View full documentView full document Previous section | Next section
House of Representatives

Taxation Laws Amendment Bill 1985

Taxation Laws Amendment Act 1985

Explanatory Memorandum

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

General outline

The Taxation Laws Amendment Bill 1985 will amend the Income Tax Assessment Act:

·
to abolish the rule (known as the "30/20 rule") which requires life assurance companies and two categories of superannuation funds to hold at least 30 per cent of their assets in public securities, including at least 20 per cent in Commonwealth securities, in order to be eligible for special tax concessions (proposal announced on 10 September 1984);
·
to counter further tax avoidance schemes of the "expenditure recoupment" type;
·
to phase in personal income tax on Christmas Island from the commencement of the 1985-86 income year and to introduce full company tax and Medicare levy from the same date (proposal announced on 10 April 1985);
·
to permit the Commissioner of Taxation to make available to the Australian Statistician for statistical purposes certain information in respect of business taxpayers;
·
to achieve consistency between the pay-as-you-earn (PAYE) and prescribed payments system (PPS) provisions by extending the objection and appeal rights available in relation to certain PPS penalties to corresponding penalties under the PAYE provisions;
·
to correct a drafting error in the provisions extending eligibility to the dependent spouse rebate to de facto couples that has the unintended effect of denying a part year entitlement to a daughter-housekeeper rebate where the taxpayer contributes to the maintenance of a spouse (whether legal or de facto) during some other part of the year of income;
·
to exclude payments of social security family income supplement from the separate net income of a dependant for concessional rebate purposes; and
·
to make a number of formal amendments to reflect changes in the machinery of Government; to effect some minor drafting changes and to repeal redundant provisions relating to Commonwealth and State public servants appointed to taxation Boards of Review,

and the Taxation (Interest on Overpayments) Act:

·
to provide for the payment of interest on certain PPS and PAYE penalties that are refunded as a result of a successful objection or appeal.

Financial impact

The potential revenue gain arising from the extension of the "expenditure recoupment" provisions of the income tax law to further schemes of the recoupment type is estimated at $25m.

Revenue from the introduction of income tax and Medicare levy on Christmas Island (estimated at $1m for 1985-86, $4.4m for 1986-87, $6.4m for 1987-88 and $6m for 1988-89) will be offset by the costs of other aspects of the Island integration package.

The other measures contained in this Bill are expected to have little direct effect on revenue, although the provision of further tax information to the Australian Statistician will give rise to some administrative costs (estimated at $0.4m in a full year) for the Australian Taxation Office and the Australian Bureau of Statistics. The beneficial effects on statistical reporting resulting from this measure are, however, expected to more than offset those administrative costs.

Main features

The main features of this Bill are as follows:

Abolition of 30/20 rule (Clauses 7, 10, 11, 13, 15 to 27, 29 and 38)

The Bill proposes the abolition with effect from 10 September 1984 (the date of announcement of the proposal) of the rule under which life assurance companies and two categories of superannuation funds are required to hold at least 30 per cent of their assets in public securities including at least 20 per cent in Commonwealth securities to enable them to qualify for special income tax concessions. This rule has become known as the 30/20 rule.

In relation to superannuation funds the 30/20 rule is a requirement to be met by those funds in order for their investment income to qualify for exemption from income tax by virtue of either paragraph 23(ja) or section 23F of the Income Tax Assessment Act. Broadly, paragraph 23(ja) provides for exemption of the income of provident, benefit, superannuation and retirement funds established for the benefit of non-employees, while section 23F exempts the income of employee funds. The Bill will remove this requirement for exemption in respect of both types of fund.

The 30/20 rule has three applications in relation to the calculation of tax payable by life assurance companies. First, life assurance companies that satisfy the 30/20 rule are exempt from income tax on investment income attributable to superannuation and certain other eligible policies. Second, the inter-corporate dividend rebate that would otherwise be allowable in respect of assessable dividends received by a life assurance company may be modified in certain circumstances where the company does not comply with the 30/20 rule.

The third application relates to a special deduction based on a life assurance company's calculated liabilities (broadly, a specified percentage of an actuarial valuation of the company's liabilities, with special rules applying where an actuarial valuation is not made). The basic deduction is 1 per cent of an amount calculated by multiplying the total of the calculated liabilities by the ratio which the value of the assets producing assessable income bears to the value of the total assets of the company. However, the basic deduction is increased on a sliding scale for over-compliance with the 30/20 rule and reduced on a sliding scale (to no less than 0.75 per cent) for under-compliance.

The amendments proposed by this Bill will therefore have the following effects in relation to life assurance companies:

·
tax exemption in respect of investment income attributable to superannuation and other eligible policies will apply without the need to observe the 30/20 rule;
·
the modification of the inter-corporate dividend rebate in respect of assessable dividends received by a life assurance company not observing the 30/20 rule will no longer apply; and
·
the deduction allowable on the basis of a life assurance company's calculated liabilities will be 1 per cent of the relevant amount of the liabilities, irrespective of the level of investment in public or Commonwealth securities.

For the purposes of the calculated liabilities deduction, transitional rules will apply in respect of the year of income of a life assurance company in which 11 September 1984 occurred. By allowing a deduction that is a composite of the old and new amounts these rules will ensure that the abolition of the 30/20 rule does not result in the retrospective withdrawal of an increased deduction where a company, at 10 September 1984, had public and Commonwealth securities in excess of the amount necessary to obtain the basic deduction. The other amendments will apply for the whole of the income year in which 11 September 1984 occurred (as well as in subsequent years) irrespective of whether the 30/20 rule was complied with during the first part of the year.

Expenditure recoupment schemes of tax avoidance (Clauses 12, 14 and 38)

Existing provisions of the Income Tax Assessment Act operate to deny a deduction (or rebate) where certain specified expenditure is incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date under which the taxpayer (or an associate) receives a compensatory benefit the value of which, together with the tax saving sought in respect of the expenditure, effectively recoups the taxpayer for the expenditure so that no real loss or outgoing is incurred.

Amendments proposed by this Bill will extend those existing provisions to counter further tax avoidance schemes of the expenditure recoupment type. With the further schemes effectively recouped expenditure is formally incurred -

·
in respect of a unit of industrial property to which special deduction provisions of the Assessment Act apply; and
·
by way of a loss or outgoing to which the general deduction provision of the Act applies.

The proposed amendments will apply to relevant expenditure incurred after 24 September 1978 under a tax avoidance agreement entered into after that date; that being the date on which the former Treasurer announced legislative action against such schemes and said that any future legislation dealing with variants of the schemes would be effective from that date. However, the amendments will not apply in relation to deductions obtained under schemes entered into after 27 May 1981, the date of effect of the general anti-avoidance provisions of Part IVA of the Assessment Act.

An existing provision of the Assessment Act that precludes the carry-forward of losses generated under "expenditure recoupment" tax avoidance schemes entered into on or before 24 September 1978 will also be amended to reflect the measures proposed in this Bill.

Introduction of income tax on Christmas Island (Clauses 5, 6, 9, 30, 34, 35, 36 and 38)

As an element in the package of measures to integrate Christmas Island with mainland Australia, the Bill will amend the Income Tax Assessment Act to phase in personal income tax on the Island from the commencement of the 1985-86 income year, and to introduce full Medicare levy and company tax there with effect from the same date.

The present income tax law extends to the Territories of Christmas Island, Norfolk Island and Cocos (Keeling) Islands, and has effect as if they were part of Australia and their residents were residents of Australia. However, under Division 1A of Part III of the Assessment Act, an individual genuinely resident in one of those Territories - called "a prescribed Territory"' - is exempt from income tax on income derived from sources in any one of the Territories or from sources otherwise outside mainland Australia. Such income is also exempt from tax when derived by a Territory company (a company incorporated in one of the Territories and, broadly, wholly owned and controlled by Territory residents), and by a Territory trust (a trust established in one of the Territories and having only Territory residents as beneficiaries). For these purposes, the three Territories are effectively treated as though they were one Territory separate and distinct from mainland Australia. The practical effect of the present provisions is to subject individuals, companies and trusts genuinely resident in any one of the Territories to tax only on income derived from mainland sources.

The Bill will amend Division 1A to exclude Christmas Island from its scope, thus leaving only Norfolk Island and Cocos (Keeling) Islands as prescribed Territories for purposes of that Division. In other words, Christmas Island will in future be regarded as part of mainland Australia for all purposes of the income tax law, including the operation of Division 1A.

By this measure, Christmas Island residents will no longer qualify for exemption from tax on income from sources in any one of the three Territories or from sources outside Australia. However, such income will be subject to the personal income tax (but not Medicare or company tax) phasing arrangements that are discussed below and are to apply for the first three income years, and to full mainland personal income tax only from commencement of the 1988-89 income year. Income derived from mainland sources by all Island residents will continue to be subject to full Australian income tax.

As part of these new arrangements, the Bill also proposes measures that, subject to the phasing arrangements mentioned above, will -

·
include, with effect from 1 July 1985, Christmas Island in Zone A of the income tax law so that Island resident individuals will be eligible for the special zone rebate;
·
ensure that Christmas Island and ex-Australian source long service leave payments and superannuation, termination of employment and kindred payments made to Christmas Island residents on or after 1 July 1985 on retirement from or termination of employment -

·.
to the extent that such payments relate to periods of service or superannuation fund membership after that date - will be broadly subject to existing mainland taxing laws for payments of that nature;
·.
to the extent that such payments relate to relevant periods or membership before that date - will remain exempt from tax.

The personal income tax phasing arrangements that are to apply to Christmas Island residents will be given effect by a special rebate of tax which is also proposed by this Bill. This rebate will ensure that, for 1985-86, 1986-87 and 1987- 88 years of income, Christmas Island residents will only be liable for 25 per cent, 50 per cent and 75 per cent respectively of the personal income tax (not including the Medicare levy) that would otherwise be payable on income which was previously exempt from tax. In practical terms, income tax liability during the phasing years will be determined, in the usual way on total taxable income with the allowance of rebates to which the taxpayer is entitled. The tax liability so determined to the extent that it relates to previously exempt income, will then be reduced by the special rebate to the appropriate percentage for the particular phasing year. In cases where a Christmas Island resident derives both mainland source income and previously exempt income, the latter will be treated as the final component of taxable income attracting tax at the higher marginal rates. This approach will provide the greatest benefit to Island resident taxpayers.

The removal of Christmas Island from the scope of Division 1A of the Income Tax Assessment Act will also have consequential effects for Norfolk Island and Cocos (Keeling) Islands residents. For example, such residents will in future be liable to Australian tax on income derived from sources in Christmas Island (but subject to the phasing arrangements mentioned earlier) in the same way as they are now liable to tax on income derived from sources on the mainland. The amendments proposed by this Bill will not, however, affect the exemptions presently available to residents of Norfolk Island and Cocos (Keeling) Islands in respect of income from sources in either of those Territories or from sources outside mainland Australia.

Disclosure of information to Australian Statistician (Clause 4)

The Bill will also amend the secrecy provisions of the Income Tax Assessment Act to authorise the Commissioner of Taxation to make available to the Australian Statistician, for the purposes of the Census and Statistics Act 1905, certain information in respect of business taxpayers. The information includes relevant information that is presently permitted to be supplied in respect of taxpayers who are employers for purposes of the pay-as-you-earn provisions of the income tax law, as well as information that the Statistician requires for or in connection with the conduct of periodic industry surveys and the compilation of the Australian national accounts.

Objection and appeal rights in relation to certain penalties (Clauses 31 to 33 and 38)

Amendments proposed by the Bill will provide that decisions by the Commissioner of Taxation on the remission of "culpability penalties" imposed for breaches of the pay-as- you-earn (PAYE) provisions of the income tax law (that is, statutory additional tax penalties imposed as a flat percentage of, for example, amounts deducted by an employer from employees' wages but not remitted to the Commissioner by the due date) are subject to objection and appeal rights. This will correct an oversight in the Taxation Laws Amendment Act 1984 which introduced the PAYE statutory additional tax penalties.

The amendments will also maintain the principle that objection and appeal rights do not extend to remission decisions in relation to the 20% per annum late payment penalties imposed for breaches of either the PAYE or the prescribed payments provisions of the law.

Rebates for dependants (Clauses 28 and 38)

The Bill will correct a drafting error in one of the provisions of the income tax law which gave effect to the 1984-85 Budget proposal to recognise de facto marriages for purposes of the dependent spouse rebate.

At the time those amendments were made, it was also intended that, amongst other things, a daughter-housekeeper rebate would not be allowable for any period that a taxpayer contributed to the maintenance of a spouse (whether legal or de facto). However, the provision concerned - sub-section 159J(5D) of the Income Tax Assessment Act - was drafted in such a way that it effectively precludes a partial daughter- housekeeper rebate claim not only for the period of an income year during which a taxpayer contributes to the maintenance of a spouse, but also for any other period of the year.

The measure to correct this error is to operate with effect from 1 July 1984 which is the operative date of the provision it amends.

The Bill will also exclude payments of social security family income supplement from the definition of separate net income for purposes of the dependant rebate provisions of the income tax law.

Family income supplement is an income-tested allowance payable to low income families with children. It is exempt from income tax in the hands of the recipient. With effect from May 1984, the supplement has been payable to the recipient of family allowances - generally the mother - rather than to the primary breadwinner. As the law now stands, the supplement is not excluded from the separate net income test for purposes of the dependant rebates and this situation would result in a reduction in the amount of the rebate that might otherwise be allowable to a taxpayer for a dependent spouse to whom a family income supplement is paid.

The amendment proposed in the Bill will ensure this outcome is avoided and will be effective from the date family income supplement first became payable to the recipient of family allowances, that is 1 May 1984.

Interest on refunded PPS and PAYE penalties (Clauses 41 to 43)

The Bill will include those prescribed payments and pay-as- you-earn penalties that are subject to objection and appeal rights in the categories of taxes in respect of which interest is payable by the Commissioner of Taxation where refunds are made following a successful objection or appeal.

Other amendments (Clause 37)

The Schedule to the Bill proposes a number of formal amendments of the Income Tax Assessment Act. Most of these amendments reflect changes in Departmental and Ministerial titles arising out of the changes in the machinery of Government. Others are of a minor drafting nature.

Another amendment to be made by the Schedule will repeal a section relating to the rights of Commonwealth and State public servants appointed to taxation Boards of Review. The section now being repealed has been made redundant by subsequent legislation that now provides those rights.

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

Notes on Clauses

PART I - PRELIMINARY

Clause 1: Short title

By this clause the amending Act is to be cited as the Taxation Laws Amendment Act 1985.

Clause 2: Commencement

In terms of clause 2 the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub- section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after Assent.

PART II - AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 3: Principal Act

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

Clause 4: Officers to observe secrecy

Clause 4 of the Bill proposes two amendments of the secrecy provisions of the income tax law. Paragraph (a) of clause 4 will correct a technical deficiency in sub-section 16(2). Paragraph (b) will omit existing paragraph 16(4)(ga) of the Principal Act and substitute a revised paragraph, the purpose of which is to authorise the Commissioner of Taxation to communicate to the Australian Statistician, for the purposes of the Census and Statistics Act 1905, some further information relating to business taxpayers.

The technical amendment proposed by paragraph (a) of clause 4 will make it clear that the information which - under sub- section 16(2) of the Principal Act - an officer, unless otherwise specifically authorised, is prohibited from divulging is any information in respect of the income tax affairs of another person that was disclosed or obtained under the provisions of the Principal Act or a previous Commonwealth income tax law and was acquired by that officer during his or her appointment or employment by the Commonwealth. The existing reference in sub-section 16(2) to "such information so acquired" is intended to refer back to the definition of "officer" in sub-section 16(1), but the insertion of sub-section 16(1A) and of a further definition in sub-section 16(1) has made this obscure. The amendment will overcome this obscurity.

Existing paragraph 16(4)(ga) authorises the Commissioner to provide the Australian Statistician with an employer's name and address (sub-paragraph (i)) and industry description (sub-paragraph (ii)), and the number of male and female employees of the employer (sub-paragraph (iii)). Under new paragraph 16(4)(ga) to be inserted by paragraph (b) of clause 4, the Commissioner will continue to be authorised to supply that information and will also be able to provide similar details in respect of business taxpayers generally. In addition, the Commissioner will be authorised to provide information relating to the gross receipts of a business that the Statistician requires for or in connection with the conduct of periodic industry surveys, and other information required by the Statistician for or in connection with the compilation of the Australian national accounts.

Sub-sub-paragraphs (i)(A), (B) and (C) of new paragraph 16(4)(ga) applicable in relation to employers, will effectively re-enact existing paragraph 16(4)(ga).

Sub-sub-paragraphs (ii)(A) and (B) of new paragraph 16(4)(ga), applicable in relation to business persons (which may include employers), will enable the Commissioner to supply the Australian Statistician with :

·
the name and address of a business person (sub-sub- paragraph (ii)(A)); and
·
a description of the business together with, where it is administratively practicable to do so, the name under which the business trades (sub-sub-paragraph (ii)(B)).

Sub-sub-paragraph 16(4)(ga)(ii)(C) will permit the Commissioner to communicate information in relation to the size of a business, in terms of gross business receipts, that the Statistician requires for or in connection with statistical collections conducted from time to time for the purpose of providing statistics in relation to those industries in which the business is engaged.

By proposed sub-sub-paragraph (ii)(D) of new paragraph 16(4)(ga) the Commissioner is to be authorised to provide selected statistical data relating to a business that is required by the Statistician for or in connection with the compilation of the Australian national accounts.

Paragraph (c) of clause 4 will insert new sub-section 16(4AA) to define certain terms used in new paragraph 16(4)(ga) :

'business person' means a person who is carrying on a business alone, in partnership or otherwise. Business persons will thus include sole traders, as well as partnerships, trustees and companies carrying on business.
'description', in relation to a business, is defined to include a description or specification of a business category. This will mean that where, for statistical purposes, a business has been allocated a digital industry code as a means of identifying its principal activity, such a digital coding can be communicated to the Statistician.
'employer' means a person who is an employer within the meaning of Division 2 of Part VI of the Principal Act - that is, a person who pays or is liable to pay salary or wages.

Clauses 5-6, 9, 30, 34-36 and 38 : Introduction of income tax on Christmas Island

Introductory note

By virtue of section 7A of the Principal Act, the present income tax law applies as if the three Territories of Norfolk, Cocos (keeling) and Christmas Islands were part of Australia. The primary effect of that section is that residents of those Territories are treated as if they were residents of Australia subject to tax on the same basis as other Australian residents. Another primary effect of section 7A is that Territory source income is treated as if it had a source in Australia. (A consequential effect of treating the three Territories as if they were part of Australia is that dividend and interest withholding tax applies to payments from the Territories, in the same way as it applies to payments from Australia. In addition sections 129 and 142 of the Principal Act apply to shipping freights and insurance contracts, respectively, as they apply to Australia.)

The basic exposure of Island residents to Australian tax is, however, modified by the operation of Division 1A of Part III of the Principal Act. That Division - comprising sections 24B to 24N - confers a special exemption from tax on income derived in the circumstances specified in the Division by individuals and entities who are residents of the Territories as also defined in the relevant provisions. In broad terms, the exemptions apply to income derived from sources in any one of the Territories or from sources otherwise outside Australia by -

·
a "Territory resident" - an individual ordinarily resident in one of the Territories and not otherwise resident in Australia;
·
a "Territory company" - a company incorporated and managed in one of the Territories and wholly owned and controlled by Territory residents;
·
a "Territory trust" - a trust established in one of the Territories and accumulating income for, or having as beneficiaries, only Territory residents.

An individual who does not qualify as a Territory resident, but who goes to one of the Territories for six months or more is also exempt from tax under Division 1A on income from an office or employment, the duties of which are performed there.

Although Division 1A treats each of the three Territories as a separate "prescribed Territory", in several aspects of its practical application the Division operates as though they were one Territory separate and distinct from mainland Australia, e.g. a company incorporated, managed and controlled in Norfolk Island is a Territory company even though it is so managed and controlled by a resident of say, Cocos (Keeling) Islands.

By the operation of the foregoing provisions individuals, companies and trusts genuinely resident in a prescribed Territory are in practical terms subject to tax only on income derived from sources in mainland Australia.

As part of the package of measures to integrate Christmas Island with the mainland, income tax is to be introduced on the Island with effect from 1 July 1985. In the case of personal income tax, its introduction is to be subject to phasing arrangements under which, in each of the 1985-86, 1986-87 and 1987-88 years of income, Christmas Island residents will only be liable for 25 percent, 50 percent and 75 percent respectively of the personal income tax that would otherwise be payable on income which was previously exempt from tax. Full mainland personal income tax will apply from commencement of the 1988-89 income year. Income derived from mainland sources by Christmas Island residents will continue to be subject to full Australian personal income tax.

Full company tax and Medicare levy is also to be introduced on Christmas Island from the commencement of the 1985-86 income year.

The Bill provides (in clause 5) the basic amendment to achieve the above result by proposing the exclusion of Christmas Island from the scope of Division 1A. Other related measures proposed by the Bill will -

·
modify the application of section 26AD of the Principal Act to avoid any element of retrospectivity for Christmas Island residents receiving lump sum long service leave payments on and after 1 July 1985 (clause 6);
·
similarly modify the application of Subdivision AA of Division 2 of Part III of the Principal Act relating to superannuation termination of employment and kindred payments made to Island residents after that date (clause 9);
·
provide a special rebate of tax to give effect to the phasing arrangements mentioned above (clause 30);
·
modify the provisions of Part VIIB of the Principal Act to ensure that, with effect from 1 July 1985, Christmas Island residents are no longer exempt from Medicare levy (clauses 34 and 35);
·
include, also with effect from 1 July 1985, Christmas Island in Zone A of the income tax law so that Island resident individuals will be eligible for the special zone rebate from that date (clauses 36 and 38).

The operation of the above provisions is explained in the notes on each of the clauses concerned. As appropriate, those notes also discuss the consequential effects of the measures for Norfolk and Cocos (Keeling) Island residents.

Clause 5: Application of Division

This clause will insert a new section - section 24BA - in Division 1A of Part III of the Principal Act to effectively exclude the Territory of Christmas Island from the scope of that Division with effect from 1 July 1985. This will facilitate the introduction of personal income tax on Christmas Island from the commencement of the 1985-86 income year (subject to the phasing arrangements proposed by clause 30 of the Bill - see notes on that clause), and the introduction of full Medicare levy and company tax on the Island with effect from the same date.

Paragraph 24BA(a) will effectively substitute, with effect from 1 July 1985, a new definition of "prescribed Territory" in sub-section 24B(1) of the Principal Act which omits the Territory of Christmas Island. In other words, from that date, Division 1A will apply only in relation to the Territories of Norfolk and Cocos (Keeling) Islands, and Christmas Island will in future be regarded as a part of mainland Australia for all purposes of the income tax law, including the operation of Division 1A.

The practical effect of this change is that a Christmas Island resident individual, as well as a company or trust established on the Island that would qualify as a Territory company or Territory trust under the present law, will no longer qualify for exemption from tax on income derived from sources in any one of the three Territories or from sources outside Australia. An individual not ordinarily resident in Christmas Island but who goes there to work will also cease to be exempt from tax under Division 1A on income from an office or employment the duties of which are performed on the Island. However, the tax liability of individuals and certain trustees on income that was previously exempt from tax will be subject to phasing arrangements that are to apply during the 1985-86, 1986-87 and 1987-88 income years - see notes on clause 30 of the Bill. Full tax will apply to such income from commencement of the 1988-89 income year. Income derived from mainland sources by all Christmas Island residents will of course continue to be subject to full Australian tax. Where a Christmas Island resident moves to the mainland during the phasing years and so becomes a mainland resident, any income (whatever its source) subsequently derived will as is the case now, be subject to full rates of Australian tax.

The removal of Christmas Island from the scope of Division 1A of the Principal Act will have consequential effects for residents of Norfolk and Cocos (Keeling) Islands. Residents of these Territories will in future be liable to Australian tax on any income derived from sources in Christmas Island in the same way as they are presently liable to tax on income derived from sources in the mainland. The same personal income tax phasing arrangements mentioned earlier will, however, apply in relation to the Christmas Island source income.

A further consequential effect will be that a Territory company incorporated in Norfolk or Cocos (Keeling) Islands, or a Territory trust established in either of these Islands will cease to be a Territory company or Territory trust should a Christmas Island resident be a shareholder of, or in control of, such a company, or be a beneficiary of such a trust. The company or trust will, in those circumstances, cease to be exempt from income tax on income derived from sources in any one of the three Territories or from sources otherwise outside Australia.

Apart from these possible consequences, the exemptions from Australian tax presently available to residents of Norfolk and Cocos (Keeling) Islands in respect of income derived from sources in either of those two Territories or from sources otherwise outside Australia will remain.

Paragraph 24BA(b) proposes, in its practical application, the substitution, also with effect from 1 July 1985, of a new sub-section 24L(5) of the Principal Act which is relevant to the determination of the source of interest or royalties derived by Territory residents.

Section 24L of the Principal Act operates to preclude the exemptions provided by Division 1A applying to interest or royalties derived by a resident of a prescribed Territory, where the interest or royalties are paid as an expense of an Australian business, by deeming such payments not to have a source in a Territory or otherwise outside Australia. For this purpose, existing sub-section 24L(5) restricts the meaning of the terms "Australia", "resident" and "non- resident" (for the purposes of sub-sections (1), (3), (4), (4A), (4B) and (4C) of section 24L only) to what might be described as their normal meaning, that is, to the meaning they would have if the income tax law were not made to apply as if the three Territories were part of Australia. The effect is that, for the purposes of section 24L, the three Territories are excluded from the meaning of "Australia", when it is used in a geographical sense, and persons who would not be treated as "residents" or "non-residents" apart from section 7A of the Principal Act are excluded from the scope of these terms.

The amended definition proposed by paragraph (b) reflects the change of status that is to apply to Christmas Island with effect from 1 July 1985, that is, it will cease to be a prescribed Territory and will be regarded as part of mainland Australia for all purposes of the income tax law. As a result of this change, interest and royalties derived by Norfolk and Cocos (Keeling) Island residents will no longer have a Territory source and thus be exempt from Australian tax if paid as an expense of a Christmas Island business - e.g., if paid as an expense of a permanent establishment in Christmas Island of a Norfolk Island company. This equates with the way in which such income is treated under the present law if paid as an expense of an Australian mainland business.

Clause 6: Amounts received on retirement or termination of employment in lieu of long service leave

Clause 6 will insert new sub-section (12) in section 26AD of the Principal Act and is associated with the amendment to be effected by clause 5 to exclude Christmas Island from the scope of Division 1A of that Act.

Section 26AD basically operates to include in a taxpayer's assessable income so much of an unused long service leave lump sum payment made in consequence of retirement from, or the termination of, an office or employment as is attributable to a period of service after 15 August 1978. A rebate of tax is allowed, where necessary, to ensure that the tax imposed on the amount so included is no greater than the standard rate of tax - 30 per cent in 1984-85. Any portion of the long service leave lump sum payment that is attributable to a period of service before 16 August 1978 is included in assessable income only to the extent of 5 per cent of that amount.

These mainland taxing rules extend to relevant lump sum payments received by Christmas Island residents from Australian sources, but not to those received from Island or ex-Australian sources which are presently exempt from tax by the operation of Division 1A. The amendment of that Division proposed by clause 5 of the Bill will result in the latter payments being exposed to tax under section 26AD.

To avoid any element of retrospectivity in this area, new sub-section 26AD(12), will modify the basic mainland taxing rules outlined above in their future application to unused long service leave lump sum payments made on and after 1 July 1985 from Christmas Island and ex-Australian sources by Christmas Island residents. The modification to be effected by the sub-section will ensure that, subject to the overall phasing arrangements proposed by clause 30 of the Bill, such payments will only be subject to the mainland taxing rules to the extent they relate to periods of service on and after 1 July 1985 and that, to the extent they relate to periods of service before that date, will remain exempt from tax.

Paragraph 26AD(12)(a) is a drafting measure to identify whether, by the application of the existing provisions of section 26AD of the Principal Act, an amount would be included in the assessable income of a taxpayer in respect of a lump sum payment for unused long service leave.

If an amount would have been so included in assessable income, it will then be necessary, by the terms of paragraph 26AD(12)(b), to determine whether any part of that amount would have been exempt from income tax if the Territory of Christmas Island had not been excluded from the scope of Division 1A by the operation of section 24BA - see notes on clause 5.

Where it is established that, but for section 24BA, Division 1A would have operated to exempt from tax the whole or a part of the lump sum amount, the sub-section will apply the mainland taxing rules to the whole of the lump sum payment as if -

·
the references in section 26AD to 15 August 1978 were references to 30 June 1985 so that, in practical effect, only the proportion of the payment referable to service after the latter date will be subject to the taxing rules contained in the section (paragraph (c)); and
·
sub-section 26AD(5) - which includes in assessable income 5 per cent of the proportion of a lump sum long service leave payment that is attributable to pre-16 August 1978 service - were omitted with the result that, in conjunction with paragraph (c), the proportion attributable to pre-1 July 1985 service will be exempt from tax (paragraph (d)).

Clause 7: Assessable income to include value of benefits received from or in connection with certain superannuation funds

Section 26AF of the Principal Act includes in the assessable income of a taxpayer the value of benefits received from a superannuation fund to which paragraph 23(ja) or section 23FB applies, where those benefits are received otherwise than in accordance with the approved terms and conditions of the fund. For the purposes of section 26AF, a paragraph 23(ja) superannuation fund is defined by reference to, inter alia, section 121C of the Principal Act which is to be repealed by clause 21 of this Bill as a result of the abolition of the 30/20 rule. Clause 7 will amend the definition of "paragraph 23(ja) fund" in sub-section 26AF(3) of the Principal Act to provide that the reference to section 121C is a reference to the section as in force before the amendment proposed by clause 21.

Clause 8: Assessable income to include value of certain benefits received from or in connection with section 23F superannuation funds

Section 26AFA of the Principal Act provides for the assessment in full of amounts received under arrangements (known as "cherry picker" schemes) which exploit superannuation funds, the income of which is exempt from tax under section 23F of that Act.

Clause 8 will correct a drafting oversight by removing the reference in sub-section 26AFA(1) to paragraph 26(d) of the Principal Act. Paragraph 26(d) was repealed by the Income Tax Assessment Amendment Act (No.3) 1984.

Clause 9: Interpretation

Clause 9 will insert new sub-section (14) in section 27A of Subdivision AA of Division 2 of Part III of the Principal Act to modify the application of mainland taxing rules for superannuation, termination of employment and kindred payments where such payments are made after 30 June 1985 to a resident of Christmas Island from Christmas Island or ex- Australian sources. This clause is also associated with the amendment to be effected by clause 5 and, like clause 6, is also designed to avoid retrospective application of mainland taxing rules applicable to the payments concerned.

In general terms, Subdivision AA - comprising sections 27A to 27J - provides a comprehensive set of rules for the taxation of retirement and kindred payments (defined in sub-section 27A(1) of the Principal Act as "'eligible termination payments") made on or after 1 July 1983, annuities or superannuation pensions derived on or after 1 July 1983 and payments of a supplement to an annuity or superannuation pension made after 30 May 1984.

An eligible termination payment includes the following types of payments -

·
payments from superannuation funds whether or not on retirement through age or invalidity or upon other cessation of employment;
·
"golden handshakes" and other severance payments;
·
contractual termination payments;
·
payments for unused sick leave;
·
payments as compensation for loss of office or employment;
·
payments in respect of full or partial commutation of pensions and most classes of annuity;
·
payments of residual capital values of pensions and annuities; and
·
payments from approved deposit funds.

Where an eligible termination payment is made to a taxpayer on or after 1 July 1983, sections 27B and 27C of the Principal Act apply to determine whether, and to what extent, the payment is to be included in assessable income. Broadly, that part of an eligible termination payment that is referable to periods of service or fund membership after 30 June 1983 is included in a taxpayer's assessable income in full. However, the maximum rate of tax payable on amounts so included is limited to 30 per cent and, in the case of payments received at age 55 or later, the first $50,000 of the fully assessable amount is taxed at a rate not exceeding 15 per cent. That part of an eligible termination payment that is referable to periods of service or fund membership before 1 July 1983 is included in the taxpayer's assessable income only to the extent of 5 per cent of that amount and is subject to tax at ordinary marginal rates.

The other principal function of Subdivision AA is performed by section 27H. That section operates broadly to include in a taxpayer's assessable income the amount of any annuity or superannuation pension first payable to the taxpayer on or after 1 July 1983 reduced by the amount of any undeducted purchase price which is attributable to the annuity on pension payments.

Annuities or superannuation pensions first payable before 1 July 1983 are assessed in accordance with former section 26AA of the Principal Act, which provided for the inclusion in a taxpayer's assessable income of the amount of any annuity received excluding, in the case of a purchased annuity, that part of the annuity which represented the undeducted purchase price. (Section 26AA was repealed by Act No. 47 of 1984 but, by virtue of section 61 of that Act, it continues to have application in respect of annuities which commenced to be payable before 1 July 1983).

Section 27H also operates to include in a taxpayer's assessable income amounts paid after 30 May 1984 as supplements to annuities or superannuation pensions, irrespective of when the annuity or pension itself was first payable.

New sub-section 27A(14) will modify these mainland taxing rules in relation to their application, from 1 July 1985, to eligible termination payments received by Christmas Island residents from Island or ex-Australian sources which, but for the amendment of Division 1A of the Principal Act proposed by clause 5 of the Bill, would have been exempt from tax. This modification will be effected, broadly, by substituting the key application date of 1 July 1983 in relevant provisions of the Principal Act with the date 1 July 1985.

By this means, a Christmas Island or ex-Australian source eligible termination payment made to a Christmas Island resident after 30 June 1985, to the extent it relates to periods of service or fund membership up to that date, will remain exempt from tax. That part of such a payment that relates to periods of service or fund membership after 30 June 1985, will be subject to the same mainland taxing rules outlined above applicable to post-30 June 1983 payments received by Australian residents.

New sub-section 27A(14) will not alter the basic taxing rules outlined earlier for annuities and superannuation pensions in relation to such payments made on and after 1 July 1985 from Christmas Island and ex-Australian sources to Christmas Island residents. In other words, annuities and superannuation pensions derived by Christmas Island residents on or after 1 July 1985, that would previously have been exempt from tax, will be assessable in accordance with section 26AA of the Principal Act if they were first payable to that resident before 1 July 1983, or in accordance with section 27H of that Act if they were first payable on or after that date. However, new sub-section 27A(14) will change - from 1 July 1983 to 1 July 1985 - the relevant date for determining the amount of undeducted purchase price to be taken into account in establishing the amount to be included in assessable income under section 27H. This modification reflects the fact that the annuity or superannuation contributions made during the 1984 and 1985 income years, having been made out of tax exempt income, would not have borne tax.

Paragraphs 27A(14)(a) and (b) are drafting measures designed to establish whether any part of an eligible termination payment, an annuity (which, by virtue of sub-section 27H(4) of the Principal Act, includes a superannuation pension) or a supplement thereto - called the "received amount" - would have been exempt from income tax if the Territory of Christmas Island had not been excluded from the scope of Division 1A. For these purposes, it is assumed that paragraph 27C(1)(d) and section 27D - which also have the effect of exempting from tax all or a part of an eligible termination payment - do not apply in relation to the received amount.

Where it is established that, but for section 24BA, Division 1A would have operated to exempt from tax the whole or a part of the received amount, paragraph 27A(14)(c) will modify the operation of Subdivision AA so that it will apply to the whole amount as if references in the Subdivision to 30 June 1983 were references to 30 June 1985 (sub-paragraph (c)(i)) and references (other than in sub-paragraph (a)(ii) of the definition of "superannuation fund" in sub-section (1)) to 1 July 1983 were references to 1 July 1985 (sub-paragraph (c)(ii)).

The practical effect of these measures is to change, for relevant payments received by Christmas Island residents, the key date for the application of the mainland taxing rules contained in Subdivision AA from 1 July 1983 to 1 July 1985 When applied in conjunction with paragraph 27A(14)(d), these provisions will operate to exclude from assessable income any amount that would, but for this paragraph, have been so included by virtue of sub-section 27C(1) of the Principal Act But for this paragraph, sub-section 27C(1) - as proposed to be modified by paragraphs 27A(14)(c) - would have included as assessable income 5 per cent of that part of a relevant eligible termination payment received by a Christmas Island resident after 1 July 1985 that related to service or fund membership before that date. As explained earlier such an amount is to remain exempt from tax.

It is to be noted that, during the phasing years, the arrangements proposed by clause 30 of the Bill will operate to reduce the tax otherwise payable on any amounts included in the assessable income of a Christmas Island resident by the modified application of Subdivision AA of the Principal Act as a result of the amendments proposed by this clause.

Clause 10: Rebate on dividends

Sub-section 46(9) of the Principal Act, which is to the effect that the allowance of a rebate of tax under section 46 in respect of inter-corporate dividends is subject to the operation of sections 116AA and 116A, will be amended by clause 10 to remove the reference to section 116A which is to be repealed by clause 19 as a result of the proposed abolition of the 30/20 rule.

Clause 11: Rebate on dividends paid as part of dividend stripping operation

The amendment by clause 11 is also consequential upon the repeal of section 116A by clause 19. It will omit sub-section 46A(16) of the Principal Act, which provides that section 46A has effect subject to section 116A. Section 46A deals with the allowance of a rebate of tax in respect of inter-corporate dividends paid as part of a dividend stripping operation.

Clause 12: Losses of previous years

This clause proposes an amendment of sub-section 80(5) of the Principal Act which has the general effect of denying deductions, in the year of income that commenced on 1 July 1978 and in subsequent years of income, in respect of losses generated from certain tax-avoidance schemes. This is achieved by providing that, in calculating the amount of any deduction for a carry-forward loss that would otherwise be allowable, the anti-avoidance measures specified in the sub- section are to be taken as having been applicable throughout the year of income in which the loss was incurred.

By clause 12, paragraph 80(5)(m) is to be amended by omitting the reference to the Income Tax Laws Amendment Act 1981, which last extended the scope of the "expenditure recoupment" anti-tax avoidance provisions of the income tax law to loss- generating deductions, and substituting a reference to the legislation proposed by this Bill, which will further extend the scope of those provisions (see notes on clause 14).

The amendment of paragraph 80(5)(m) will ensure that losses generated from tax-avoidance expenditure recoupment schemes entered into on or before 24 September 1978 and which involve expenditure in respect of a unit of industrial property to which the special deduction provisions of Division 10B of the Principal Act apply, or expenditure by way of a loss or outgoing deductible under the general deduction provision (section 51) of the Act, will not be deductible in the year of income that commenced on 1 July 1978 or in subsequent years of income.

Clause 13: Interpretation

Sub-section 82AAS(1) of the Principal Act defines terms used in those provisions of the law that authorise income tax deductions for contributions to superannuation funds by self- employed persons. Clause 13 will amend the definition of "qualifying superannuation fund" in sub-section 82AAS(1) to remove the reference to section 121C, which is being repealed by clause 21 as a result of the proposed abolition of the 30/20 rule.

Clause 14: Interpretation

Clause 14 proposes amendments of section 82KH of the Principal Act to extend the operation of the "expenditure recoupment" anti-tax avoidance provisions of Subdivision D of Division 3 of Part III of the Act so that they apply to schemes of tax avoidance designed to exploit -

·
the special deduction provisions of Division 10B applicable to capital expenditure incurred on units of industrial property; and
·
the general deduction provision - section 51 - applicable to losses or outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

Broadly, the existing expenditure recoupment provisions deny a tax benefit (income tax deduction or rebate of tax) for specified types of expenditure incurred as part of a tax avoidance arrangement under which the taxpayer (or an associate) receives a compensatory benefit the value of which, together with the tax saving sought, effectively recoups the taxpayer for the expenditure.

The provisions require that the particular expenditure meet the statutory description of "relevant expenditure" - a term defined in sub-section 82KH(1) to include those types of expenditure to which the provisions may apply. Presently, the definition of "relevant expenditure" consists of 19 paragraphs, each of which identifies a particular type of expenditure.

The provisions also require that the relevant expenditure be "eligible relevant expenditure" as described in sub-section 82KH(1F). Relevant expenditure qualifies as "eligible relevant expenditure" if it is incurred after 24 September 1978 under an agreement entered into after that date that has a purpose (other than a merely incidental purpose) of tax avoidance, and under the tax avoidance agreement the taxpayer or an associate is to obtain a benefit in addition to the benefits that flow in the ordinary course of events from incurring the expenditure sought to be deducted. In the case of relevant expenditure in the form of calls paid on shares in an afforestation company, the expenditure must also be incurred under a tax avoidance agreement entered into before 28 May 1981 (the operative date of the general anti-avoidance provisions in Part IVA of the Principal Act).

Where the additional benefit relating to the particular eligible relevant expenditure, when taken together with the "expected tax saving" in respect of that expenditure, is equal to or greater than the expenditure itself, sub-section 82KL(1) operates to deny a deduction or rebate. The "expected tax saving" is defined in sub-section 82KH(1) and is determined primarily under sub--section 82KH(1B). Broadly, the expected tax saving in respect of an amount of eligible relevant expenditure is the amount by which a person's liability to tax in any year of income would be reduced if deductions or rebates were allowed in respect of the eligible relevant expenditure. Where eligible relevant expenditure is incurred by a partnership, sub-section 82KL(1) looks to whether the sum of the additional benefits to the partnership, the partners or their associates and the total expected tax savings of the partners equals or exceeds the partnership expenditure.

The amendments proposed by clause 14 will extend the operation of the existing provisions to further variants of expenditure recoupment schemes. Variants not covered by the existing law that have been identified involve expenditure incurred -

·
in the acquisition of a licence to use a copyright subsisting in certain works relating to electronic devices;
·
by way of cattle leasing and management fees paid in respect of the breeding of pure-bred cattle where expenditure recoupment is a feature of the arrangement;
·
by way of contract farming fees paid in respect of the growing of cotton;
·
by way of management fees paid in relation to the growing of jojoba beans; and
·
by way of fees paid for advertising services.

The effect of the amendments will be that a deduction will not be available for expenditure of the kinds listed above where the expenditure is incurred after 24 September 1978 as part of a tax avoidance agreement entered into after that date that involves the receipt by the taxpayer (or an associate) of a compensatory benefit the value of which, together with the amount of the tax saving sought in respect of the expenditure, is equal to or greater than the amount of the expenditure. The proposed extension of the provisions is not, however, limited to the particular categories of expenditure referred so above. The extended provisions are to apply also to any other kinds of "recouped" expenditure for which a deduction is sought under section 51 or Division 10B of the Principal Act.

Paragraph (a) of clause 14 is a drafting change to facilitate the insertion, by paragraph (b), of new paragraphs (v) and (w) in the definition of "relevant expenditure" in sub- section 82KH(1).

New paragraph (v) of the definition of "relevant expenditure" refers to expenditure (other than that to which paragraph (h) or (n) of the definition applies) that is incurred on a unit of industrial property and would otherwise be deductible under Division 10B of the Principal Act. Existing paragraph (h) of the definition applies to expenditure incurred in relation to copyright subsisting in a film and existing paragraph (n) applies to expenditure incurred in respect of the acquisition of a licence under a copyright subsisting in computer software. New paragraph (v) of the definition will provide that other categories of expenditure incurred in respect of a unit of industrial property - for example, in the acquisition of a licence to use a copyright subsisting in relation to electronic devices - can be "relevant expenditure" to which the expenditure recoupment provisions can apply.

New paragraph (w) of the definition of "relevant expenditure" refers to a loss or outgoing which would otherwise be deductible under section 51 of the Principal Act, but excludes from its scope a section 51 loss or outgoing that is already specifically referred to in other paragraphs of the definition. Also excluded from the scope of new paragraph (w) is expenditure to which the non-tangible property loss provisions of section 52A of the Principal Act apply.

Paragraphs (c), (d), (e), (f), (g), (h) and (j) of clause 14 are all drafting measures consequential on the insertion, by paragraphs (a) and (b) of clause 14, of new paragraphs (v) and (w) in the definition of "relevant expenditure" in sub- section 82KH(1).

Paragraph (c) of clause 14 proposes the inclusion in paragraph 82KH(1AD)(a) of a reference to new paragraph (v) of the definition of "relevant expenditure". As is the case now with paragraphs (h) and (n) of the definition (which paragraphs also describe expenditure incurred in relation to a unit of industrial property), the amendment of paragraph 82KH(1AD)(a) will mean that a reference in section 82KH or 82KL to a tax benefit being allowable or not being allowable in respect of expenditure to which new paragraph (v) of the definition of "relevant expenditure" applies is to be read as a reference to a deduction being allowable or not being allowable under section 124M or 124N of Division 10B in respect of the "residual value" of a unit of industrial property, where that residual value would be calculated by reference to that relevant expenditure.

Paragraphs (d) and (e) of clause 14 propose amendments of sub-section 82KH(1F) which describes the circumstances in which an amount of relevant expenditure incurred by a taxpayer will be taken to be an amount of "eligible relevant expenditure" for the purposes of section 82KL. As presently defined, relevant expenditure is "eligible relevant expenditure" if -

(a)
the expenditure was incurred after 24 September 1978 under a tax avoidance agreement entered into after that date;
(b)
under the tax avoidance agreement, the taxpayer obtains, in relation to relevant expenditure, a benefit or benefits additional to :

(i)
the benefit in respect of which the relevant expenditure was incurred; and
(ii)
any other benefit that might reasonably be expected to result if the benefit in respect of which the relevant expenditure was incurred had been obtained otherwise than under a tax avoidance agreement; and

(c)
in a case where the relevant expenditure was incurred in respect of calls paid on shares in an afforestation company, the calls were paid under a tax avoidance agreement entered into before 28 May 1981.

By paragraph (d) of clause 14, sub-paragraphs 82KH(1F)(b)(i) and (ii) are to be omitted and replaced by new sub- paragraphs. Proposed new sub-paragraph (i) contains identical requirements for determining an additional benefit or benefits as are presently found in existing sub-paragraphs 82KH(1F)(b)(i) and (ii). Proposed new sub-paragraph 82KH(1F)(b)(ii) will provide for alternative requirements in a case where the relevant expenditure is expenditure to which new paragraph (w) of the definition of "relevant expenditure" applies - that is, a general loss or outgoing that would otherwise be deductible under section 51. In such a case, the additional benefit is limited to any benefit in addition to that which resulted directly or indirectly from the incurring of the section 51 loss or outgoing and which might reasonably be expected to have resulted otherwise than under a tax avoidance agreement. This limitation in sub- paragraph (b)(ii) makes it unnecessary to specifically identify the benefits directly applicable to section 51 deductions in sub-section 82KH(1G) which in other cases identifies, for the purposes of sub-section 82KH(1F), the direct benefits related to the specific forms of "relevant expenditure" defined in sub-section 82KH(1).

Paragraph (e) will insert in paragraph 82KH(1F)(c) a reference to new paragraphs (v) and (w) of the definition of "relevant expenditure". This will preclude the application of the expenditure recoupment provisions to expenditure dealt with in those new paragraphs that is incurred as part of a tax avoidance scheme entered into after 27 May 1981, the date after which the general anti-avoidance provisions (Part IVA) of the Principal Act apply.

Sub-section 82KH(1F) as amended, together with sub-clause 38(2), will have the effect that the extended provisions apply where the expenditure is incurred after 24 September 1978 under a tax avoidance agreement entered into after that date and before 28 May 1981.

Paragraphs (f) and (g) of clause 14 propose the insertion of new paragraph (u) in sub-section 82KH(1G). As mentioned earlier, sub-section 82KH(1G) identifies, for the purposes of sub-section 82KH(1F), the direct benefits related to "relevant expenditure". The direct benefit identified by new paragraph 82KH(1G)(u) - where the relevant expenditure, other than expenditure to which paragraph (h) or (n) of the definition of "relevant expenditure" applies, was incurred in respect of a unit of industrial property and would otherwise be deductible under Division 10B - is the ownership by the taxpayer of the unit of industrial property.

Paragraphs (h) and (j) of clause 14 propose the insertion of new paragraphs (v) and (w) in sub-section 82KH(1L), which operates in conjunction with sub-section 82KH(1K). Sub- section 82KH(1K) provides that, where 2 or more amounts of the same class of relevant expenditure are incurred by a taxpayer under the same tax avoidance agreement, and in respect of the same benefit, those amounts are to be treated as one amount of relevant expenditure. Sub-section 82KH(1L) specifies, for the purposes of sub-section 82KH(1K), circumstances in which 2 or more amounts of relevant expenditure are to be treated as being incurred in respect of the same benefit.

New paragraphs 82KH(1L)(v) and (w) will specify that two or more amounts of relevant expenditure are to be treated as being incurred in respect of the same benefit in the following circumstances -

·
in a case where two or more amounts of relevant expenditure (other than expenditure to which existing paragraph (h) or (n) of the definition of "relevant expenditure" applies) are incurred in respect of a unit of industrial property - where those amounts were incurred in respect of the same unit of property; and
·
in a case where two or more amounts of relevant expenditure (other than expenditure of a specified kind already defined as "relevant expenditure") are incurred in gaining or producing assessable income or in carrying on a business for that purpose - where those amounts were incurred in respect of the same source of assessable income or in carrying on the same business.

Clause 15: Definitions

Section 110 of the Principal Act defines various terms used in Division 8 of that Act, which provides a special assessment code for life assurance companies. The definition of "exempt statutory fund" in section 110 is being omitted by clause 15 in consequence of the repeal of existing section 115 by clause 18. Similarly, clause 15 will omit the definition of "overseas policy" in consequence of the repeal of section 115A by clause 19. Existing sections 115 and 115A are to be repealed as a result of the proposed abolition of the 30/20 rule.

Clause 16: Repeal of section 110A

Section 110A specifies the conditions with which a life assurance company must comply to enable it to qualify for the special tax concessions available under Division 8. Those concessions are:

·
exemption from tax of investment income attributable to superannuation and other eligible policies (section 112A);
·
the availability of a special deduction calculated by reference to a certain proportion of a life assurance company's calculated liabilities (section 115); and
·
exclusion from the restriction on the section 46 rebate allowable in respect of assessable inter-corporate dividends received by a life assurance company (section 116A).

In broad terms, a company satisfies the conditions specified by section 110A if, throughout the year of income, it held at least 30 per cent of its assets in public securities, including at least 20 per cent in Commonwealth securities - that is, if it complied with the 30/20 rule.

By repealing section 110A, clause 16 will give effect to the proposal (announced on 10 September 1984) to abolish the 30/20 rule as it applies to life assurance companies. In terms of sub-clause 38(1), the abolition of the rule will apply in the year of income in which 11 September 1984 occurred and in all subsequent income years.

Clause 17: Exemption of income attributable to superannuation policies and certain annuities

Section 112A of the Principal Act exempts from tax so much of the investment income of a life assurance company as is attributable to superannuation policies and certain specified life assurance policies. At present, the exemption is available only to companies to which section 110A applies - that is, companies that satisfy the 30/20 rule. Consequent upon the repeal of section 110A by the preceding clause, clause 17 will amend section 112A to remove the condition that, for the section to apply, a life assurance company must be a company to which section 110A applies, with the result that life assurance companies need no longer satisfy the 30/20 rule in order to qualify for the exemption provided by section 112A.

Clause 18: Deductions in relation to calculated liabilities

Under section 115 of the Principal Act, a life assurance company is entitled, in addition to its normal deductions, to a special deduction based on 1 per cent of a proportion of its calculated liabilities (broadly, an actuarial valuation of the company's liabilities). The basic deduction of 1 per cent is increased on a sliding scale for over-compliance with the 30/20 rule and reduced on a sliding scale (to no less than 0.75 per cent) for under-compliance.

Consequent upon the abolition of the 30/20 rule by the repeal of section 110A, sub-clause 18(1) will repeal the existing section 115 and substitute a new section 115 which will provide for a flat 1 per cent deduction irrespective of the level of investment in public or Commonwealth securities. By new sub-section 115(1), the amount allowable as a deduction is to be, broadly, 1 per cent of the proportion of the calculated liabilities of the company that the value of the company's assets producing assessable income bears to the total value of the company's assets. More precisely, the deduction is calculated in accordance with the formula

(AB)/(100C)

, where -

A
is the calculated liabilities of the company as at the end of the year of income;
B
is the value, as at the end of the year of income, of those assets included in the insurance funds of the company from which the company derives assessable income; and
C
is the value, as at the end of the year of income, of all the assets included in the insurance funds of the company.

New sub-section 115(2), which effectively re-enacts existing sub-section 115(3), will ensure that an appropriate adjustment is made in the calculation of the deduction allowable under new sub-section 115(1) where part of the income derived from assets related to a company's life assurance business fund is exempt from tax under section 112A as being attributable to superannuation and other eligible policies.

In these circumstances, the value of B for the purposes of the formula in new sub-section 115(1) will include only so much of the assets of the fund that produce assessable income as is ascertained by means of the calculation -

Actual value of assets of fund producing assessable income * ((Assessable income derived from assets of fund)/(Amount that would be assessable income derived from assets of fund if section 112A did not apply))

This adjustment is designed to maintain a principle that has always been incorporated in section 115 - that the deduction, although based on 1 per cent of calculated liabilities, is to be reduced to the proportion which the company's assessable income bears to its total income.

New sub-section 115(3) is a re-enactment of existing sub- section 115(8) and will ensure that a company which is a life assurance company during part only of a year of income - for example, where it commences or ceases business during a year of income - receives equitable treatment. Paragraph 115(3)(a) provides that the deduction allowable in such cases is an amount which bears the same proportion to the deduction otherwise allowable as the period during which the company was a life assurance company bears to a year. Paragraph (3)(b) provides that, where a company ceases to be a life assurance company before the end of the year of income, the last day on which the company was a life assurance company shall be deemed to be the end of the year of income - the values of the A, B and C components of the formula in new sub-section 115(1) will therefore be the respective values as at that date.

Sub-clause 18(2), which will not be inserted in the Principal Act, contains transitional rules applicable to the year of income in which 11 September 1984 (the date on and from which the 30/20 rule is to cease to apply) occurred. By the transitional rules, the calculated liabilities deduction for the 1984-85 income year will be a proportion of the sliding scale deduction for the period from the start of the company's year of income to 10 September 1984 plus a proportion of the flat 1 per cent deduction for the rest of the year.

The deduction in the transitional year is to be calculated in accordance with the formula

(AB + CD)/(E)

, where -

A
is the "former section 115 amount" (as defined in sub- clause 18 (4));
B
is the number of days in the transitional year of income (as defined in sub-clause 18(4)) before 11 September 1984 during which the company was a life assurance company;
C
is the "new section 115 amount" (as defined in sub-clause 18(4));
D
is the number of days in the transitional year of income after 10 September 1984 during which the company was a life assurance company; and
E
is the number of days in the transitional year of income.

In arriving at the calculated liabilities deduction for the period from the start of a company's year of income to 10 September 1984 - the "former section 115 amount" - it will be necessary to determine the value of the company's liabilities as at 10 September 1984. The value as at that date of those assets included in the insurance funds of the company from which the company derives assessable income, along with the value of all assets included in insurance funds, will also be required.

In the usual case where a life assurance company has not had an actuarial calculation of its liabilities made as at 10 September 1984, that value will be ascertained under the established rules contained in sub-section 114(2) of the Principal Act.

By sub-section 114(2), where an actuarial valuation of liabilities is not made as at the end of the year of income, a calculation is made of the proportion which the last preceding actuarial valuation of liabilities, as at some other date, bears to the value of the assets of the company as at that date. The amount which bears to the value of all the assets of the company at the end of the year of income is deemed to be an actuarial valuation of liabilities made as at the end of that year on the same basis as that last preceding valuation.

For the purpose of the application of section 114, the end of the year of income is, by virtue of paragraph (a) of the definition of "former section 115 amount" in sub-clause 18(4), to be taken as 10 September 1984.

The value of assets as at 10 September 1984 will generally be known. Where a valuation of assets as at 10 September 1984 has not been made, their value, for the purposes of the application of sub-section 114(2) and determining other relevant components of the "former section 115 amount", will be ascertained on the basis of monthly or quarterly figures prepared by life assurance companies or other relevant information.

Sub-clause 18(3) will ensure that section 116AA of the Principal Act applies in relation to the composite deduction to be allowed under section 115 in the transitional year of income in accordance with sub-clause 18(2).

Section 116AA reduces the amount of dividends, in respect of which a life assurance company is entitled to the inter- corporate dividend rebate under section 46 of the Principal Act, to reflect deductions allowed to the company under section 113 (in respect of general management expenses) or section 115 (in respect of calculated liabilities). Broadly, in the case of a section 115 deduction, the rebatable amount of dividends is reduced by the extent to which that deduction reflects the inclusion, at the end of the year of income, of shares in income-producing assets.

In recognition of the fact that a section 115 deduction in the transitional year of income is to have two components - the "former section 115 amount" and the "new section 115 amount" (see notes on sub-clause (2)) - sub-clause (3) will ensure that, in the application of section 116AA, account is taken of the value of shares and of income-producing assets as at the appropriate date. In the case of the "former section 115 amount", that date is 10 September 1984 and, in the case of the "new section 115 amount", it is the last day of the transitional year of income.

Sub-clause 18(4) defines terms used in sub-clauses (2) and (3) and also will not amend the Principal Act. The term "former section 115 amount" is defined to mean the amount which would have been allowable but for the repeal of the previous section 115, with several qualifications to reflect the fact that the 30/20 rule need not be observed for any purposes after 10 September 1984. In essence, the qualifications provide that the post-10 September 1984 period is to be ignored in determining the deduction that would have been allowable but for the repeal of former section 115.

The term "new section 115 amount" is defined in sub-clause 18(4) to mean the amount that would be allowable under the new section 115 being inserted by sub-clause 18(1) - that amount to be calculated as if the company were a life assurance company during the whole of the year of income.

The item "transitional year of income" is defined in sub clause 18(4) to mean the year of income in which 11 September 1984 (the date on and from which the 30/20 rule will cease to apply) occurred.

Clause 19: Repeal of sections 115A, 116A, 116B and 116C

Clause 19 will repeal sections 115A, 116A, 116B and 116C of the Principal Act. Those sections will have no relevance following the abolition of the 30/20 rule.

Section 115A provides that a life assurance company may elect to have securities issued in respect of an overseas loan excluded from the calculation, for the purposes of the 30/20 rule, of the various proportions of public and Commonwealth securities.

Section 116A places an upper limit on the section 46 rebate that may be allowed in respect of inter-corporate dividends received by a life assurance company that does not comply with the 30/20 rule.

Section 116B enables a life assurance company to elect that, for the purpose of determining the various proportions of assets invested in public securities and Commonwealth securities and so ascertaining whether the 30/20 rule has been complied with, calculations be made by reference to the "value" of the various assets. If the right of election is not exercised, the cost price of those assets applies in the calculations.

Section 116C is a machinery provision designed to ascribe, for the purposes of the 30/20 rule, a "cost" to a particular asset that has been acquired wholly or partly for consideration in a form other than money. In these circumstances, the cost of the asset is taken to be such amount as, in the opinion of the Commissioner of Taxation, is reasonable in the circumstances.

The abovementioned sections of the Principal Act apply only in relation to the 30/20 rule and serve no other purpose. Their repeal is consequential upon the abolition of the 30/20 rule.

Clause 20: Definitions

Section 121B of the Principal Act defines a number of terms used in Division 9B, which provides the basis on which superannuation funds and approved deposit funds are assessed to tax on income not qualifying for exemption from tax. The definition of "investment income", a term used in section 121D, will be omitted by clause 20 in consequence of the repeal of section 121D (applicable to superannuation funds not complying with the 30/20 rule) by clause 23. The omission of the definition of "transaction" by clause 20 will correct a drafting oversight - the term has no relevance following the repeal of section 121BA by the Income Tax Assessment Amendment Act (No.3) 1984.

Clause 21: Repeal of section 121C

Section 121C of the Principal Act provides that the investment income of a superannuation fund to which paragraph 23(ja) (non-employee funds) or section 23F (employee funds) applies is not exempt from tax unless, throughout the year of income, it held at least 30 per cent of its assets in public securities, including at least 20 per cent in Commonwealth securities - that is, unless it complies with the 30/20 rule.

By repealing section 121C, clause 21 will give effect to the proposal (announced on 10 September 1984) to abolish the 30/20 rule as it applies to superannuation funds. In terms of sub-clause 38(1), the abolition of the rule will apply in the year of income in which 11 September 1984 occurred and in all subsequent years of income.

Clause 22: Assessment of income of superannuation funds to which section 23F applies

Clause 22 will amend section 121CA of the Principal Act - which provides for the taxing of the non exempt income of a section 23F (employees) superannuation fund - to reflect the repeal of section 121C by the preceding clause. Clause 22 will omit from section 121CA the reference to section 121C.

Clause 23: Repeal of section 121D

Under section 121D of the Principal Act the income of those superannuation funds that fail to satisfy the 30/20 rule is subject to tax. As a consequence of the abolition of that rule, section 121D will be repealed by clause 23.

Clause 24: Assessment of income of other superannuation funds

Section 121DA of the Principal Act provides for the taxing of the income of non-exempt superannuation funds, other than such funds subject to tax under other provisions of Division 9B. One of those other provisions (section 121D) is being repealed by clause 23 as a result of the abolition of the 30/20 rule. Clause 24 will omit from section 121DA the existing reference to section 121D.

Clause 25: Assessment of income of certain superannuation funds

Section 121DAB of the Principal Act, which governs the taxing of non-exempt superannuation funds established for traditional superannuation purposes (that is, to provide benefits only to members in the event of retirement or to dependants of a member in the event of the member's death) refers, inter alia, to section 121D. Clause 25 will amend section 121DAB to omit the reference to section 121D in consequence of the repeal of that section by clause 23 to reflect the abolition of the 30/20 rule.

Clause 26: Repeal of section 121DE

Clause 26 proposes the repeal of section 121DE of the Principal Act, which has effect only where the trustee of a section 23F (employees) superannuation fund has been assessed and is liable to pay tax under section 121CA on certain income not exempt under section 23F. Section 121DE effectively excludes the assets that gave rise to the income taxed under section 121CA from the fund's total assets for the purposes of determining whether the fund has complied with the 30/20 rule. The section accordingly has no relevance in the absence of the 30/20 rule and is to be repealed.

Clause 27: Diverted income and diverted trust income

Clause 27 will omit paragraphs (4)(d), (5)(d) and (6)(d) of section 121G of the Principal Act, as a consequence of the repeal by clause 23 of section 121D. Each of those paragraphs deals exclusively with income to which section 121D presently applies.

Clause 28: Rebates for dependants

This clause proposes two amendments of section 159J of the Principal Act under which, subject to various qualifying conditions including a separate net income test, rebates of tax may be allowed to a taxpayer who contributes to the maintenance of certain dependants.

In 1984 section 159J of the Principal Act was amended to extend to a taxpayer living in a bona fide de facto marriage relationship eligibility to the dependent spouse rebate on the same basis as that rebate was available to a legally married taxpayer. Reflecting a longstanding provision of the law that denied a rebate for a daughter-housekeeper for any part of an income year during which a taxpayer was legally married, sub-section 159J(5D) was inserted in the Principal Act with the intention of ensuring that a taxpayer who would otherwise qualify for a daughter-housekeeper rebate but who contributed to the maintenance of a de facto spouse during any part of an income year was not entitled to a daughter- housekeeper rebate for that period.

Due to a drafting error, however, sub-section 159J(5D) effectively eliminates entitlement to a daughter-housekeeper rebate for any part of an income year if a taxpayer has contributed to the maintenance of a spouse - whether legal or de facto - during any other part of that year. Clause 28 will rectify this situation.

A further amendment to be effected by this clause will exclude payments of family income supplement made under the Social Security Act 1947 from the separate net income of a dependant of a taxpayer.

Under the existing law, the concessional rebate entitlement of a taxpayer in a year of income in respect of certain dependants is reduced by $1 for every $4 by which the separate net income of the relevant dependant in the year of income exceeds $282. Family income supplement was originally paid to the primary breadwinner in a family with children but, from 1 May 1984, has been paid to the recipient of the family allowance, generally the mother. The payment is exempt from tax in the recipient's hands, and the proposed amendment will ensure that its receipt by a dependant of a taxpayer will not adversely affect the taxpayer's entitlement to a concessional rebate in respect of that dependant.

Paragraph (a) of clause 28 will amend sub-section 159J(5D) of the Principal Act to specify that a taxpayer who contributes to the maintenance of a de facto spouse during the whole or a part of a year of income will not be entitled to a rebate for a daughter-housekeeper during the whole or that part of the year of income, as the case may be. This amendment will ensure that a taxpayer who otherwise qualifies for a part year daughter-housekeeper rebate is not denied that rebate simply because he or she contributed to the maintenance of a spouse during another part of the year.

Reflecting the commencement date of sub-section 159J(5D), the amendment made by paragraph (a) will, by the operation of sub-clause 38(4) of the Bill apply for 1984-85 and subsequent income years.

Paragraph (b) of clause 28 will amend paragraph (a) of the definition of "separate net income" in sub-section 159J(6) of the Principal Act to include in the list of various forms of government assistance that are not taken into account in determining the separate net income of a dependant, payments of family income supplement. The amendment proposed by this paragraph will, by sub-clause 38(5) of the Bill, apply to payments of family income supplement made on or after 1 May 1984.

Clause 29: Life insurance premiums, etc.

Section 159R of the Principal Act provides that amounts paid as life insurance premiums, as contributions to a superannuation fund or for other specified purposes are, up to a limit of $1200 in any year of income, rebatable amounts for the purposes of the rebate of tax available in respect of eligible concessional expenditure in excess of $2000. In relation to contributions to superannuation funds, sub- section 159R(8) limits the rebate to contributions made to funds of the kind specifically mentioned in the sub-section, including funds that would, but for section 121C, be exempt from tax by virtue of paragraph 23(ja). A similar reference to section 121C is incorporated in the definition of "policy of life insurance" in sub-section 159R(9).

As a consequence of the repeal of section 121C by clause 21 to abolish the 30/20 rule in relation to superannuation funds, clause 29 will omit from sub-sections 159R(8) and (9) the references to section 121C.

Clause 30: Rebate in respect of certain Territory income

The amendments to be effected by clause 5 of the Bill will operate to remove the exemptions presently available under Division 1A of Part III of the Principal Act for income derived from sources in Christmas Island and other ex- Australian sources by Christmas Island residents, and for income derived from sources in Christmas Island by residents of Norfolk Island and Cocos (Keeling) Islands. However, as indicated in the notes on clause 5, personal income tax on such income will be phased in over a period of three years. The phasing arrangements will not apply in relation to company tax or Medicare levy on that income.

Clause 30 proposes the insertion in the Principal Act of a new section - section 160ACD - to give effect to the phasing arrangements by providing for a rebate of tax against the tax otherwise payable in respect of the formerly exempt income. By the operation of the rebate, the tax payable on such income will, for the 1985-86 year of income, be reduced to 25 per cent of the tax, at full rates, applicable to that income. For 1986-87 and 1987-88, it will be 50 per cent and 75 per cent respectively of the tax, at full rates, on that income. Full tax will first apply in the year of income commencing on 1 July 1988.

Under new sub-section 160ACD(1) the amount of the rebate for the relevant phasing year will be determined by first calculating the amount of tax otherwise applicable to the taxpayer's total taxable income - that is, assessable income from sources on the mainland, on Christmas Island and from other ex-Australian sources, as reduced by allowable deductions. The "gross" tax so calculated will then be reduced by the special Zone A rebate, which will be extended to Christmas Island residents by the amendment proposed by clause 36 of the Bill, and any other rebates or credits to which the taxpayer is entitled (e.g., a spouse rebate or a credit for tax paid in another country on ex-Australian income such as dividends), in order to arrive at the amount of tax that, but for the phasing rebate, would be payable in respect of the total taxable income.

Where the taxpayer's assessable income consists only of income that is presently exempt from tax by virtue of Division 1A - that is, income from sources in Christmas Island and other ex-Australian sources - the phasing rebate will be the relevant percentage of the amount of tax payable calculated on the basis outlined above for the particular phasing year.

Where, however, the taxpayer's assessable income also includes mainland Australian income, a further calculation will be required to determine the "notional" amount of tax that would have been payable on the Australian income if Division 1A had not been amended by the insertion in the Principal Act of new section 24BA, and entitlement to the zone rebate (as proposed by clause 36) had not been extended to Christmas Island residents. In other words, the calculation will be made on the basis that the Australian mainland income had remained the only assessable income, and only those rebates and credits (if any) to which the taxpayer would have been entitled in such an assessment were allowed. In such cases, the relevant rebate for the particular year will be determined on the basis of the excess of the actual amount of tax payable, at full rates, on the taxpayer's total taxable income over the "notional" tax calculation of the tax payable on the mainland income only. In this way, where a taxpayer has both mainland income and Christmas Island or other ex-Australian source income that was previously exempt from tax under Division 1A, the latter income will be treated as the final component of taxable income attracting tax at higher marginal rates, thus providing the greatest benefit for the taxpayer from the phasing arrangements.

The phasing rebate will apply in relation to income derived from sources in Christmas Island or otherwise outside Australia in each of the 1985-86, 1986-87 and 1987-88 income years by a Christmas Island resident individual (either directly or indirectly through a trust) or by the trustee of a trust that would, in relation to Christmas Island, be a Territory Trust but for the exclusion of Christmas Island from Division 1A. It will also apply in relation to income derived from sources in Christmas Island during that period by a Norfolk Island or Cocos (Keeling) Islands resident individual (either directly or indirectly through a trust) or by the trustee of a trust that, in relation to Norfolk Island or Cocos (Keeling) Islands, remains a Territory Trust for the purposes of Division 1A.

An individual who is a non-resident of Australia within the ordinary meaning of that term (but not including a person who is presently exempt from income tax under Division 1A on Christmas Island employment income who will be entitled to the phasing rebate on that income) is not exempt from income tax under Division 1A on Christmas Island source income - such income up to $19500 is subject to tax at the rate of 30 per cent, and to ordinary personal income tax rates thereafter. As the amount of tax payable by a non-resident individual on Christmas Island source income will not be affected by the amendments to be made to Division 1A by new section 24BA, the phasing rebate will have no application to such taxpayers. New sub-section 160ACD(2) will make it clear that the phasing rebate will also not be available in an assessment raised on a trustee on behalf of a non-resident beneficiary of a trust estate pursuant to sub-section 98(3) or 98(4) of the Principal Act.

New sub-section 160ACD(3) defines the expression "transitional year of income" to mean the respective years of income to which the phasing arrangements will apply. That expression is used in sub-section 160ACD(1) to describe the respective years in which the phasing rebate of 75 per cent, 50 per cent and 25 per cent will apply.

Clause 31: Remission of certain amounts

Clause 31 proposes the insertion of a new sub-section in section 221N of the Principal Act. Section 221N empowers the Commissioner of Taxation to remit, in whole or in part, the statutory additional tax penalties imposed for breaches of the pay-as-you-earn (PAYE) provisions of the income tax law.

Existing sub-section 221N(1) authorises the Commissioner, subject to his being satisfied that certain specified circumstances exist to remit the 20% per annum late payment penalties imposed for breaches such as failure to make PAYE deductions and failure to remit to the Commissioner by the due date deductions that are made. Existing sub-section 221N(2) provides the Commissioner with unrestricted authority to remit "culpability penalties" (imposed at a flat rate) for such breaches, as well as the 20% per annum late payment penalty imposed on a government body that fails to make PAYE deductions.

As part of the proposal to provide objection and appeal rights in respect of decisions by the Commissioner on the remission of PAYE "culpability penalties" - which rights are already available in respect of similar penalties imposed for breaches of the prescribed payments provisions of the law - new sub-section 221N(3) will require the Commissioner to give written notification of a decision made in terms of existing sub-section 221N(2) to not remit any, or to remit only part, of the relevant penalties. Such a notification will form the basis for the lodgment of an objection (see notes on clause 32).

Clause 32: Review of decisions

By this clause, new section 221U is to be inserted in the Principal Act. The new section will provide the machinery to enable objections and appeals to be lodged against decisions of the Commissioner of Taxation relating to the remission of the statutory "culpability penalties" imposed at a flat rate for breaches of the pay-as-you-earn (PAYE) provisions of the income tax law.

In terms of sub-section 221U(1), a person who is dissatisfied with a decision made by the Commissioner under existing sub- section 221N(2) in relation to the remission of a culpability penalty imposed by paragraph 221EAA(1)(a) (for failure to make PAYE deductions), sub-sub-paragraph 221F(12)(b)(ii)(A) (for failure, by a group employer, to remit PAYE deductions to the Commissioner by the due date) or sub-paragraph 221G(4A)(d)(i) (for failure, by an employer other than a group employer, to affix within the time required tax stamps of a face value equal to PAYE deductions) will be able to lodge an objection against the decision. The objection will have to be lodged with the Commissioner within 60 days of notification of the decision, be in writing and explain in full the grounds upon which the person relies.

Excluded from the application of new sub-section 221U(1) is a decision made by the Commissioner under existing sub-section 221N(2) in relation to the remission of the 20% per annum late payment penalty imposed on a government body that fails to make PAYE deductions (sub-section 221EAA(2)). Consistent with the position regarding other 20% per annum late payment penalties imposed for breaches of the PAYE provisions, a remission decision on such a penalty will not give rise to objection and appeal rights. Those rights are to be available only in relation to decisions on the remission of "culpability penalties".

The extension of objection and appeal rights to decisions on the remission of these penalties will apply from 14 December 1984 - the date from which such penalties first applied by virtue of the Taxation Laws Amendment Act 1984. Sub-clause 38(6) will enable objections to be lodged against remission decisions made and notified before the date on which this amending legislation comes into operation.

By sub-section (2) of new section 221U, the review and appeal provisions of the income tax law are to be extended to objections made under sub-section 221U(1). The effect of this will be that a person who complies with the requirements of Division 2 of Part V of the Principal Act may have the Commissioner's decision on an objection lodged under sub- section (1) referred to an independent Taxation Board of Review for review or have the objection treated as an appeal and forwarded to a Supreme Court.

Clause 33: Notification and review of decisions

As a basic principle, objection and appeal rights are not available in relation to decisions made by the Commissioner of Taxation on the remission of statutory penalties imposed at the rate of 20% per annum for late payment of taxes (including PAYE and PPS deductions). Those rights are, however, available in relation to decisions on the remission of "'culpability penalties" imposed at a flat rate for breaches of the PAYE and PPS provisions of the income tax law. In one respect - that is, in relation to decisions on the remission of the late payment penalties imposed on government bodies that fail to make PPS deductions - the relevant PPS provisions did not by inadvertence adhere to that basic principle.

To rectify that situation, clause 33 proposes the amendment of existing sub-section 221YHT(2) of the Principal Act, which provides for objections to be lodged against remission decisions made by the Commissioner under sub-section 221YHL(2) of that Act in relation to relevant PPS penalties. The amendment will exclude from the scope of sub-section 221YHT(2) a decision on the remission of a penalty imposed by sub-section 221YHH(2) - being the late payment penalty imposed where a government body fails to make deductions from prescribed payments. The amendment is to apply from the date on which this amending legislation comes into operation.

Clause 34: Medicare levy

Clause 35: Prescribed persons

Clauses 34 and 35 will respectively amend sections 251S and 251U - which are contained in Part VIIB of the Principal Act - to subject Christmas Island residents to full Medicare levy for the 1985-86 and subsequent years of income.

Section 251S of the Principal Act is the basic section providing for the payment of Medicare levy. As that section is presently enacted, persons who are residents of Norfolk, Cocos (Keeling) and Christmas Islands are not treated as residents of Australia for the purposes of the levy and thus are exempt from it.

Section 251U of the Principal Act identifies the classes of persons who, if the relevant tests are met, are entitled to exemption from the Medicare levy. Paragraph 251U(1)(d) provides, in effect, that a person who takes up residence in Australia during an income year, or who ceases to be an Australian resident during the course of a year, will be exempt from the levy for that part of the year in which he or she was a non-resident, or was a resident of Norfolk, Cocos (Keeling) or Christmas Islands.

As an element of the integration package for Christmas Island, Island residents are entitled to the full benefits of Medicare, and accordingly are to become liable for the full Medicare levy with effect from 1 July 1985. The levy will not be subject to the phasing arrangements for personal income tax purposes proposed by clause 30 of the Bill.

New sub-section 251S(3) will effectively modify the present references to Territory residents in paragraphs 251S(1)(a) and (b) of the Principal Act - and who are, by the operation of those paragraphs, exempt from the levy - to exclude, in relation to the 1985-86 and subsequent income years, residents of Christmas Island.

It is to be noted that the operation of paragraph 251T(b) of the Principal Act - which provides exemption from Medicare levy for the trustee of a Territory trust -will be affected by the proposed insertion (by clause 5 of the Bill) of section 24BA in the Principal Act. By that section, a Christmas Island trust will not from 1 July 1985 be a Territory trust and the present exemption will no longer apply to the trustee of such a trust.

New sub-section 251U(1A) will also effectively modify, also with effect for the 1985-86 and subsequent years of income, paragraph 251U(1)(d) of the Principal Act so that a person will not in future be exempt from the levy by reason that he or she was a resident of Christmas Island for part of a year of income.

Clause 36: Schedule 2

Clause 36 proposes that Part I of Schedule 2 of the Principal Act - the Schedule that defines the areas included in income tax Zone A - be amended to include the Territory of Christmas Island. By sub-clause 38(7) of the Bill this amendment will have effect from 1 July 1985.

As a result of this change, Christmas Island will, under the zone rebate provisions of section 79A of the Principal Act, qualify as a special area in Zone A. That section provides that the special areas are those zone areas that are more than 250 kilometres by the shortest practicable route from an urban centre with a Census population of 2500 or more. As Christmas Island is not an urban centre as defined in the law, and because of its distance from an urban centre on the mainland, the Island's inclusion in Zone A, as proposed by clause 36, will mean that it meets the requirement for recognition as a special zone area.

Accordingly, Christmas Island resident individuals will be eligible for the special zone rebate in their assessments for 1985-86 and subsequent income years. As indicated in the notes on clause 30, that special zone rebate will be taken into account in determining the amount of tax payable that will be subject to the personal income tax phasing arrangements that are to apply for the 1985-86, 1986-87 and 1987-88 income years.

As indicated in the notes on clause 36, sub-clause 38(7) proposes that the inclusion of Christmas Island in Zone A is to have effect in relation to assessments in respect of the 1985-86 year of income and all subsequent years of income.

Clause 37: Other amendments

The Schedule to the Bill proposes a number of formal amendments of the Principal Act, the effect of which is explained in subsequent notes on that Schedule.

Clause 38: Application and transitional

This clause, which will not amend the Principal Act, will specify the year of income in which, or the dates from which, various amendments proposed in Part II of the Bill will first apply. The clause also provides transitional rules in relation to certain amendments.

Sub-clause 38(1) deals with the various amendments to give effect to the proposed abolition of the 30/20 rule. These are to first apply in assessments in respect of income of the year of income in which 11 September 1984 (the effective date of abolition of the 30/20 rule) occurred. This will mean that, with the exception of the deduction in relation to the calculated liabilities of life assurance companies - transitional rules in respect of which are explained in the notes on sub-clause 18(2) and 18(3) - the concessions presently allowable if the 30/20 rule is observed will be allowed for the whole of the year of income in which 11 September 1984 occurred (as well as in subsequent years), irrespective of whether the 30/20 rule was complied with during the first part of the year.

Sub-clause 38(2) provides that the extension of the "expenditure recoupment" provisions proposed by clause 14 to counter further variants of recoupment schemes will apply to a relevant loss or outgoing, or expenditure, incurred after 24 September 1978 - the general application date for the existing provisions.

By reason of sub-clause 38(2) and of sub-section 82KH(1F) of the Principal Act - as proposed to be amended by clause 14 - the expenditure recoupment provisions will apply to relevant expenditure of the kinds incurred under the schemes to which clause 14 applies, where the expenditure is incurred after 24 September 1978 under a tax avoidance agreement entered into after that date and before 28 May 1981 - the date from which the general anti-avoidance provisions (Part IVA) of the Principal Act apply.

Sub-clause 38(3) also relates to the extension of the "expenditure recoupment" provisions proposed by clause 14. By this sub-clause, a taxpayer will, in specified circumstances, be given the right to extend the grounds of an objection previously lodged against an assessment to include the ground that section 82KL does not apply to deny a tax benefit to the taxpayer.

As mentioned above, the amendments proposed by clause 14 to counter the further variants of expenditure recoupment schemes apply to relevant expenditure incurred by a taxpayer after 24 September 1978 under a tax avoidance agreement entered into between that date and 28 May 1981. Consequently, once the amending Act comes into operation, section 82KL may deny tax benefits claimed in respect of relevant expenditure incurred in the 1978-79 to 1983-84 income years, as well as in 1984-85 and subsequent years.

The enactment of the proposed amendments will provide a basis for denying a tax benefit sought as a result of participation in these latest identified recoupment schemes should other provisions of the law be found not to do so. However, by virtue of the operation of sections 185 and 190 of the Principal Act, which limit a taxpayer's grounds for contesting an assessment to those stated in a valid objection, it is possible that a taxpayer who lodged an objection before enactment of the amendments could, but for this sub-clause, be precluded from contesting the application of section 82KL to the particular tax benefit claimed.

To obviate this possibility, sub-clause 38(3) will give a taxpayer, who has previously lodged a valid objection against the disallowance of a tax benefit in respect of expenditure of a kind now proposed to be brought within the scope of section 82KL, the right to apply to the Commissioner to amend the objection to include the ground that section 82KL does not apply to deny a tax benefit in respect of that expenditure. An application for this purpose must be in respect of an objection lodged on or before the date on which the amending Act receives Royal Assent and must be lodged within 60 days after that date.

Sub-clause 38(4) will ensure that the amendment made by paragraph (a) of clause 28 to sub-section 159J(5D) of the Principal Act will apply from the commencement of the 1984-85 income year - being the first year in which a taxpayer is entitled to a rebate for a de facto spouse.

By sub-clause (5) the amendment proposed by paragraph (b) of clause 28, - to exclude family income supplement from the separate net income of a dependant of a taxpayer - is to apply to payments made on or after 1 May 1984.

Sub-clause 38(6) is a transitional provision relevant to the insertion in the Principal Act of new sub-section 221U(1), as proposed by clause 32 of the Bill.

That new sub-section will, as from the date on which the Bill receives the Royal Assent, enable objections to be lodged, within the usual 60 day period, against decisions of the Commissioner of Taxation relating to the remission of statutory "culpability penalties" imposed for breaches of the pay-as-you-earn (PAYE) provisions of the income tax law. Sub-clause 38(6) will operate to similar effect in respect of the period prior to the date of Royal Assent.

In terms of the sub-clause, a person notified of a decision on the remission of a PAYE culpability penalty (which penalties first applied from 14 December 1984, by virtue of the Taxation Laws Amendment Act 1984) before the date on which the Bill receives the Royal Assent will have 60 days after the date of Assent in which to lodge an objection.

By sub-clause 38(7) the inclusion of the Territory of Christmas Island in income tax Zone A, as proposed by clause 36, will have effect from 1 July 1985.

Clause 39: Amendment of assessments

Clause 39, which will not amend the Principal Act, is a standard measure which will ensure that the commissioner of Taxation has authority to re-open an income tax assessment made before the Bill becomes law should that be necessary in order to give effect to the various provisions of the Bill.

PART III - AMENDMENTS OF THE TAXATION (INTEREST ON OVERPAYMENTS) ACT 1983

Clause 40: Principal Act

This clause facilitates reference to the Taxation (Interest on Overpayments) Act 1983 which, in this Part, is referred to as "the Principal Act".

Clause 41: Interpretation

Clause 41 proposes the amendment of section 3 of the Principal Act, which defines a number of terms used in the Act.

Paragraphs (a) and (b) will correct a minor drafting error resulting from the insertion, by the Trust Recoupment Tax (Consequential Amendments) Act 1985 of a new sub-paragraph in the definition of "objection".

Paragraph (c) will extend the definition of "objection" to include objections under sub-section 221U(1) (as inserted by clause 32) and sub-section 221YHT(2) (as amended by clause 33) of the Income Tax Assessment Act 1936 .

This will bring within the scope of the Principal Act objections lodged against decisions made by the Commissioner of Taxation to not remit any, or to remit only part, of the statutory "culpability penalties" imposed for breaches of the pay-as-you-earn (PAYE) and prescribed payments system (PPS) provisions of the income tax law. Together with the amendments proposed by paragraph (d) of this clause and by clause 42, this amendment will give effect to the proposal that interest be paid on such penalties that are refunded as a result of a successful objection or appeal against their imposition.

By paragraph (d) of clause 41, the term "relevant tax" is to be expanded. The term is used in the Principal Act to identify the kinds of tax that, if refunded as a result of a successful objection or appeal, give rise to an entitlement to interest.

The term "relevant tax" is to be expanded by adding two new paragraphs to include those PAYE penalties (new paragraph (ba)) and PPS penalties (new paragraph (bb)) in respect of which there are objection and appeal rights, namely penalties imposed under the Income Tax Assessment Act 1936 for :

·
failure by a group employer, other than a government body, to -

·.
make PAYE deductions (paragraph 221EAA(1)(a)); or
·.
remit PAYE deductions to the Commissioner by the due date (sub-sub-paragraph 221F(12)(b)(ii)(A));

·
failure by an employer, other than a group employer and other than a government body, to affix within the time required tax stamps of a face value equal to PAYE deductions (sub-paragraph 221G(4A)(d)(i));
·
failure by a paying authority, other than a government body, to -

·.
make PPS deductions where required (paragraph 221YHH(1)(a)); or
·.
remit PPS deductions to the Commissioner by the due date (sub-sub-paragraph 221YHJ(1)(b)(ii)(A)); or

·
in the case of a paying authority who is a householder or other person not required to make PPS deductions, failure to forward a deduction form to the Commissioner within the required time (sub-section 221YHK(1)).

Clause 42: Amount of interest

Clause 42 will amend section 10 of the Principal Act, which provides the basis of calculation of the amount of interest to be paid on relevant amounts refunded as a result of a successful objection or appeal. The amendments will specify the earliest date of commencement of the period in respect of which interest will be payable on refunds of the amounts being included in the definition of "relevant tax" by paragraph (d) of clause 41 - that is, refunds of certain penalties imposed for breaches of the pay-as-you-earn (PAYE) and prescribed payments system (PPS) provisions of the income tax law. Existing sub-sub-paragraph 10(1)(a)(iii)(B) is to be omitted and three new sub-sub-paragraphs substituted.

By new sub-sub-paragraph 10(1)(a)(iii)(B), the interest calculation period in respect of amounts referred to in new paragraph (ba) of the definition of "relevant tax" - that is, PAYE penalties subject to objection and appeal rights (see notes on clause 41) - will commence not earlier than 14 December 1984, being the date from which, by virtue of the Taxation Laws Amendment Act 1984, those penalties first applied.

Similarly, new sub-sub-paragraph 10(1)(a)(iii)(C) will provide for the interest calculation period in respect of amounts referred to in new paragraph (bb) of the definition of "relevant tax" - that is, PPS penalties subject to objection and appeal rights (see notes on clause 41) - will commence not earlier than 1 September 1983, being the date from which the prescribed payments system came into operation.

New sub-sub-paragraph 10(1)(a)(iii)(D) effectively replaces existing sub-sub-paragraph 10(1)(a)(iii)(B) and will specify the earliest date from which interest is calculated in respect of refunds of "relevant tax" not dealt with in sub- sub-paragraphs (A), (B) or (C). The specified date in those cases is 20 December 1984, being the date presently referred to in existing sub-sub-paragraph 10(1)(a)(iii)(B) as the "day that occurs 2 months after the day on which the Taxation Laws Amendment Act 1984 received the Royal Assent". That Act subjected the other relevant taxes to late payment penalties of 20% per annum from that date.

Clause 43: Application

This clause, which will not amend the Principal Act, relates to the proposed inclusion within the scope of that Act of certain pay-as-you-earn (PAYE) and prescribed payments system (PPS) penalties, so that interest is paid where such penalties are refunded as a result of a successful objection or appeal.

Clause 43 will ensure that interest is paid on relevant PAYE penalties - as specified in new paragraph (ba) of the definition of "relevant tax" in sub-section 3(1) of the Principal Act (see notes on clause 41) - that are paid on or after 14 December 1984, being the date that the Taxation Laws Amendment Act 1984, which introduced those penalties, came into operation. The clause will also ensure that interest is paid on relevant PPS penalties - as specified in new paragraph (bb) of the "relevant tax" definition (see notes on clause 41) - that are paid on or after 1 September 1983, being the date from which the prescribed payments system came into operation.

NOTES ON SCHEDULE

MINOR AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936

Sub-sections 16(5BA) and (5C)

Amendments to alter references to a Commonwealth Department to reflect changes to the machinery of Government.

Sub-section 23AD(1)

Amendments of a drafting nature consequential upon the amendment of the Social Security Act 1947.

Sub-section 26AG(10)

Amendment to convert the incorrectly lettered second paragraph (c) of sub-section 26AG(10) to paragraph (d), and to re-letter subsequent paragraphs in the sub-section.

Sub-paragraph 78(1)(a)(lv), paragraphs 78(5)(a) and (b) and sub-sections 78(6DA), 78(6DB), 124K(1), 124K(1A) and 124ZAA(1)

Amendments to alter references to Ministers or Departments to reflect changes to the machinery of Government.

Section 179

Amendment to repeal provisions relating to the rights of Commonwealth and State public servants appointed to Taxation Boards of Review. These provisions have been rendered redundant by the repeal in 1981 of the Officers' Rights Declaration Act 1928 and by the insertion in Part IV of the Public Service Act 1922 of detailed provisions relating to the rights of officers holding public offices or employed by public authorities.

The provisions were originally enacted to preserve the rights of public servants who were appointed to Taxation Boards of Review. The rights of those officers are now preserved by section 87TA of the Public Service Act.


View full documentView full documentBack to top