D.

Paragraphs (a) and (b) establish the conditions that must be satisfied before the subsection applies. Paragraph (a) provides that the person must be taken by virtue of section 160ZSA to have disposed of an asset, being a building or a part of a building (subparagraph (a)(i)), the whole or a part of an estate in fee simple (subparagraph (a)(ii)) or the whole or a part of a lease or sublease of land (subparagraph (a)(iii)). Paragraph (b) sets out a further condition, that is, immediately before the grant of the new lease mentioned in section 160ZSA, the person must be the owner for the purposes of Division 10D (whether because of the previous application of this subsection or otherwise) of:

·
if subparagraph (a)(i) applies - the building or the part of the building; or
·
if subparagraph (a)(ii) or (a)(iii) applies - any building or the part of any building in the area to which the whole or the part of the estate in fee simple or the lease or sublease taken to be disposed of relates.

Where the conditions outlined above are satisfied, paragraph (c) deems, for the purpose of the Division, the holder of the new lease under section 160ZSA to be the owner of the building or the part of the building mentioned in paragraph (b) above during the subsistence of the new lease.

Paragraph (d) operates to ensure that no other person is taken to be the owner of the building or that part of the building during the subsistence of the new lease.

The reference in paragraph (b) to the person being the owner for the purposes of Division 10D whether because of the previous application of the subsection or otherwise, ensures that if the holder of the new lease referred to in paragraph (c) subsequently grants an eligible long term lease and as a result is taken to have disposed of the building or the part of the building because of section 160ZSA, then 'ownership' of the building or the part of the building will be transferred to the new sublessee.

Clause 18: Qualifying expenditure

Clause 18 will amend section 124ZG of the Principal Act, which identifies expenditure that is qualifying expenditure for the purposes of Division 10D. By paragraph (a) of this clause, the qualifying use to which a building can be put will be extended to cover use (or disposal for use) for the purpose of carrying on research and development (R & D) activities by or on behalf of a person.

Paragraph (b) of clause 18 will amend subsection 124ZG(3) of the Principal Act to also extend its application. By that subsection, expenditure that is incurred on property and is deductible under certain other provisions of the Act is not to be treated as qualifying expenditure for the purposes of Division 10D, i.e., no double deduction is to be allowable. By inserting, in section 124ZG(3), a reference to expenditure that is or would be deductible under section 73B if the property were for use for the purpose of carrying on R & D, paragraph (b) will similarly ensure that such expenditure cannot be qualifying expenditure under Division 10D.

Clause 19: Deductions in respect of qualifying expenditure

This clause will insert a new subsection - subsection (6) - in section 124ZH of the Principal Act, which establishes the primary entitlement to deductions under Division 10D. The tax concession, available under section 73B of that Act, for certain expenditure on qualifying research and development (R & D) activities, is limited to eligible companies.

A condition for eligibility for deductions under section 73B for R & D expenditure is that a company must be registered with the Industry Research and Development Board under section 39J or 39P of the Industry Research and Development Act 1986. Consistent with that condition, new subsection 124ZH(6) will also require that, before a company can be eligible for deductions in respect of a building used for the purposes of carrying on R & D activities, it be registered in the same manner as required by section 73B. Only companies will have to meet this requirement, and it will apply only where entitlement to the deduction is based on R & D use of the building, and not where the building is used for producing assessable income.

Clause 20: Reduction of deductions

The primary entitlement to deductions under section 124ZH of the Principal Act for qualifying expenditure on buildings is subject to reduction, in defined circumstances, by the operation of section 124ZJ. Where an owner of a building (or part of a building) would be entitled to a deduction in respect of that building but it is only partly used for the purposes of producing assessable income, subsection 124ZJ(1) authorises a reduction in the deduction otherwise available to the owner.

Under proposed amendments to section 124ZF (see the earlier notes on clause 17), the use to which a building may be put to qualify for Division 10D deductions is to be extended to include use for the purposes of carrying on research and development (R & D) activities. Consistent with that amendment and the present role of subsection 124ZJ(1), that subsection is to be amended so that a deduction otherwise allowable under subsection 124ZH is also to be reduced where a building is used for purposes other than the production of assessable income or the carrying on of R & D activities.

Clause 21: Deduction in respect of destruction of building

Subsection 124ZK of the Principal Act entitles the owner of a building (or part of a building) that is destroyed to a deduction of the amount of any qualifying expenditure remaining to be written off at the time of the destruction, that amount being reduced by any amount receivable (e.g., under an insurance policy) in respect of the destruction or partial destruction of the building. One of the requirements that must be satisfied if this concessional section is to apply is that the last use of the building was for the purposes of producing assessable income.

Under amendments proposed by this clause, where the last use to which a building was put before its total or partial destruction was the carrying on of research and development activities, the concessional write-off of any balance of qualifying expenditure is similarly to be available subject, of course, to reduction by amounts receivable.

Clause 22: Determinations binding on the Commissioner

This clause will insert a new section into Division 10D of the Principal Act as a consequence of amendments proposed by this Bill under which expenditure on buildings used for the purposes of carrying on research and development (R & D) activities is to become eligible for deductions under that Division.

Under section 39L of the Industry Research and Development Act 1986, the Industry Research and Development Board is required, upon request from the Commissioner of Taxation, to give a certificate to the Commissioner stating whether particular activities are R & D activities. This provision was initially relevant for section 73B claims for expenditure on R & D activities. As a consequence of the proposed amendments by which buildings used for the purposes of carrying on R & D activities will be eligible for deductions under Division 10D, the Industry Research and Development Board's power to make determinations will be relevant to deductions claimed under Division 10D.

Consistent with a requirement in section 73B, new section 124ZL will make a determination of the Industry Research and Development Board binding on the Commissioner for the purpose of the making of an assessment of the income of a person in a year of income. The proposed amendment of section 39L of the Industry Research and Development Act 1986 (see later notes on clauses 33 and 34) will ensure that the Industry Research and Development Board can make a determination in respect of all taxpayers (and not only eligible companies).

Clause 23: Interpretation

Section 160APA defines terms used in the imputation provisions contained in Part IIIAA of the Principal Act. The amendment proposed by clause 23 is a drafting measure to ensure that the 'general company tax rate' is the rate of tax imposed on companies other than companies that are registered organisations or life assurance companies.

Clause 24: Election to treat grant of long term lease as disposal of freehold interest or head lease

Clause 24 inserts a new section 160ZSA in Division 5 (Leases) of the capital gains and capital losses provisions contained in Part IIIA of the Principal Act. This section will allow a taxpayer to elect to have a long term lease or sublease of land granted after 16 November 1988 treated for capital gains tax purposes as a disposal of the underlying freehold or leasehold interest in the land.

Subsection 160ZSA(1) establishes the conditions that must be satisfied before a taxpayer can make an election under subsection (2) and then sets out the consequences of a valid election. The required conditions are as follows :

·
after 16 November 1988 :

·.
a taxpayer (the 'lessor') who holds an estate in fee simple (the 'freehold interest') grants a lease (the 'new lease') of the whole or a part of the area of land to which the freehold interest relates (subparagraph (a)(i)); or
·.
a taxpayer (also called the 'lessor') who holds a lease of land (the 'head lease') grants a sublease (also called the 'new lease') of the whole or a part of the area of land to which the head lease relates (subparagraph (a)(ii));

·
the new lease is an 'eligible long term lease' (paragraph (b)) - broadly a lease with a term of at least 50 years (see notes on new subsection 160ZSA(3)); and
·
the taxpayer who has granted the new lease has made an election in accordance with subsection 160ZSA(2) that this section will apply in relation to the grant of the new lease.

Existing section 160ZR provides that in Division 5 (including proposed section 160ZSA) the term 'lease' includes a sublease. Consequently, subparagraph (a)(ii) will apply where the holder of a sublease of land grants a sublease.

Paragraphs (d) to (n) of subsection 160ZSA(1) outline the consequences that follow where a valid election is made in accordance with subsection (2).

Paragraph 160ZSA(1)(d) provides that existing section 160ZS will not apply in relation to the lessor in relation to the grant of the new lease. That is, the grant of the new lease will not be treated as a disposal of an asset, i.e. the new lease, created by the lessor and section 160ZS will not operate to prevent the grant of the new lease being taken to be a disposal by the lessor of the underlying freehold interest or headlease.

Paragraph 160ZSA(1)(e) provides that subsection 160ZT(1) will not apply to the lessor in relation to the new lease. That is, where a lessor has granted a new lease and has subsequently incurred expenditure in obtaining the consent of the holder of the new lease to the variation or waiver of any of the terms of the lease, the lessor will not be taken to have incurred a capital loss. The expenditure will now be treated in accordance with proposed paragraph 160ZSA(1)(m) (see notes on that paragraph).

Paragraph 160ZSA(1)(f) ensures that subsection 160ZSA(1), (other than paragraph (n)), is to be disregarded for the purposes of the application of Part IIIA in relation to the lessee under the new lease. In particular, section 160ZS and subsection 160ZT(1) will continue to apply to the lessee under the new lease. Accordingly, at the time of the grant of the new lease, the lessee will be taken under subsection 160ZS(1) to have acquired an asset (i.e. the new lease) created by the lessor for a consideration equal to the premium paid or payable for the grant of the new lease. Similarly, where the lessor has incurred expenditure in obtaining the consent of the lessee to the variation or waiver of a term of the new lease, the amount of consideration paid by the lessee in respect of the grant of the new lease will be reduced in accordance with paragraph 160ZT(1)(b).

By new paragraph 160ZSA(1)(g) the effect of a valid election under subsection 160ZSA(2) for capital gains tax purposes will be:

·
where the taxpayer grants a lease out of a freehold interest, the taxpayer will be taken to have separately disposed of:

·.
the freehold interest; and
·.
any buildings or improvements that are separate assets for capital gains tax purposes in the area of land to which the lease relates; or

·
where the taxpayer grants a sublease out of a head lease, the taxpayer will be taken to have separately disposed of:

·.
the headlease (or the relevant portion of the head lease); and
·.
any buildings or improvements that are separate assets for capital gains tax purposes in the area of land to which the head lease (or portion of the head lease) relates.

Subparagraph (g)(i) applies where the area of land to which the new lease relates is only part of the area to which the freehold interest or head lease relates and subparagraph (g)(ii) applies where the area of land to which the new lease relates is the whole of the area to which the freehold interest or head lease relates.

Paragraph 160ZSA(1)(h) expresses the consideration received by the lessor in respect of each of the deemed disposals under paragraph (g) to be the greatest of the following three amounts:

·
so much of the market value of the freehold interest or head lease, immediately before the grant of the new lease, as is attributable to the area of land, the building or the improvement concerned (subparagraph (h)(i));
·
so much of the market value of the freehold interest or head lease, immediately before the grant of the new lease, ascertained on the assumption that the grant of the new lease was never proposed to take place, as is attributable to the area of land, the building or the improvement concerned (subparagraph (h)(ii)); or
·
so much of the premium paid or payable for the grant of the new lease as is attributable to the area of land, the building or the improvement concerned (subparagraph (h)(iii)).

Ordinarily, where the lease or sublease is equivalent to the underlying freehold interest or head lease, it is expected that the premium paid or payable for the grant of the lease or sublease would be approximately the same as the market value of the underlying asset, i.e. the freehold interest or the head lease. In particular, this is likely to be the case where there is a grant of an eligible long term lease, because the requirements of paragraph 160ZSA(3)(c) will ensure that a new lease is only an eligible long term lease if the new lease acquired by the lessee or sublessee, is broadly equivalent to the underlying freehold interest or head lease of which the lessor is taken to have disposed.

Subparagraph 160ZSA(1)(h) recognises that the market value may vary depending upon whether it is known, immediately prior to the grant of the new lease, that the grant of the new lease is proposed to take place. The consideration received by the lessor in respect of a deemed disposal in these circumstances will, subject to the operation of subparagraph (g)(iii), be treated as being whichever market value is the greater.

In the event that the premium paid or payable for the grant of the new lease exceeds the market value of the relevant underlying freehold interest or head lease, subparagraph (h)(iii) will ensure that that premium will be treated as the consideration received by the lessor in respect of the disposal.

To take account of the possibility that the lessor may subsequently sell, subject to the new lease, the relevant freehold interest or head lease, subparagraph 160ZSA(1)(j) treats the lessor as having immediately reacquired each asset disposed of under subparagraph 160ZSA(1)(g) without having paid or given any consideration in respect of the re-acquisition.

Paragraph 160ZSA(1)(m) operates where a lessor has granted a new lease and subsequently incurs expenditure in obtaining the consent of the lessee or sublessee to the variation or waiver of any of the terms of the new lease, or the forfeiture or surrender of the new lease. As explained in the notes on paragraph 160ZSA(1)(e), existing paragraph 160ZT(1)(a) will no longer operate in these circumstances to deem the lessor to have incurred a capital loss equal to the amount of that expenditure. However, under paragraph (m) the expenditure will be included in the cost base, the indexed cost base or the reduced cost base of the asset, comprising the whole or the part of the freehold interest or head lease, which was taken to be reacquired by the lessor under paragraph (j).

Paragraph 160ZSA(1)(n) outlines the consequences if a new lease granted under paragraph (a) relates partly to property for which depreciation is or was allowable under section 54 of the Principal Act to the taxpayer who granted that new lease.

Broadly, the effect of paragraph (n) is to ensure that if a new lease granted by a taxpayer relates to depreciable property (for example, property which is taken to be plant or articles for depreciation purposes and which forms part of a building that is in the area to which the new lease relates) a separate lease of the depreciable property will be taken to have been granted. That separate lease and any part of the premium relating to it will be excluded from the application of section 160ZSA and will therefore be treated under the existing provisions of Division 5.

Where the new lease to which the proposed section 160ZSA applies is over a unit of depreciable property, subparagraph (n)(i) takes that the new lease not to relate to the unit of depreciable property. The lessor will be treated as having granted - in addition to the grant of the new lease - a separate lease of each such unit of depreciable property (subparagraph (n)(ii)).

Subparagraph (n)(iii) ensures that the depreciable property the subject of the separate lease will not be deemed to be disposed of under paragraph 160ZSA(1)(g). Subparagraph (n)(iv) provides that in determining the market value or the premium attributable to the assets that are deemed to be disposed of under paragraph (g), the depreciable property is to be disregarded.

Subsection 160ZSA(2) requires an election for the purposes of subsection (1) to be lodged with the Commissioner on or before the date of lodgment of the lessor's return of income for the later of the following years of income:

·
the year of income in which the grant of the new lease took place - paragraph (a); or
·
the year of income in which this section commenced - paragraph (b);

or within such further period as the Commissioner allows.

This provision takes account of the possibility that a taxpayer with a substituted accounting period may have granted an eligible long term lease after 16 November 1988, but in a year of income which ended prior to the year of income in which this section commenced.

Subsection 160ZSA(3) defines 'eligible long term lease' for the purposes of new section 160ZSA. Briefly, a new lease will qualify as an eligible long term lease if, and only if:

·
the new lease was granted for a term of at least 50 years (paragraph (a));
·
at the time of the grant of the new lease, it was reasonable to expect that the new lease would continue for at least 50 years (paragraph (b)); and
·
the terms of the new lease are substantially the same as either the terms of the head lease or the terms applying to the freehold interest, as the case may be (paragraph (c)).

Paragraph (3)(a) requires that the new lease be granted for a term of at least 50 years. In this context it should be noted that existing section 160ZU provides that the renewal or extension of a lease is to be treated, for capital gains tax purposes, as the grant of a fresh lease by the lessor immediately after the time when the lease that is being renewed or extended would have expired.

Consequently, the term of a new lease will not include any further periods available to the lessee at the lessee's option. Thus, for example, where a new lease is granted for a term of 40 years, with an additional 20 year period at the lessee's option, the effect of section 160ZU will be that the exercise of the option by the lessee will be treated as the grant of a fresh 20 year lease by the lessor immediately after the time when the initial 40 year lease would have expired.

Paragraph (3)(b) requires that at the time the new lease was granted, it was reasonable to expect that the new lease would continue for at least 50 years. The reasonable expectation requirement means that the duration of a lease will be determined at the time the lease is granted. Thus, a lease will not be an eligible long term lease in circumstances where the lease is for a term of more than 50 years but includes a provision for the determination of the lease on the occurrence of an event which is likely to occur before 50 years have elapsed.

Where any of the terms of a new lease render it unlikely that the lease will continue beyond a certain date before the expiry of the term of the lease, then it would not be reasonable to expect that the new lease would continue beyond that date. For example, this could occur where the lease provides for the lessee's obligations to become more onerous or for the lessee's rights to diminish after a given date (but the lease includes provision for the lessee to terminate the lease in that event) and those provisions render it unlikely that the lease would continue beyond that given date.

When determining whether it is reasonable to expect that the new lease would continue for at least 50 years, regard will be had to all of the facts that are known or ascertainable at the time when the lease was granted. These facts would include, for example, any separate arrangement, agreement or understanding, whether or not expressed in writing, that existed between the parties to the lease at the time the lease was granted.

If the new lease is terminated before the expiry of the term of the lease due to unforeseen circumstances (for example, the compulsory acquisition of the land) that would not, of itself, alter the fact that at the time the new lease was granted, it was reasonable to expect that the lease would continue for at least 50 years.

Furthermore, where a new lease contains a term providing that the lease may be determined by the lessor giving notice, then ordinarily it would not be reasonable to expect that the lease would continue beyond the earliest date upon which the lease may be determined by the lessor giving such notice.

By subparagraph (3)(c)(i), if the new lease is a sublease, the new lease will only qualify as an eligible long term lease if the terms of the new lease are substantially the same as the terms of the head lease held by the lessor. For example, the conditions which, if breached, would allow the sublessor to terminate the sublease should not be more onerous than the conditions which apply under the head lease.

Subparagraph (3)(c)(ii) provides that if the new lease is granted by a taxpayer who holds the freehold interest, then the new lease will only qualify as an eligible long term lease if the terms of the new lease are substantially the same as the terms applying to the taxpayer in respect of land to which the new lease relates. For example, a lessee should be able to use the land and buildings in the same manner as the owner of the freehold interest in the land. This would mean that, if there were any building or planning restrictions imposed under the terms of the new lease which were substantially different from the building or planning restrictions applying to the owner of the freehold interest, then the new lease would not qualify as an eligible long term lease.

These conditions will ensure that the asset acquired by the lessee or sublessee, i.e., the lease or sublease of land, is broadly equivalent to the underlying asset owned by the lessor or sublessor, i.e., the underlying freehold interest or head lease. Consequently, leases or subleases which give substantially lesser rights, as compared to the rights subsisting under the freehold interest or head lease will not qualify as eligible long term leases.

Under subsection 160ZSA(4), provides that for the purposes of proposed section 160ZSA, a reference to a building includes a reference to a part of a building.

Clause 25: Amendment of assessments

Subsection 170(10) of the Principal Act is to be amended by this clause. The amendment will empower the Commissioner of Taxation to amend proposed assessments, as necessary, ato give effect to two changes to the research and development deductions scheme. The changes are the clawback provisions in proposed new section 73C and the deduction provisions in proposed new section 73D. (See the notes on clause 8).

Clause 26: Sending of employment declaration to Commissioner

Subsection 202CD(6) of the Principal Act requires employers to retain a copy of an employment declaration - the form used for the quotation of a person's tax file number to his or her employer - until:

·
the next time the employee gives an employment declaration to the employer; or
·
where a declaration ceases to have effect, the following 1 July.

Clause 26 will omit existing subsection (6) and substitute a new subsection (6) to require an employer to retain a copy of an employment declaration until the second 1 July after the day on which the declaration ceases to have effect, including a declaration that is superseded by the making of a fresh declaration. An employment declaration will cease to have effect if -

·
an employee ceases to be an employee of the employer;
·
the employee lodges a fresh employment declaration with the employer; or
·
the Commissioner makes a determination under subsection 202CD(3) that all employment declarations or a specified class of declarations will cease to have effect as at a specified day.

This amendment will not apply to copies of declarations that ceased to have effect before 1 July 1989.

Clause 27: Group certificates

Sections 221F and 221G of the Principal Act require group employers and non-group employers to include an employee's tax file number on a group certificate or a tax check sheet where the employee has quoted a tax file number in an employment declaration given to the employer. The existing law also provides that where an employee receives an eligible termination payment, the employee may quote his or her tax file number on a form specified for that purpose. Such a form is separate and distinct from an employment declaration.

Clause 27 inserts new subsection 221F(5H) to ensure that a group employer includes the tax file number on a group certificate issued in respect of an eligible termination payment to an employee who has quoted a tax file number in a document given to the employer. Regulation 54DAQ of the Income Tax Regulations specifies the document in which an employee may quote a tax file number for an eligible termination payment.

For the purposes of section 221A of the Principal Act, an employer is a person who pays or is liable to pay any salary or wages. The definition of salary or wages includes eligible termination payments. As a result, superannuation funds and rollover institutions, such as approved deposit funds, are to be treated as an employer in relation to a person when an eligible termination payment becomes payable to that person. Therefore, the requirement to include a tax file number in a group certificate extends to those institutions.

Clause 28: Employers other than group employers

Section 221G of the Principal Act requires a non-group employer to include a tax file number on a tax check sheet issued to an employee where the employee has quoted his or her tax file number in an employment declaration given to the employer.

New subparagraph 221G(2B)(e)(ib) is to be inserted in the Principal Act by clause 28 to ensure that a non-group employer includes the tax file number on a tax check sheet issued in respect of an eligible termination payment to an employee who has quoted a tax file number in a document given to the employer. Regulation 54DAQ of the Income Tax Regulations provides for the document in which an employee may quote a tax file number for an eligible termination payment. As explained in the notes on clause 27 the requirement to include a tax file number on a tax check sheet issued in respect of an eligible termination payment will extend to superannuation funds and rollover institutions.

Clause 29: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the operation of certain measures contained in the Bill. For reference purposes the Principal Act, as amended by this Bill, is called the 'amended Act' (subclause (1)).

By subclause (2), the amendments proposed by paragraphs (f) and (g) of clause 7 regarding the definitions of "pilot plant" and "plant" in the research and development provisions are to apply in relation to expenditure incurred on or after 21 November 1987.

By subclause (3), the amendments proposed by paragraphs (f) and (g) of clause 7 regarding the definitions of 'pilot plant' and 'plant' in the research and development provisions are to apply in relation to expenditure incurred on or after 21 November 1987.

The amendment to section 74 of the Principal Act proposed by this clause will apply, by the operation of subclause (4) of the Bill, in assessments of the 1988-89 and subsequent income years.

The amendment to section 74A of the Principal Act proposed by this clause will apply, by the operation of subclause (5) of the Bill, to expenditure incurred after the day on which this Bill receives Royal Assent.

By subclause (6) the amendment proposed by clause 12 regarding transport allowance payments will apply in relation to expenses incurred by a taxpayer in the year of income commencing on 1 July 1988 or in a subsequent year of income.

By subclause (7) the car records amendment proposed by clause 13 will apply in respect of expenses incurred by a taxpayer in a year of income commencing on or after 1 July 1986.

By subclause (8) the amendments proposed by clause 14 to require retention of car records by taxpayers will apply, subject to this clause, in relation to an expense incurred by a taxpayer in the year of income commencing on 1 July 1989 or in a later year of income.

Subclause (9) modifies the operation of subclause (7) (see notes on that subclause). The application of subsection 82KZA(3) of the amended Act is restricted so as to only apply to notices requiring the production of documentary evidence served after this Bill receives the Royal Assent.

Subclause (10) sets 1 July 1989 as the date of commencement of the requirement to retain employment declarations until the second 1 July following a declaration ceasing to have effect (see notes on clause 26).

Clause 30: Transitional - car records lost or destroyed before 1 June 1989

If a taxpayer loses or destroys his or her car records on or before the date of introduction of this Bill, clause 30 allows a copy of the original car records, or a substitute document recording all of the details contained in the original car records to be treated, for the purposes of the substantiation rules, as if that copy or document were the original car records of the taxpayer.

This ensures that taxpayers who have destroyed their car records prior to introduction of this Bill will not be disadvantaged by the proposed amendments.

Clause 31: Transitional - modification of dividend imputation provisions resulting from reduction in the company tax rate

Clause 31 will modify the imputation of company tax provisions of the Principal Act insofar as they apply to company tax assessments for the 1988-89 year of income that are received before 1 July 1989.

By virtue of subparagraph (a)(ii) of the definition of 'applicable general company tax rate' in section 160APA of the Principal Act, the franking credit arising on the receipt by a company of its tax assessment for a year of income is calculated by reference to the general company tax rate for the year of tax to which the year of income relates. Thus, under the existing law if a company ceases operating during the 1988-89 income year and receives its assessment for that year of income on or before 30 June 1989, the franking credit arising on receipt of the assessment under section 160APN of the Principal Act is calculated by reference to the 39 per cent company tax rate (the rate for the 1989-90 year of tax).

At the same time the present structure of the law requires the amount of the franking rebate allowable to individual shareholders receiving franked dividends during the 1988-89 financial year to be calculated on the basis of the 49 per cent company tax rate as this is the applicable general company tax rate for that financial year (paragraph (c) of the definition of 'applicable general company tax rate').

A company receiving an early assessment of its 1988-89 income during that financial year (year of tax) could therefore receive franking credits based on the 39 per cent company tax rate and pay franked dividends during that financial year that would provide individual shareholders with franking rebates at the 49 per cent rate. Similarly, it could also provide its corporate shareholders with franking credits, inflated because they are at the 39 per cent rate, which could then be passed on to individual shareholders.

Clause 31 will avoid this outcome by reducing the amount of franking credits that would otherwise arise on the service of an original or amended company tax assessment for the 1988-89 year of income. The provision will apply to such assessments for the year of income commencing on 1 July 1988 which, because of the operation of subsection 6(2) of the Principal Act, includes assessments issued to companies which have adopted, or are deemed to have adopted, a substituted accounting period in lieu of the year of income commencing on 1 July 1988.

The franking credit arising from the service of an original assessment or an amended assessment increasing the company's tax liability for the 1988-89 year after 18 January 1989 (the date on which the arrangements were announced) and before 1 July 1989 will be calculated as if the applicable company tax rate was 49 per cent. Similarly, where a company receives a credit amendment for the 1988-89 year of income during the specified period, the franking debit will also be calculated on the basis of an applicable company tax rate of 49 per cent.

Clause 32: Amendment of assessments

Clause 32 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 purposes of giving effect to the amendments proposed by Part 2 of the Bill.

PART 3 - AMENDMENT OF THE INDUSTRY RESEARCH AND DEVELOPMENT ACT 1986

Clause 33: Principal Act

This clause facilitates references to the Industry Research and Development Act 1986 which, in this part, is referred to as the "Principal Act".

Clause 34: Certificate as to research and development activities

Section 39L of the Principal Act requires the Industry Research and Development Board, upon request by the Commissioner of Taxation, to give a certificate to the Commissioner stating whether particular activities are research and development (R & D) activities. The Board may also provide a certificate without prior request from the Commissioner.

The proposed amendment will allow the Board to make such a determination in respect of the activities of all taxpayers, and not only in respect of eligible companies. This change is a consequence of proposed amendments to allow all taxpayers access to deductions under Division 10D of the Income Tax Assessment Act 1936 for capital expenditure on buildings used for the purpose of carrying on R & D activities.

PART 4 - AMENDMENT OF THE SALES TAX (EXEMPTIONS AND CLASSIFICATIONS) ACT 1935

Clause 35: Principal Act

This clause facilitates references to the Sales Tax (Exemptions and Classifications) Act 1935 which, in this Part, is referred to as 'the Principal Act'.

Clause 36: Amendment of the First Schedule

Clause 36 will amend the First Schedule of the Principal Act by adding a new exemption item - item 154 - to exempt from sales tax shipping containers (described as 'receptacles' in item 154) where the containers:

·
are to be repeatedly used on ships to transport cargo by sea (paragraph (a)); and
·
are designed to be loaded from one mode of transport to another without the contents being repacked (for example, a packed container of this kind might be designed to be trucked from an overseas warehouse to a barge, taken by barge to a seaport, loaded to a ship and transported to an Australian port, unloaded from the ship onto a train, transferred from the train to a truck and finally delivered to a warehouse without being unpacked) (paragraph (b)); and
·
are of a kind used in containerised cargo transportation systems that have been developed to efficiently transport large quantities of cargo over long distances by designing containers, ships and handling operations to be fully integrated (paragraph (c)); and
·
have a minimum capacity of 14 cubic metres (paragraph (d)).

Clause 37: Application of amendment

By this clause the amendment made by this Part will apply in relation to transactions, acts or operations effected or done in relation to goods on or after 25 January 1989.

PART 5 - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 38: Principal Act

This clause facilitates references to the Taxation Administration Act 1953 which, in this Part, is referred to as the "Principal Act".

Clause 39: Setting Aside etc. of Conviction or Order on Application of Commissioner

Introductory Note

Clause 39 will insert a new Division - Division 6 comprising new section 13CA - in the Principal Act. New Division 6 will permit the Commissioner of Taxation to apply to a court of summary jurisdiction for an order to -

·
set aside a conviction or order; or
·
vary an order,

for a prescribed taxation offence in circumstances where the defendant did not appear in court at the original proceedings, whether or not the defendant entered a plea in his or her absence.

When a person is charged with having committed an offence against a taxation law, the person is served with a summons to appear before a court which has jurisdiction to hear the charge.

Persons charged in courts of summary jurisdiction with taxation offences may choose not to appear in court when the charge is being heard. Although a summons requires the person to whom it is directed to appear in court in answer to the charge, the courts of summary jurisdiction in the States and Territories have power to proceed to hear a charge against a person in that person's absence. In other words, when the defendant does not attend court in obedience to the summons, a court would normally proceed to hear the case ex parte.

Court procedures usually apply to enable a court of summary jurisdiction to rehear a case and rectify any anomalies which may have arisen at the original proceedings because the defendant was not present. However, relevant State legislation does not sufficiently provide procedures to correct all anomalies involving offences under Commonwealth taxation legislation. This has resulted in a significant number of applications to the Attorney-General's Department for the remission of court penalties imposed in accordance with Commonwealth taxation law. In these circumstances, in order to have a fine remitted or a pardon granted where a person is committed to goal for non-payment of a fine, the Attorney-General must place the matter before the Governor-General to exercise the Royal Prerogative of Mercy.

New Division 6 of the Principal Act will remove the need for the Governor-General to exercise the Royal Prerogative of Mercy to -

·
rectify cases where a conviction has been recorded, or an order made, due to an error or misunderstanding; or
·
deal with hardship cases,

where rehearing provisions under State or Territory law do not provide a satisfactory procedure for rectifying or dealing with these matters.

A detailed explanation of each of the subsections in new section 13CA follows.

New subsection (1), applicable where a person has been convicted of a prescribed taxation offence in his or her absence, will allow the Commissioner of Taxation to apply to a court of summary jurisdiction (the 'quashing court') for an order to either have the -

·
conviction or order set aside (paragraph (a)); or
·
the penalty reduced (paragraph (b)).

Subsection (1) empowers the Commissioner to make an application notwithstanding that the defendant, in his or her absence at the original proceedings which resulted in the conviction, entered a plea where State or Territory court procedures permit a plea to be made in the defendant's absence.

Subsection (1) is expressed to operate before or after the commencement of section 13CA. This will enable the Commissioner of Taxation to apply to a court to have a matter reheard notwithstanding that a defendant was convicted of a prescribed taxation offence prior to Division 6 of the Principal Act commencing to operate by virtue of subclause 2(1) of the Bill. By subclause 2(1) Division 6 will commence on the date of Royal Assent.

The expression 'prescribed taxation offence' is defined in section 8A of the Principal Act. It means, broadly, a taxation offence (also a defined term in section 8A) that is committed by a natural person and punishable by fine and not imprisonment, or a taxation offence committed by a corporation.

New subsection (2) will enable the Commissioner of Taxation not only to make an application to the convicting court (paragraph (a)), i.e., the court in which the defendant was originally convicted, but also to any other court of summary jurisdiction that would have had jurisdiction to make the conviction or order (paragraph (b)). In addition, this subsection requires that any application made to a court of summary jurisdiction by the Commissioner be in written form. Paragraph 26(d) of the Acts Interpretation Act 1901 contains a definition of a 'court of summary jurisdiction' for the purposes of Commonwealth law. Courts of summary jurisdiction of the States have been given jurisdiction to hear matters arising under laws made by the Commonwealth by virtue of Section 39 of the Judiciary Act 1903.

Under subsection (3), the appropriate official of the court in which the application is made for rehearing is required to notify other parties to the application.

Subsection (4) establishes that all persons who were party to the original proceedings are to be parties to the application to have the decision arising out of those proceedings set aside. This will ensure, for example, that the defendant in the original proceedings will be a party to the rehearing application and will be able to draw to the court's attention any matters relevant to the application for rehearing.

Subsection (5) sets out the circumstances in which the quashing court is required to set aside the conviction or order, or vary an order, in response to the application under subsection (1). The discretion of the court is expressed in broad terms to cover the large variety of circumstances that may make it desirable for a case to be reopened. Paragraph (a) relates to circumstances in existence at the time of the conviction. That is, where a conviction was recorded or an order made that was based on an error of law or of fact, or it would otherwise be contrary to the interests of justice to -

·
allow the conviction or order to stand; or
·
not vary the order.

Subparagraph (5)(a)(i) gives the court a discretion to completely set aside a conviction or order whereas subparagraph (5)(a)(ii) allows scope to deal with a situation where the offence is proven but it is appropriate that a lesser pecuniary penalty (fine) be imposed. Paragraph (b) relates to special circumstances and is limited to the question of the penalty imposed and not the issue of guilt. This paragraph would cover circumstances where the defendant in the original proceedings that resulted in the conviction or order can show undue hardship (financial or otherwise) as would justify setting aside the order completely (subparagraph (5)(b)(i)) or varying the order so as to reduce the pecuniary penalty (subparagraph (5)(b)(ii)). By subsection (5) a court may also (in addition to setting aside a conviction or order, or varying an order) exercise its discretion in the awarding of costs.

Subsection (6) provides that if the application is successful, in addition to setting aside the conviction or order, or varying the order, the quashing court must also set aside any warrant issued in consequence of the conviction. This will ensure that a warrant for commitment to prison is set aside in circumstances where such a warrant was issued because the defendant failed to pay the fine which was imposed at the original proceedings in the convicting court.

Subsection (7) requires a quashing court that sets aside the conviction or order, or varies an order, made by another court to notify that other court forthwith to ensure that action to enforce the original conviction is not proceeded with.

By subsection (8), a reference to a conviction in new section 13CA includes a reference to an order made under section 19B of the Crimes Act 1914. Broadly, section 19B gives discretion to a court that is satisfied that a charge is proved to dismiss the charge or discharge the person without proceeding to conviction upon the person entering into a good behaviour bond.

Subsection (9) provides that the setting aside of a conviction or order will operate as a bar to any legal proceedings in any court (other than proceedings on appeal to a higher court) for the same matter against the defendant. Accordingly, the right to make an application under subsection (1) will not be available to allow the informant to set aside a conviction so as to re-commence proceedings against the defendant.

Subsection (10) has the effect that the Commonwealth law expressed in new section 13CA will operate in addition to, and not in derogation of, any other law of the Commonwealth or the law of a State or Territory. The Commonwealth law will not therefore override any particular State or Territory law dealing with the rehearing of matters in courts of summary jurisdiction when exercising federal jurisdiction. In other words, the new system will operate in tandem with existing laws already in operation in a State or Territory.


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