House of Representatives

Taxation Laws Amendment Bill (No. 3) 1987

Taxation Laws Amendment Act (No. 3) 1987

Income Tax Amendment Bill (No. 2) 1987

Income Tax Amendment Act (No. 2) 1987

Medicare Levy Amendment Bill 1987

Medicare Levy Amendment Act 1987

Explanatory Memorandum

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

GENERAL OUTLINE

TAXATION LAWS AMENDMENT BILL (NO. 3) 1987

The Bill will amend -

·
the Income Tax Assessment Act 1936 -

·.
to ensure that the intercorporate dividend rebate is limited or denied in cases where a dividend stripping operation gives rise to a capital gain or a capital loss to which Part IIIA applies (proposal announced on 4 June 1987);
·.
to deny the intercorporate dividend rebate in respect of dividends paid out of profits arising on the revaluation of an asset as part of a scheme to avoid tax on disposal of the asset concerned (proposal announced on 4 June 1987);
·.
to deny franking credits to companies, and franking rebates to individuals and certain trustees, under the imputation system of company taxation where a dividend is paid in the course of a dividend stripping scheme (proposal announced on 4 June 1987);
·.
to overcome technical deficiencies in the provisions which deem certain payments by private companies to be dividends (proposal announced on 4 June 1987);
·.
to provide that the tax on capital gains will not apply in certain circumstances at the time a taxpayer ceases to be a resident of Australia (proposal announced on 23 December 1986);
·.
to ensure that, for the purposes of determining a capital gain, the cost base of an interest or units in a trust will not be reduced where the trustee distributes income freed from tax by deductions allowed for certain income-producing buildings (proposal announced on 17 December 1986);
·.
to vary the date on which a taxpayer is taken, for the purposes of the tax on capital gains, to have acquired bonus shares in a company or bonus units in a unit trust issued in respect of shares or units acquired before 20 September 1985, where a payment is subsequently made by the shareholder or unitholder in respect of the bonus shares or units (proposal announced on 10 December 1986);
·.
to determine the capital gains treatment of bonus shares issued after 30 June 1987, other than bonus shares paid out of a genuine share premium account (proposal announced on 10 December 1986);
·.
to maintain eligibility for deductions for contributions to private superannuation funds where there are also certain employer provided superannuation benefits (proposal announced 22 December 1986);
·.
to remove, from 1 January 1987, the exemption of income in the form of allowances paid under the Commonwealth's Assistance for Isolated Children Scheme and the Veterans' Children Education Scheme to or in respect of students 16 years or over (1986-87 Budget announcement);
·.
to allow income tax deductions for gifts to the Lionel Murphy Foundation (proposal announced on 24 April 1987) and to the Australian-Hellenic Memorial Trust Fund (proposal announced on 1 April 1987);
·.
to amend the income tax gift provisions to reflect name changes to certain organisations currently listed in the provisions;
·.
to increase from $280 to $430 for married taxpayers (including de facto marrieds), and decrease from $190 to $180 for other taxpayers, the existing rebates of tax (and increase the income levels above which they shade-out) available for taxpayers wholly or mainly dependent on social security unemployment, sickness or special benefits, and recipients of certain Commonwealth educational allowances (1987-88 Budget announcement);
·.
to provide the method of calculating provisional tax for the 1987-88 income year; and
·.
to omit the requirements to impose provisional tax and instalments of company tax by the Act which imposes income tax upon taxable income.

·
This Bill will also amend -

·.
the Taxation Administration Act 1953 to make it clear that the modification, by section 14ZKA of the Act, of State and Territory limitation laws applies to both the amount of primary taxes outstanding and to any additional tax for late payment of those taxes; and
·.
the Taxation Laws Amendment Act (No. 2) 1987 to ensure that the provisions of that Act, which amended section 46A of the Income Tax Assessment Act 1936 consequent upon the phasing out of liability of private companies to additional tax under Division 7 of the Assessment Act, apply to dividends paid on or after 1 July 1986.

INCOME TAX AMENDMENT BILL (NO. 2) 1987

The Bill will amend the Income Tax Act 1986 -

·
to formally impose tax payable for the 1987-88 and all subsequent financial years, at the rates of tax declared by the Income Tax Rates Act 1986, by -

·.
individuals, and trustees generally;
·.
companies and registered organisations; and
·.
trustees of prescribed unit trusts, superannuation funds, ineligible approved deposit funds and certain other trusts; and

·
to repeal certain sections dealing with the imposition of a liability to pay provisional tax and instalments of company tax, following amendments of the Income Tax Assessment Act 1936.

MEDICARE LEVY AMENDMENT BILL 1987

The Bill will amend the Medicare Levy Act 1986 -

·
to declare and impose a basic rate of Medicare levy of 1.25 per cent for 1987-88 and subsequent income years (1986-87 Budget announcement); and
·
to exempt from the levy individuals with taxable incomes of $8,980 or less and families and sole parents with family incomes of $15,090 or less; the family or sole parent threshold to be raised by a further $2,100 for each dependent child or student (1987-88 Budget announcement).

FINANCIAL IMPACT

Taxation Laws Amendment Bill (No.3) 1987

The nature of the proposed amendments of the capital gains and losses provisions, and the anti-avoidance provisions contained in this Bill, are such that a reliable estimate of the potential revenue effect cannot be made.

The revenue cost of extending the income tax gift provisions to admit the Lionel Murphy Foundation is estimated at nil for 1986-87, $80,000 in 1987-88 and rising to $400,000 in 1988-89 and subsequent years. The revenue cost of providing deductibility for gifts to the Australian Hellenic Memorial Trust Fund is estimated at nil in 1986-87, $60,000 in 1987-88 and $70,000 in both 1988-89 and 1989-90.

The amendments of the income tax gift provisions to reflect name changes of certain organisations currently listed will have no effect on revenue.

The potential effect on the revenue arising from the various taxing arrangements associated with the Assistance for Isolated Children Scheme and Veterans' Children Education Scheme is estimated to be negligible.

The changes to the levels of rebates available for recipients of certain social security benefits and Commonwealth educational allowances will have no cost in 1987-88 and are estimated to cost $8 million in a full year.

The clarification of section 14ZKA of the Taxation Administration Act 1953 will guard against a potential total loss of revenue of the order of $250 million.

Income Tax Amendment Bill (No 2) 1987

The estimated revenue cost of the reductions in the personal income tax rates made as part of the tax reform exercise are $4,480m in 1987-88 and $4,560m in a full year.

Medicare Levy Amendment Bill 1987

The estimated gain to revenue by increasing the rate of Medicare levy to 1.25 per cent, first effective from 1 December 1986, is $370m in 1987-88.

The increase in the Medicare levy low income thresholds is estimated to cost $10m in 1987-88, $70m in 1988-89 and $40m in a full year. The higher cost in 1988-89 reflects the full application of the thresholds in the assessment of 1987-88 income, in lieu of the application through the PAYE system in that year.

MAIN FEATURES

The main features of the Bills are as follows:

Taxation Laws Amendment Bill (No.3) 1987

Rebate on dividends paid as part of a dividend stripping operation (Clauses 6, 7 and 38)

The Bill will give effect to the proposal announced on 4 June 1987 to extend the operation of sections 46A and 46B of the Income Tax Assessment Act 1936 (referred to as the "Assessment Act") to ensure that the intercorporate dividend rebate will be reduced or denied, as appropriate, where a dividend is paid in the course of a dividend stripping operation and the relevant property was acquired after 19 September 1985, i.e., where the capital gains and capital loss provisions in Part IIIA of the Assessment Act would apply to a disposal of the share or property.

Section 46A of the Assessment Act limits the amount of section 46 rebate allowable on intercorporate dividends if the Commissioner is satisfied that the dividends are paid in the course of a dividend stripping operation. In brief terms, the section requires that certain deductions (principally the cost of shares or other relevant property acquired as a part of the dividend stripping operation) be offset against the amount of dividends otherwise eligible for the rebate.

Section 46B of the Assessment Act applies where shares in a company are purchased for dividend stripping purposes and the stripped dividend is paid to another company on a special class of shares, but the cost of the shares purchased from the first company (and the resultant tax loss) is borne by a company or other entity associated with the stripping company. Where the conditions of the section are met the dividend is ineligible for the intercorporate dividend rebate.

Both sections 46A and 46B operate where the relevant property is acquired as trading stock or in circumstances where any profit that would arise from the disposal of the relevant property would be included in the assessable income of the shareholder, or any loss that would arise from the disposal would be an allowable deduction. As presently worded, the sections do not apply to limit or deny the intercorporate dividend rebate in cases where a dividend stripping operation gives rise to a net capital gain or a net capital loss for the purposes of Part IIIA of the Assessment Act.

The amendments proposed by clauses 6 and 7 will apply in relation to relevant dividends paid on or after 5 June 1987, other than where the dividends were declared before that date.

Franked dividends paid as part of a dividend stripping operation (Clauses 18 to 22 and 38)

As part of the imputation system of company tax a resident company is entitled to a franking credit if, during a franking year, it receives a franked dividend either directly as a shareholder, or indirectly through a partnership or trust estate. A rebate of tax - calculated by reference to the extra amount included in the shareholder's assessable income under section 160AQT of the Assessment Act - is allowable in the assessments of resident individuals and certain trustees for franked dividend income received directly, or indirectly through a partnership or trust.

To prevent companies from engaging in dividend stripping arrangements to gain the benefit of franking credits attaching to franked dividends, the amendments proposed by this Bill will ensure that such credits are not available where franked dividends are paid as part of dividend stripping operations.

As franked dividends will be effectively tax free in the hands of resident individuals and certain trustees under the new imputation system, the double benefit from dividend stripping previously gained by companies would become available to these taxpayers. To prevent this, the amendments will also exclude from eligibility for the rebate of tax, franked dividends received by resident individuals and certain trustees (whether directly or through a partnership or trust estate) where those dividends are paid in the course of dividend stripping operations.

The amendments will deny franking credits to companies and franking rebates to individuals and certain trustees under the new imputation system in any case where the payment of a dividend arises out of, or is made in the course of, a scheme that is by way of, or is in the nature of, dividend stripping, or has substantially the same effect as such a scheme.

The amendments will apply in relation to dividends paid on or after 1 July 1987, when the imputation system commenced to apply.

Dividends paid out of profits arising from the revaluation of certain assets (Clause 8)

The Bill proposes an amendment to address a means of avoidance of tax by companies on profits - in the form of income or capital gains, as the case may be - on the disposal of assets. In the most typical situation, a company which would otherwise be liable to pay tax on the gain arising from the sale of an asset could arrange its affairs so that the asset concerned is held by a wholly owned subsidiary. The subsidiary could revalue the asset to reflect its market worth at the time, and pay a dividend to the parent out of the profit on revaluation, the dividend being effectively free from tax because of the intercorporate dividend rebate. The dividend could be funded in a number of ways, e.g., by the purchase of further shares in the subsidiary by the parent, by a loan to the subsidiary by the parent, or a loan to the subsidiary by another (related or unrelated) party. The parent company, having effectively received the taxable gain on the asset in an untaxed form, would then be able to dispose of the shares in the subsidiary at a price equal to the paid-up value of the shares held - thus avoiding tax on the gain. The arrangements could be suitably ordered to ensure that the purchaser of the shares (and therefore the asset) acquires a cost base equal to the market value of the asset concerned, thus also ensuring that the purchaser is not at a later time exposed to tax on the gain realised by the vendor.

A new section - section 46E - is to be inserted in the Assessment Act, and will operate to deny the intercorporate dividend rebate to the vendor company in the types of circumstances outlined. The section will have effect only where the company revaluing its assets is not a listed company and where the revalued asset or assets of the company out of which dividends have been paid (being assets the disposal of which would, broadly, have given rise to a "taxable" gain) represent at least 75 per cent of the net worth of the company at the time of disposal of the shares by the "parent" company.

Loans etc. to shareholders and associates and excessive payments to shareholders, directors and associates deemed to be dividends (Clauses 9, 15, 38 and 39)

Sections 108 and 109 of the Assessment Act are anti-avoidance provisions which relate to private companies. In broad terms, they enable amounts to be deemed to be dividends (other than for withholding tax purposes) where private companies -

·
make loans or advances to their shareholders which are disguised distributions of income, thereby avoiding personal tax at the shareholder level (section 108); or
·
pay excessive remuneration or retirement allowances to their shareholders and directors and their relatives, thus obtaining a deduction at the company level (section 109).

The Bill will repeal the existing sections and substitute new sections, in order to remedy technical deficiencies that have become apparent in their application over the years. The new sections 108 and 109 will apply to relevant payments made on or after 5 June 1987.

Under the existing section 108, disguised distributions to shareholders by way of loans or advances or by way of payments by the company on behalf of, or for the individual benefit of, any of its shareholders, to the extent they represent distributions of income, are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section 108 is to be repealed and a strengthened provision inserted in its place.

The proposed new section 108 will apply in a greater range of circumstances than the existing section. It will encompass arrangements that fall outside the scope of section 108 as it is currently worded but which achieve, in essence, exactly the same ends against which the section is directed.

Instead of being limited to purported loans or advances to, or payments by a company on behalf of, or for the individual benefit of, actual shareholders, the new section will apply to loans or advances to, or payments or amounts credited on behalf of, or for the individual benefit of, a person associated with the company. An associated person for the purposes of the new section is to include a person who indirectly holds a beneficial interest in shares in addition to an actual shareholder, as well as relatives of such shareholders.

To the extent such amounts represent, in the opinion of the Commissioner, a distribution of profits (rather than a distribution of income as specified in the existing section) they will be deemed to be dividends paid by the company out of profits derived by it, and as if the recipient of the amount were a shareholder.

Under existing section 109, amounts paid or credited to a past or present shareholder, director or relative of a shareholder or director, either as remuneration for services rendered or as a retirement or termination payment, to the extent they exceed a reasonable amount, are not deductible against the company's assessable income and are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section is to be repealed and a strengthened provision inserted in its place.

As with the revision of section 108, the scope of the new section 109 is to be extended to encompass transactions which have essentially the same effect as those against which the existing provisions are directed.

To remove any doubt which may exist as to its meaning, the reference in the present section to amounts paid or credited is to be rewritten to expressly include the transfer of an asset. The class of recipients of excessive payments to which the proposed new section applies is to be extended to include persons with indirect beneficial holdings in shares and relatives of such persons.

To the extent that amounts paid or credited as remuneration for services rendered or as a retirement or termination payment exceed what is, in the Commissioner's opinion, a reasonable amount, they will not be deductible against the company's assessable income, and will be deemed to be dividends paid by the company out of profits derived by it as if the recipient of the amount were a shareholder.

Amounts deemed to be dividends under the new sections 108 or 109 will not be subject to the dividend franking rules which are to apply under the imputation system, as they do not fall within the definition of "frankable dividend" contained in section 160APA of Part IIIAA of the Assessment Act.

Gifts (Clause 11)

The Bill will give effect to proposals to extend those provisions of the Assessment Act that authorise deductions for gifts of the value of $2 or more made to specified organisations, to include the Australian-Hellenic Memorial Trust Fund and the Lionel Murphy Foundation. In accordance with announcements previously made, gifts made to the Lionel Murphy Foundation on or after 24 April 1987 will qualify for deduction, while those made to the Australian-Hellenic Memorial Trust Fund will qualify for deduction where they are made on or after 1 April 1987 and on or before 30 June 1989.

The Bill will also amend references to certain organisations currently listed in the gift provisions to reflect name changes to those bodies.

Contributions to superannuation funds by eligible persons: Interpretation (Clauses 12 and 38)

The Bill will give effect to the proposal, announced on 22 December 1986, to amend the income tax law to authorise deductions for contributions to private superannuation funds in circumstances where the contributor is also the subject of certain employer-provided superannuation benefits.

Under sections 82AAS and 82AAT of the Assessment Act, a deduction, limited to $1,500, is available for contributions made to qualifying superannuation funds, where the contributor is not a person for whom provision for superannuation benefits is - to any extent - funded by an employer or other person.

On 26 June 1986, the Australian Conciliation and Arbitration Commission agreed to the ratification by it, or a State industrial tribunal, of agreements between unions and employers providing for limited employer contributions to superannuation funds under certain conditions. An effect of these agreements, as the law stands, is that the employer-provided contributions would render employees for whose benefit they are provided ineligible for deductions under section 82AAT for their own contributions to qualifying superannuation funds.

The amendments made by this clause will ensure that taxpayers will not be denied deductions for contributions to qualifying superannuation funds by reason only that they also receive employer-provided superannuation support arising from -

·
such an agreement; or
·
an agreement that has not been ratified by an industrial tribunal, but which is identical to an agreement that has been made or ratified by an industrial tribunal for employees in the same industry as the relevant employer.

The amendments are to apply in respect of employer contributions made under such agreements on or after 1 July 1986.

Taxing of certain educational assistance (Clauses 5, 16, 17, 35 and 38)

From 1 January 1987 payments of income under the Commonwealth's Assistance for Isolated Children Scheme (AIC) and the Veterans' Children Education Scheme (VCES) to or in respect of students 16 years or over are to be made subject to tax by this Bill. The removal from 1 January 1987 of the existing exemptions for these payments is consistent with the removal, from the same date, of the exemption for AUSTUDY secondary education assistance (previously paid under the Secondary Allowances Scheme) by the Taxation Laws Amendment Act (No.4) 1986.

The payments under AIC or VCES may be made to the student or, where the student is 16 or 17 years old, to a parent, guardian or trustee in respect of the student. Payments made to a parent, guardian or trustee are to be regarded as made to that person in the capacity of an agent of the student and, as such, will be assessable income of the student.

Payments of income under VCES and payments under AIC in respect of students 16 years and over, to the extent they are for the maintenance or accommodation of a student, will be separate net income of the student for concessional rebate purposes.

Rebate in respect of certain pensions (Clauses 17 and 38)

This Bill will give effect to the 1987-88 Budget proposal to vary for 1987-88 the maximum rebates of tax (referred to as the "beneficiary rebates"), and the income levels above which the rebates shade-out, for taxpayers in receipt of social security unemployment, sickness or special benefits and certain Commonwealth educational allowances. For married (including de facto married) taxpayers the maximum rebate will be increased from $280 to $430 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $10,350 ($9,436 in 1986-87). For other taxpayers the maximum rebate will decrease from $190 to $180 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $5,850 ($5,669 in 1986-87). No rebate will be available at taxable incomes of $13,790 or more for married taxpayers and $7,290 or more for others.

The Bill will also extend, from 1 July 1987, the availability of the beneficiary rebates to students assessed on payments under the Assistance for Isolated Children Scheme or Veterans' Children Education Scheme. This is consistent with the availability of the beneficiary rebates to recipients of AUSTUDY general secondary educational assistance from that date.

Changes to deeming provisions on change of residence (Clause 23)

The Bill will implement the proposal, announced on 23 December 1986, to amend the capital gains and capital losses provisions of the Assessment Act relating to the treatment of assets owned by a taxpayer who ceases to be a resident. The changes to the law are intended, amongst other things, to remove any deterrent to Australian residents wishing to gain work experience abroad or to foreign experts considering a temporary assignment in Australia.

Resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated. In this regard, assets held by a taxpayer who acquires residency status become subject to the capital gains tax provisions and are deemed to have been acquired for their market value at the time the taxpayer becomes a resident. However, non-residents are liable to tax on capital gains only on the disposal of an asset which, by section 160T, is treated as the disposal of a taxable Australian asset.

Where a taxpayer ceases to be a resident of Australia, the existing law deems there to have been a disposal of all the assets owned by the taxpayer (other than taxable Australian assets or assets that were acquired by the taxpayer before 20 September 1985) at the time that the taxpayer ceases to be a resident. Also, where a resident partnership ceases to be a resident, the partners in the partnership are deemed to have disposed of the assets of the partnership (other than taxable Australian assets or assets that were acquired by the partners before 20 September 1985) at the time the partnership ceases to be a resident partnership. These requirements ensure that tax on gains in respect of assets, other than taxable Australian assets, that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non-resident status.

The operation of the law will be modified where a taxpayer (not being a company or trustee of a trust estate) has been a resident for a total period of less than five years in the period of ten years immediately before the time when the taxpayer ceased to be a resident or when a partnership in which the taxpayer is a partner ceased to be a resident partnership. An asset will not be taken to have been disposed of for these purposes if the asset was owned by the taxpayer at the time he or she became or last became a resident, or was acquired by the taxpayer since that time as a beneficiary in the estate of a deceased person or as a surviving joint tenant. In this way, short-term residents will not be required to pay capital gains tax on assets they owned when they became a resident.

Another change proposed by the Bill is that a taxpayer who is a natural person will be able to elect that the provisions not apply that would otherwise deem a particular asset to have been disposed of by the taxpayer when he or she ceased to be a resident or when a partnership ceased to be a resident partnership. The election must be made in writing on or before the date of lodgment of the return for the year of income in which residency ceased, or within such further time as the Commissioner allows, and it must apply in respect of all assets owned by the taxpayer that would otherwise be deemed to have been disposed of.

The effect of an election will be to treat an asset subject to the election as a taxable Australian asset until such time as it is disposed of, or until the taxpayer again becomes a resident. This means that gains and losses on the asset related to a period in which the taxpayer was not a resident will be included in any gain or loss which is subject to the capital gains and capital losses provisions on eventual disposal of the asset.

The amendments will apply to assessments made for the year of income in which 20 September 1985 occurred (the date of first effect of the tax on capital gains) and all subsequent years of income.

Return of capital on investment in trust (Clauses 24, 25 and 38)

Clauses 24 and 25 give effect to the proposal announced on 17 December 1986 to amend the capital gains and capital losses provisions relating to the return of capital on an investment in a trust. Section 160ZM operates to reduce the cost bases of interests in or units in a trust where a beneficiary or unitholder receives a distribution that is not assessable income of the beneficiary or unitholder, and is not in respect of the disposal of the interest or unit.

The provisions contained in this Bill will change the application of the law where the distribution made by the trustee includes an amount that was freed from income tax by the allowance of deductions for capital expenditure on traveller accommodation or certain income-producing buildings (under Division 10C or 10D of Part III of the Assessment Act, respectively). The cost base of the interest or units in the trust will not be reduced, for the purpose of determining capital gains, by the amount of the distribution which is attributable to the deductions so allowed.

These amendments will apply in relation to a payment made by a trustee after 17 December 1986.

Partly paid bonus shares and bonus units (Clauses 26 to 30)

Under the existing capital gains and capital losses provisions, the date of acquisition of bonus shares is taken to be the date on which the taxpayer acquired the original shares in respect of which the bonus shares are issued. Accordingly, a gain or loss on the disposal of bonus shares, where the original shares were acquired before 20 September 1985, is not subject to the capital gains and capital losses provisions because the date of acquisition of the bonus shares is deemed to be before 20 September 1985.

Similar rules also apply to the issue of bonus units that result in no amount being included in the assessable income of the recipient unitholder.

The Bill will implement the proposal announced on 10 December 1986 to amend the law where the original shares or units were acquired before 20 September 1985, the bonus shares or units were issued after 1pm Eastern Summer Time on 10 December 1986, and a payment is subsequently made by or on behalf of the taxpayer in respect of the bonus shares or units, e.g., payments of calls of capital in respect of such partly paid bonus shares or units. In such cases, the date of acquisition of the bonus shares or units will be taken to be the time when liability to make the first payment arose.

Where the new provisions apply to bonus shares or units to deem them to have been acquired at the time when liability to make the first payment arose, the cost base of the bonus shares or units will be the sum of their market value immediately before that time and the amount of the payment.

Where bonus shares issued after 30 June 1987 are not within the changes contained in clause 32 in respect of bonus shares issued after that date (that is, where no part of their paid-up value is a dividend), the new measures in respect of partly paid bonus shares will apply.

Bonus shares issued after 30 June 1987 (Clauses 31 to 32)

The Bill will also amend the capital gains and losses provisions so that certain bonus shares issued after 30 June 1987 will be subject to those provisions irrespective of the date of acquisition of the primary shares. This proposal was also announced on 10 December 1986.

The amendments apply to all bonus shares issued after 30 June 1987, where some or all of the paid-up value of the bonus shares is a dividend. Accordingly, bonus shares paid wholly out of a bona fide share premium account will continue to be subject to the existing rules (including those rules as modified by the new provisions in the Bill in respect of partly paid bonus shares).

Under the amendments, the cost base, indexed cost base and reduced cost base of the bonus shares include that part of their paid-up value that was included in assessable income as a dividend under the Assessment Act. The acquisition date of the relevant bonus shares will be determined under section 160U of that Act. This will generally mean that the bonus shares will be taken to have been acquired at the time of their issue, so that their disposal will be subject to the capital gains and capital losses provisions, irrespective of whether the date of acquisition of the original shares in respect of which the bonus shares were issued was before or after 19 September 1985.

Provisional tax for 1987-88 year (Clause 37)

Provisional tax for the 1987-88 year of income is to be calculated, basically, by applying 1987-88 rates of tax and Medicare levy to 1986-87 taxable incomes as increased by 11 per cent. Rebates and credits allowed in 1986-87 income tax assessments will be taken into account as appropriate in calculating the 1987-88 provisional tax.

In the case of the rebate of tax available to Christmas Island residents as part of the personal income tax phasing arrangements there the amount to be taken into account in the provisional tax calculation will be one-half of the amount allowed in 1986-87 assessments. Arrangements for pro-rating the tax free threshold which may apply where a person leaves full-time education in the 1987-88 year of income or is a resident of Australia for only part of the year will not be taken into account.

Application of limitation laws to recovery of additional tax for late payment (Clauses 41 to 43)

Section 14ZKA was inserted in the Taxation Administration Act 1953 (referred to as the "Administration Act") by the Taxation Administration Amendment (Recovery of Tax Debts) Act 1986 to guard against a potential revenue loss of $900 million that would occur if the decision of the Full Court of the Queensland Supreme Court in the case of Deputy Commissioner of Taxation v Moorebank Pty Ltd was upheld on an appeal pending by the Commissioner to the High Court. The Moorebank decision overturned an established principle that State or Territory limitation laws did not apply to the recovery of taxation debts.

In the absence of section 14ZKA, the Moorebank decision, if upheld by the High Court, would require recovery actions by the Commissioner of Taxation generally to be commenced within 6 years in the case of taxes and 2 years in the case of penalties, measured from the date the taxes became due and payable. However, where a tax debt that relates to an assessment is the subject of an objection or appeal, it may be several years after the date on which the tax became due and payable before the objection and appeal process is finalised. In these cases, the limitation period would commence on the due date for payment and could therefore expire at a time before the objection and appeal process is completed.

Section 14ZKA was inserted in the Administration Act to modify the operation of State and Territory limitation laws in those cases where an objection has been lodged against an assessment. The effect of the modification is simply to extend any State or Territory limitation period so that it continues to the date on which it would have ended if the limitation period had commenced on the date of finalisation of the relevant objection and appeal process. The section is drafted in such a way as to apply only if the Moorebank decision is upheld by the High Court.

Section 14ZKA also ensured that additional tax that is assessed - for example, additional tax for late lodgment, for making a false or misleading statement or for participating in a tax avoidance scheme - is treated as "tax" and not as a "penalty", so that the shorter limitation period that generally applies to the recovery of penalties does not apply to the recovery of such unpaid additional tax.

That treatment does not extend to additional tax for late payment, which is not an assessed tax. If, therefore, the Commissioner's appeal in the Moorebank case were to be unsuccessful, an action for recovery of additional tax for late payment would be subject to the shorter limitation period that applies to penalties. However, it was always intended that, where such additional tax relates to tax that is the subject of an objection or appeal, section 14ZKA would also operate to extend the normal (shorter) limitation period so that it too would run for a continuous period beginning on the date on which the tax became due and payable and ending when the limitation period would have ended if it had commenced on the date of finalisation of the relevant objection and appeal process.

A technical argument has been advanced to the effect that this intention has not been achieved by section 14ZKA. This Bill will amend section 14ZKA to make it clear that the modification by that section of State and Territory limitation laws also applies to additional tax for late payment.

Income Tax Amendment Bill (No 2) 1987

The Bill will amend the Income Tax Act 1986 to impose the rates of tax payable for the 1987-88 and all subsequent financial years by -

·
individuals and trustees generally;
·
companies;
·
registered organisations; and
·
trustees of prescribed unit trusts, superannuation funds, ineligible approved deposit funds, and certain other trusts,

as declared by the Income Tax Rates Act 1986. In addition, the Bill will repeal certain sections dealing with the imposition of provisional tax and instalments of company tax, consequent on amendments to be made to the Income Tax Assessment Act 1936 by the Taxation Laws Amendment Bill (No. 3) 1987.

Medicare Levy Amendment Bill 1987

The Medicare levy will, by this Bill, be payable on taxable incomes for 1987-88 and subsequent income years. The amendments to the levy arrangements contained in the Bill will -

·
declare and impose the Medicare levy in respect of 1987-88 and all subsequent financial years at the rate of 1.25 per cent; and
·
increase the level of the low income thresholds so that no levy will be payable by:

·.
a person whose taxable income does not exceed $8,980; or
·.
a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $15,090, or by a sole parent where his or her taxable income does not exceed $15,090; for each dependent child or student maintained by a married couple or sole parent the threshold for payment of the levy is to be increased by $2,100.

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

Notes on Clauses

TAXATION LAWS AMENDMENT BILL (NO.3) 1987

PART I - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act (No.3) 1987.

Clause 2: Commencement

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

PART II - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 3: Principal Act

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

Clause 4: Officers to observe secrecy

Clause 4, will replace the words "enquiry" and "enquire" where they occur in section 16 of the Principal Act with the more appropriate words "inquiry" and "inquire" respectively. Section 16 imposes the obligation of secrecy upon taxation officers.

Clause 5: Exemptions

This clause will amend paragraphs (z) and (zaa) of section 23 of the Principal Act which provide an income tax exemption for a range of income receipts.

Subject to certain exceptions, paragraph 23(z) of the Principal Act exempts from tax income derived by way of scholarship, bursary or other educational assistance by students receiving full-time education at a school, college or university, other than assistance provided by the Commonwealth for secondary education and in connection with the education of isolated children. It does not exempt payments for tertiary assistance (other than in respect of a dependent child of the recipient) under the new Commonwealth educational assistance scheme referred to as AUSTUDY.

Paragraph 23 (zaa) of the Principal Act, on the other hand, exempts from tax, with one exception, income derived by way of Commonwealth assistance for secondary education and in connection with the education of isolated children. The exception is income paid under the AUSTUDY scheme for secondary education to the extent it is not provided in respect of a dependent child of the recipient.

The amendments proposed by clause 5 will remove the exemptions provided by paragraphs 23(z) and 23(zaa) in respect of income derived by students aged 16 or over from educational assistance under the Commonwealth's Assistance for Isolated Children Scheme (AIC) and the Veterans' Children Education Scheme (VCES).

The amendments of paragraph 23(z) by paragraphs (a) and (b) of clause 5 will insert new subparagraph 23(z)(vii) to remove the exemption presently available for income derived in the form of tertiary educational assistance under VCES by students aged 16 years and over. No assistance is available under AIC for tertiary education.

Paragraphs (c), (d) and (e) of clause 5 will amend paragraph 23(zaa) to insert new subparagraph 23(zaa)(iii) that will remove the exemption presently available for income derived in the form of secondary educational assistance by students aged 16 years and over under AIC and VCES.

The payment arrangements for AIC and VCES allowances are such that they are payable direct to a student 18 years or older and either direct to the student, or to the parent or guardian of a student, where the student is under 18 years of age. When paid direct to the student, a taxable allowance will be assessable income of the student. Similarly, when paid to a parent or guardian of a student under 18 years of age the taxable allowance will be assessable income of the student in respect of whom the allowance is paid. In these cases the parent or guardian is regarded as receiving payment as an agent for the student.

By subclause 38(2) the removal of the exemptions will apply in respect of income received under AIC and VCES in respect of a period commencing on or after 1 January 1987.

Clauses 6 and 7: Measures relating to dividend stripping

Introductory note

These clauses will amend existing measures against dividend stripping tax avoidance arrangements.

By section 46 of the Principal Act, a resident company is entitled to a rebate of tax on dividends received from other resident companies. Under changes effected by the recently enacted Taxation Laws Amendment Act (No.2) 1987, the rebate entitlement for the 1987-88 and later years is generally to be calculated by applying a average rate of tax payable by a company to the dividends included in its assessable income. In this way, the rebate allowable under section 46 effectively frees from tax dividends paid by one resident company to another. However, where the payment of a dividend is made in the course of an operation that the Commissioner of Taxation is satisfied is by way of dividend stripping, section 46A, rather than section 46, governs the determination of the rebate entitlement.

In its simplest form, a dividend stripping operation against which section 46A is aimed turns on the purchase by a share-trading company of shares in another (target) company which has accumulated profits. A payment of a dividend is then made by the target company to the share-trading company which, in effect, wholly or substantially recoups its outlay on the purchase of the shares in the target company. The shares purchased can then be resold at a reduced price, or retained at a reduced value. Either way, the share-trading company would, in the absence of any measures to the contrary, receive a double benefit. Firstly, it would have a tax deductible loss represented by the difference between the purchase price of the shares and their resale price or reduced value as trading stock. Secondly, the dividend received that effectively recoups the share-trading company's outlay would be freed from tax by the intercorporate dividend rebate.

Section 46A also applies where the relevant property is not acquired by the dividend stripper as trading stock, i.e., a share-trader, but in such circumstances that any profit that would arise from disposal of the property would be included in the assessable income of the shareholder, or that any loss that would be incurred from disposal of the property would be deductible to the shareholder.

Section 46A denies the double benefit that would otherwise be available in the foregoing cases by limiting the rebate to the amount calculated by reference to the net dividends received by the share-trading company, after taking into account deductions relating to the purchase of the shares.

Specifically, the rebate entitlement under section 46A is calculated by applying the average rate of company tax to the amount of net income from dividends derived by the shareholder in a dividend-stripping operation. In determining that amount of net dividend income for rebate calculation purposes, subsections 46A(11) and (12) treat expenditure incurred in the acquisition of the relevant property, including its purchase price, and any other expenditure taken into account in ascertaining the amount of the profit or loss, as being deductions allowed or allowable to the shareholder.

Section 46B of the Principal Act complements section 46A by denying the intercorporate dividend rebate where a dividend is not paid directly to a company in respect of the shares acquired by it in a dividend stripping operation, but is instead paid to one or more associates of that company on a special class of shares issued at a nominal consideration for the purpose of enabling the payment of that dividend.

With the introduction of the capital gains tax provisions contained in Part IIIA of the Principal Act, there is scope for income tax to be avoided in those situations where dividends are paid in the course of a dividend stripping operation and the disposal of property by a company gives rise to a capital, rather than an income, gain or loss.

The amendments proposed by the Bill will extend the existing principles of both sections 46A and 46B to cases where a capital gain or loss is involved. By subclauses 38(3) and (4), the amendments will apply in relation to dividends paid after 4 June 1987, being the date on which the Government's intention to introduce the amendments was announced, other than where the dividend was declared on or before that date (see later notes on clause 38).

Clause 6: Rebate on dividends paid as part of dividend stripping operation

The amendments of section 46A of the Principal Act proposed by clause 6 are designed to remove scope for tax avoidance of the kind outlined above, by ensuring that the provisions dealing with the calculation of the rebate to which a company is entitled under section 46A apply in those cases where the disposal of property gives, or will give, rise to a capital gain or capital loss as defined by subsection 160Z(1) of the Principal Act.

Paragraph (a) of clause 6 will amend subsection 46A(2) by inserting a further condition which may invoke the application of section 46A. That condition - that the 'relevant property' was acquired by the company on or after 20 September 1985 - is contained in new paragraph (g), and will override the existing pre-conditions (that are to be re-expressed as paragraph (f) and subparagraphs (f)(i) and (ii)) which require the company to be actually or effectively entitled to a deduction for the cost of acquiring the relevant property.

For these purposes the 'relevant property' (which is a term defined in existing subsection 46A(13D) of the Principal Act) may be the shares on which the dividend is paid, other shares issued by either the company paying the dividend or a related company, or a beneficial interest in a trust estate related to the dividend paying company.

Paragraph (b) of clause 6 proposes the inclusion of a new subsection - subsection (10B) - in section 46A which will make existing subsections 46A(11) and (12) inapplicable where the relevant property was acquired on or after 20 September 1985, while paragraph (c) proposes to insert in section 46A additional subsections - subsections (12A), (12B) and (12C) - which will substitute for the inapplicable subsections.

For the purpose of calculating the amount of a company's net income derived from dividends, and hence its rebate entitlement, proposed new subsection (12A) specifies for each set of circumstances where the relevant property (other than trading stock) was acquired on or after 20 September 1985, the amounts that are to be treated as allowable deductions in respect of dividends included in the company's assessable income for a particular income year. The circumstances vary depending on whether the income year in which the dividends were derived is the same income year in which the relevant property is disposed of or a different year.

Under subparagraph (12A)(a)(i) if the relevant property is disposed of before the end of the income year in which the dividends were derived, the amount deemed to have been deductible in that income year will be either -

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the "cost base" to the company of the relevant property ascertained as at the time of the disposal (sub-subparagraph (A)); or
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if subsection (11) or (12) would, apart from being made inapplicable by proposed subsection (10B), apply in relation to the relevant property in relation to that income year - the expenditure referred to in the appropriate subsection (sub-subparagraph (B)),

whichever is the greater. (The term "cost base" used in this and succeeding provisions of subsection 12A is defined in new subsection 12C - see later notes on this clause.)

In this way, where a provision other than a provision of Part IIIA of the Principal Act would apply to the gain or loss on disposal of the relevant property - e.g., where 26AAA would apply - and that provision allows a greater deduction in relation to the acquisition of the relevant property than would the provisions of Part IIIA, the expenditure allowed or allowable as a deduction will be set off against the dividends concerned for the purpose of calculating the rebate.

Under subparagraph (12A)(a)(ii), if the relevant property was not disposed of before the end of the income year in which the dividends were derived, the amount deemed to have been deductible in that income year will be either -

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the cost base to the company of the relevant property ascertained as at the end of that income year (sub-subparagraph (A)); or
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if subsection (11) or (12) would, apart from the operation of proposed subsection (10B), apply in relation to the relevant property in relation to that income year - the expenditure referred to in the appropriate subsection (sub-subparagraph (B)),

whichever is the greater.

Under subparagraph (12A)(b)(i), if the relevant property is disposed of during an income year after the income year in which the dividends were derived, the amount deemed to be deductible in relation to that later income year will be either -

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the cost base to the company of the relevant property ascertained as at the time of the disposal (sub-subparagraph (A)); or
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if subsection (11) or (12) would, apart from being inapplicable by virtue of proposed subsection (10B), apply in relation to the relevant property in relation to that later income year, or in relation to that later income year and the previous income year or years - the expenditure, or the sum of the expenditures, referred to in the appropriate subsection (sub-subparagraph (B)),

whichever is the greater, reduced by the amount, or the sum of the amounts, to which the new subsection (12A) has applied in earlier years.

Subparagraph (12A)(b)(ii), applies where the relevant property is not disposed of during an income year after the income year in which the dividends were derived. In such cases, the amount deemed to be deductible in relation to the later income year will be either -

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the cost base to the company of the relevant property ascertained as at the end of that later income year (sub-subparagraph (A)); or
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if subsection (11) or (12) would, apart from the operation of proposed subsection (10B), apply in relation to the relevant property in relation to that later income year, or in relation to that later income year and the previous income year or years - the expenditure, or the sum of the expenditures, referred to in the appropriate subsection (sub-subparagraph (B)),

whichever is the greater, reduced by the amount, or the sum of the amounts, to which the new subsection (12A) has applied in earlier years.

Proposed new subsection (12B) is to the effect that where Part IIIA of the Principal Act does not apply in respect of the disposal that resulted in the acquisition of the relevant property by the company (because of roll-over relief provided by Division 17 of that Part), the 'cost base' of the relevant property for the purposes of proposed subsection (12A) is to be the amount that would have been the cost base of the transferor for the purposes of Part IIIA if that Part had applied in respect of the disposal of the relevant property to the company.

Proposed new subsection (12C) is an interpretative provision which gives the same meaning to the terms "cost base" and "disposal" used in proposed subsections (12A) and (12B) as those terms have in Part IIIA.

Paragraph (d) of clause 6 proposes to amend subsection 46A(13C) of the Principal Act by making the terms of that provision subject to proposed new subsection (13CA). By subsection (13C) a person who acquires relevant property pursuant to an agreement to acquire it is taken to have acquired the property at the time the agreement was entered into.

Paragraph (e) of clause 6 proposes to insert new subsection (13CA), which is to the effect that, for the purposes of section 46A, the question whether property was acquired on or after 20 September 1985 will be determined in the same manner as that question is determined in relation to the timing of the acquisition of an asset for capital gains tax purposes.

Clause 7: Rebate not allowable in certain circumstances

Clause 7 will amend section 46B of the Principal Act in a manner similar to the amendment of section 46A proposed by clause 6 of this Bill, so that the section will also apply where the disposal of property in the course of a dividend stripping operation gives rise, or will give rise, to a capital, rather than an income, gain or loss.

Paragraph (a) of clause 7 will amend paragraph (c) of subsection 46B(1) by inserting a further condition which may give rise to the operation of the section. This is where 'associated property' was acquired on or after 20 September 1985 by a person associated with the shareholder who derives the dividend. It will operate to apply the section to transactions on capital account, as an alternative to the existing pre-conditions which require that the associated property be acquired as trading stock, or in such circumstances that any profit that would arise on its disposal would be included in the assessable income of the person engaging in the dividend stripping operation or any loss would be deductible to that person.

'Associated property', is defined in existing paragraph 46B(1)(b) of the Principal Act, and encompasses shares in the company being stripped, shares in a company related to that company and beneficial interests in a trust estate which is related to that company.

Paragraph (b) of clause 7 proposes to amend subsection 46B(4) of the Principal Act to make the terms of that provision subject to proposed new subsection (5A). Subsection (4) ensures that where a person acquires associated property pursuant to an agreement to acquire that property, the person is taken to have acquired the property at the time the agreement was entered into.

Paragraph (c) of clause 7 will insert new subsection (5A) which will ensure that, for the purposes of section 46B, the question whether property was acquired on or after 20 September 1985 will be determined in the same manner as that question is determined for capital gains tax purposes.

Clause 8: Dividends paid out of profits arising from the revaluation of certain assets

Clause 8 proposes the insertion of a new section - section 46E - in the Principal Act to counter certain schemes involving the payment of dividends after 4 June 1987 out of asset revaluation reserves.

A general object of the schemes concerned is to effectively dispose of an asset without incurring an income tax liability in respect of the asset's increased value at the time of the disposal. The asset is invariably disposed of by way of the sale of shares in the company holding the asset, or by way of the sale of shares in a related company or an interest in an investment vehicle which has a direct or indirect shareholding in the company holding the asset. The asset is, therefore, effectively disposed of by the shareholder to whom dividends - to be known as asset revaluation dividends - are paid, or by some other person having a direct or beneficial interest in the shareholder. The effective disposal of the asset may occur after, or at the time of, the revaluation of the asset or, in the case of an arrangement between the original and subsequent owners which seeks to achieve for the vendor the same tax advantage, the effective disposal may occur before the revaluation of the asset.

Scope for tax avoidance by these means is to be removed by denying the intercorporate dividend rebate in respect of asset revaluation dividends paid in the circumstances described by the proposed new section.

Subsections 46E(1) to (11) inclusive are interpretative provisions which explain the meaning of certain terms and phrases used in the section.

Under subsection 46E(1) -

"arrangement" is defined in a manner common to other provisions of the Principal Act and covers the various forms of agreement, whether formal or informal, express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings. The term is relevant to the application of sub-subparagraph 46E(2)(a)(ii)(C) and subsection 46E(12).
"asset revaluation dividend" is defined to mean a dividend paid by a 'revalued asset-holding company' after 4 June 1987 to the extent that the dividend was paid out of profits from the 'eligible revaluation of an asset'. The term is also relevant to the application of subsection 46E(12). The meaning of the terms 'revalued asset-holding company' and 'eligible revaluation of an asset' is contained in subsection 46E(2).
"net worth" is defined in relation to a company to mean the excess of the value of the company's assets over its total liabilities. The term is used to determine, under paragraph 46E(2)(b), whether a company is a 'revalued asset-holding company'.

For section 46E to operate there must have been a dividend paid by a 'revalued asset-holding company' out of profits arising from an 'eligible revaluation of an asset'. The circumstances in which an 'eligible revaluation of an asset' occurs and in which a company is to be regarded as having been a 'revalued asset-holding company' are specified in subsection 46E(2).

Paragraph 2(a) specifies the circumstances in which a revaluation of an asset of a company is to be regarded as an 'eligible revaluation of an asset'. There are four conditions which need to be satisfied for there to have been an 'eligible revaluation of an asset'.

The first condition, contained in subparagraph (a)(i), is that there be a disposal, by the shareholder or any other person, of the share on which a dividend is paid (sub-subparagraph (A)), of another share in the company which paid the dividend (the 'asset-holding company') (sub-subparagraph (B)), of a share in a company related to the asset-holding company (sub-subparagraph (C)), or a beneficial interest in a trust estate related to the asset holding company (sub-subparagraph (D)). The tests for determining whether a company or trust estate is related to an asset holding company are contained in subsection (3), notes on which follow.

Subparagraph (a)(ii) contains the second condition. It deals with the time of disposal of the shares or other property referred to in subparagraph (1). There are three alternatives which could give rise to the second condition being satisfied, viz., the time of disposal was after the revaluation of the asset concerned (sub-subparagraph (A)), at the time of the revaluation (sub-subparagraph (B)) or before the time of the revaluation and the revaluation occurred under or as a result of an arrangement entered into at or before the disposal time (sub-subparagraph (C)).

The third condition is specified in the alternatives in subparagraphs (a)(iii) and (iv). If the asset concerned was revalued before the disposal time, the condition is that the asset not be disposed of by the asset holding company at or before the disposal time. In such cases, if the asset is disposed of, the asset-holding company would become liable for tax on any gain that is realised and, accordingly, tax would not be avoided. If the asset concerned was revalued after the disposal time under an agreement entered into at or before that time, the condition is that the asset-holding company own the asset at the disposal time and at all times until the revaluation.

The fourth condition is that if the asset-holding company had disposed of the asset concerned at the time of disposal of the share or interest referred to in subparagraph (i) -

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any profit that would have arisen would have been included in the assessable income of the company, or conversely, any loss would have been deductible (sub-subparagraph (A)); or
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where the asset was acquired on or after 20 September 1985, Part IIIA would, or would but for Division 17 of that Part (i.e., the provisions dealing with roll-over relief), have applied in respect of the disposal (sub-subparagraph (B)).

Under paragraph (2)(b), a company is to be regarded as having been a 'revalued asset-holding company' at the time a dividend was paid only if it was an 'unlisted company' at that time (subparagraph (i)), and the total value of the 'revalued assets' of the company at disposal time, in a case where the revaluation occurred at or before that time (subparagraph (i)), or immediately after the time of revaluation, if revaluation occurred after the disposal time (subparagraph (ii)), were not less than 75 per cent of the net worth of the company as at the disposal time. The meaning of the term 'revalued asset' is explained later in the notes on subsection (6) and that of 'unlisted company' in the notes on subsection (8).

Subsection (3) gives a broad meaning to the connection that may exist between a company and another company or a trust estate, for the purpose of determining whether that company or trust estate is related to an asset-holding company. This connection is central to the operation of subparagraph 46E(2)(a)(ii) in determining whether there has been an eligible revaluation of an asset by an asset-holding company.

Under paragraph (a), a company is to be regarded as having been related to another company at a particular time if a reduction in the value of any shares in the latter company could reasonably be expected to have resulted in a reduction in the value of any shares in the former.

Similarly, under paragraph (b), a trust estate is to be regarded as having been related to a company if a reduction in the value of any shares in the company could reasonably be expected to have resulted in a reduction in the value of any of the property of the trust estate.

Subsection (4) broadens the meaning of the terms 'share' and 'beneficial interest in a trust estate' which are used in subparagraph (2)(a)(i) and subsection (3).

Under paragraph (4)(a), a reference in those provisions to a 'share' is to include a reference to an interest in a share and a right or option, whether vested or contingent, to acquire a share or an interest in a share. Similarly, by paragraph (4)(b), a reference to a 'beneficial interest in a trust estate' is to include a right or option, whether vested or contingent, to acquire a beneficial interest in a trust estate.

Subsection (5) requires that, for the purposes of the new section, the question of whether an asset was acquired on or after 20 September 1985 is to be determined in the same manner as under Part IIIA of the Principal Act. This is important for the purposes of sub-subparagraph 46E(2)(a)(v)(B) explained above.

Subsection (6) specifies that two conditions must be satisfied if an asset is to be regarded as a 'revalued asset'. Paragraph (a) requires the company concerned to have paid, after 4 June 1987, a dividend wholly or partly out of profits arising from the revaluation of the asset. Paragraph (b) sets out the condition that, if the company had disposed of the asset immediately after the revaluation -

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any profit that would have arisen on the disposal of the asset would have been included in the assessable income of the company, or conversely, any loss would have been deductible (subparagraph (i)); or
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where the asset was acquired on or after 20 September 1985, Part IIIA would, or would but for Division 17 of that Part (i.e., the provisions dealing with roll-over relief), have applied in respect of the disposal (subparagraph (ii)).

Subsection (7) is a technical measure to allow the Commissioner of Taxation to disregard the discharge or release of liabilities in calculating the net worth of a company, where the Commissioner is satisfied that the liabilities were discharged or released for the purpose of attempting to make the new section inapplicable. The subsection would also allow the Commissioner to disregard the value of assets where the Commissioner is satisfied that the assets were acquired for the same purpose. "Net worth" in relation to a company is defined in subsection 46E(1) and is used in paragraph 46E(1) and 46E(2)(b).

Subsection (8) specifies that a company is to be taken to have been an unlisted company at a particular time unless, at that time, the company had been admitted to, and had not been removed from, the official list of a stock exchange in Australia or elsewhere. This definition is relevant in determining whether a company is a revalued asset-holding company in accordance with paragraph 46E(2)(b).

Subsections (9) and (10) clarify the meaning of phrases used in the new section which relate to the entering into or the carrying out of an arrangement. Subsection (9) recognises that an arrangement may involve two or more parties. It specifies that a reference to the carrying out of an arrangement by a person is to be taken as including a reference to the carrying out of an arrangement by a person alone or together with another person or other persons.

Subsection (10) will ensure that the provisions of the new section apply notwithstanding that an arrangement may have been entered into or carried out before the date of commencement of the section.

Subsection (11) gives alternative meanings to the phrase 'capital tax benefit in connection with an arrangement' which is used in subsection (12).

Paragraph (11)(a) refers to the notional amount of profit that would have arisen on the disposal of an asset that is not included in a taxpayer's assessable income of an income year, but which would have been included, or might reasonably be expected to have been included, in the taxpayer's assessable income if the arrangement had not been entered into or carried out. By this paragraph a taxpayer will be taken to have obtained a capital tax benefit if, on the facts, the taxpayer could reasonably be expected to have derived an assessable profit on a disposal of an asset that, but for the arrangement, would have been disposed of.

Paragraph (11)(b) refers to the amount of a capital gain (as that term is used in Part IIIA of the Principal Act), that does not accrue to a taxpayer during an income year, where that amount would have accrued, or might reasonably be expected to have accrued to the taxpayer during the income year if the arrangement had not been entered into or carried out.

For example, an asset-holding company will be taken to have gained a capital tax benefit in connection with an arrangement if it may reasonably be concluded that an asset would have been disposed of by the company and that disposal would have given rise to an assessable profit or capital gain. Similarly, a shareholder will be taken to have gained a capital tax benefit in connection with an arrangement where a dividend has been paid to the shareholder as a part of, or as a result of, an arrangement to achieve the result that an assessable profit that would have accrued to the shareholder on disposal of a share does not so accrue.

Subsection (12) is the operative provision of the proposed new section 46E. It denies the intercorporate dividend rebate, to which a shareholder would otherwise be entitled under section 46 or 46A in respect of a dividend, where that dividend was an asset revaluation dividend paid under or as a result of an arrangement by which a company (not necessarily the shareholder) obtained a capital tax benefit (paragraph (a)).

For this provision to apply, it is necessary to have regard to factors specified in paragraph (b) by which it would objectively be concluded that the arrangement was entered into or carried out for the purpose, or for purposes that included the purpose, of enabling the company, alone or with others, to obtain a capital tax benefit in connection with the arrangement. The matters to be taken into account under paragraph (b) are -

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the manner in which the arrangement was entered into or carried out (subparagraph (i));
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the form and substance of the arrangement (subparagraph (ii));
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the time at which the arrangement was entered into and the length of the period during which the arrangement was carried out (subparagraph (iii));
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the result in relation to the operation of the Principal Act that, but for the proposed new section, would be achieved by the arrangement (subparagraph (iv));
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any change in the financial position of the company that has resulted, will result, or may reasonably be expected to result, from the arrangement (subparagraph (v));
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any change in the financial position of any person who has or has had any connection with the company, being a change that has resulted, will result, or might reasonably be expected to result from the arrangement (subparagraph(vi));
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any other consequence for the company, or for any person connected with the company, of the arrangement having been entered into or carried out (subparagraph (vii)); and
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the nature of the connection, e.g., business or family, between the company and any person connected with the company (subparagraph (viii)).

Paragraph (b) also makes it clear that the company or any other taxpayer who obtains a capital tax benefit in connection with the arrangement need not be the person, or one of the persons, who entered into or carried out the arrangement or the relevant part of the arrangement.

Subsection (13) is a technical measure which specifies that a rebate of tax under section 46 or 46A is not allowable in an assessment of a taxpayer where that taxpayer's entitlement to the rebate is denied by virtue of the proposed new section. Where a rebate of tax has been allowed in an assessment and section 46E operates to deny the entitlement to the rebate, this paragraph will also ensure that the Commissioner of Taxation has the authority to deny a rebate under section 46 and 46A, and to amend an assessment in order to disallow a rebate previously allowed.

Subsection (14) will ensure that the Commissioner has authority at any time to re-open an income tax assessment to deny a rebate where the proposed new section applies. But for this subsection, those engaged in the type of arrangement at which the section is aimed could circumvent its operation by delaying the disposal of shares or property until after the statutory time limits contained in section 170 had expired.

Clause 9: Deemed dividends

Section 50L of the Principal Act is contained in Subdivision B of Division 2A of Part III of that Act - the current year loss provisions. Under Subdivision B, an income year in which a disqualifying event occurs, for example, a change in the beneficial ownership or business of a company, is to be looked at in separate parts in order to determine the deductibility of losses or outgoings incurred during that income year.

Sections 65, 108 and 109 of the Principal Act deem certain amounts paid or credited, liabilities incurred or assets distributed by a private company to be dividends paid by the company on the last day of the year of income of the company. For the purposes of Subdivision B, section 50L treats the amounts so paid or credited, liability incurred or assets distributed, if received by another company, having been received by that company at the time at which the amount, liability or asset was in fact paid, credited, incurred or distributed.

Clause 15 of this Bill will replace the existing sections 108 and 109 to remove certain technical deficiencies which have become apparent in their application (see notes on that clause). As a consequence, the wording of section 50L will be amended by clause 9 so that it is consistent with the wording to be used in proposed new sections 108 and 109. By subclauses 38(5) and (6), the amendment to section 50L will apply from the date from which the proposed new sections 108 and 109 are to apply.

Clause 10: Money paid on shares for the purposes of certain exploration, prospecting or mining

This clause proposes a technical amendment to paragraph 77D(18)(b) of the Principal Act to delete the reference in that paragraph to subsection 44(2C) which was repealed by section 8 of the Income Tax Assessment Act (No.5) 1973.

Clause 11: Gifts, pensions, etc.

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

Paragraph (a) of clause 11 will amend references in subparagraph 78(1)(a)(lxxiv) to The United Nations Association of Australia Decade of Trees Greening Australia, an organisation admitted to the gift provisions in 1982, to reflect its change of name to Greening Australia Limited.

By the operation of subclause 38(7) of the Bill gifts made to the organisation known as Greening Australia Limited on or after 7 August 1985 will qualify for deduction.

The amendments proposed by paragraph (b) of clause 11 will replace subparagraph 78(1)(a)(lxxvii) - which authorises a deduction for gifts to the Boy Scouts Association or the Girl Guides Association - with new subparagraphs 78(1)(a)(lxxvii) and (lxxviia). New subparagraph 78(1)(a)(lxxvii) will authorise a deduction for gifts to the Scout Association of Australia, an organisation previously known as the Boy Scouts Association. Similarly, new subparagraph 78(1)(a)(lxxviia) will permit a deduction for gifts to the Girl Guides Association of Australia Incorporated, an organisation currently referred to in the gift provisions as the Girl Guides Association. The proposed amendments will make it clear that gifts to the State and Territory branches of the two Associations are deductible.

Paragraph (c) of clause 11 will insert the new subparagraphs - subparagraphs 78(1)(a)(lxxxviii) and 78(1)(a)(lxxxix) - in the Principal Act to authorise deductions for gifts to the Lionel Murphy Foundation and the Australian-Hellenic Memorial Trust Fund respectively.

By subclause 38(9) of the Bill, gifts made to the Lionel Murphy Foundation on or after 24 April 1987 will qualify for a deduction.

Paragraph (d) of clause 11 will insert new subsection (6AG) in section 78 by which gifts to the Australian-Hellenic Memorial Trust Fund will be deductible if made on or after 1 April 1987 and on or before 30 June 1989.

Clause 12: Interpretation

This clause will amend section 82AAS of the Principal Act to ensure that income tax deductions, allowable under section 82AAT to eligible persons for personal contributions to private superannuation funds, will not be denied by reason only that contributions to superannuation funds for the benefit of those eligible persons are also made by employers or other persons pursuant to certain industrial awards.

Broadly stated, section 82AAT provides deductions for contributions to qualifying superannuation funds by persons in gainful occupation for whom no provision for superannuation benefits on retirement or death is funded by an employer or any person other than the taxpayer. This special deduction is subject to a limit of $1,500 in any year of income.

As mentioned in the notes on the main features of this clause, the Australian Conciliation and Arbitration Commission agreed, on 26 June 1986, to the ratification by it, or a State industrial tribunal, of agreements between unions and employers for limited employer contributions to superannuation funds under certain superannuation agreements. Such employer contributions would have the effect of denying to the affected employees eligibility for them to obtain deductions under section 82AAT.

The amendments to section 82AAS will ensure that eligible persons will not lose their deductions under section 82AAT by reason only that they receive superannuation support by way of contributions by other persons that are provided pursuant to either -

·
a superannuation award that has been made or ratified by an industrial tribunal in accordance with the Australian Conciliation and Arbitration Commission's superannuation principles; or
·
a superannuation award that has not been ratified by an industrial tribunal but which is identical, or nearly identical, to another superannuation agreement that has been so made or ratified, and relates to employees in the same industry.

Paragraph (a) of clause 12 proposes the insertion in subsection 82AAS(1) of the Principal Act of six new definitions. These definitions are central to the operation of proposed new subsection 82AAS(2A) (see notes below), which is the provision that will allow deductions under section 82AAT to eligible persons to continue, notwithstanding that certain employer-provided contributions are also made to eligible superannuation funds. The key definition is "superannuation agreement contributions", which identifies the kind of employer-provided contributions that will not disturb deductibility under section 82AAT. The other five definitions, which support this definition, are -

"Commission's superannuation principles" means the principles set out by the Australian Conciliation and Arbitration Commission in its National Wage Case decision given on 26 June 1986, under which the Commission would make or ratify awards relating to employer contributions to superannuation funds for employees. Broadly, the principles are that such awards -

·
will not operate before 1 January 1987, except in special and isolated circumstances approved by the Commission;
·
do not involve retrospective payments;
·
do not involve a wage increase in excess of 3 per cent;
·
are in accordance with the Commonwealth's Operational Standards for Occupational Superannuation Funds; and
·
will have the genuine consent of employers.

Any subsequent variation of those principles by the Commission or its successor, the Australian Industrial Relations Commission, in a National Wage Case will also come within the definition. The significance of this definition is that subsection 82AAS(2A) will only apply to employer contributions under an agreement that has been made or ratified by an industrial tribunal in accordance with the Commission's superannuation principles or under an agreement identical or nearly identical to such an agreement.
"eligible superannuation fund" is a term used in the definition of "superannuation contributions" (see below). It is intended that contributions by employers and prime contractors for the purposes of the relevant superannuation agreements should only be made to two types of superannuation fund, namely

·
funds the income of which is exempt from tax under paragraph 23(jaa) (government, semi-government and statutory funds) or paragraph 23(ja) (funds for the benefit of self-employed persons) or which would be so exempt but for Division 9C of the Principal Act. Division 9C assesses these funds on any assessable income diverted to them under certain tax avoidance schemes; and
·
funds that meet the requirements of section 23F (funds for the benefit of employees) or section 23FB (funds for the benefit of self-employed and other gainfully occupied persons).

This definition should not be confused with the existing definition of "qualifying superannuation fund" which specifies the kind of funds to which personal superannuation contributions must be made in order to qualify for deduction under section 82AAT.
"industrial tribunal" means an industrial tribunal constituted under a law of the Commonwealth or of a State or Territory. The term is used in another new definition - "superannuation agreement contributions" (see below).
"superannuation agreement" is another term used in the definition of "superannuation agreement contributions". It means an agreement, award, determination or order that compels the making of "superannuation contributions" (see below) to persons engaged in a particular industry. Such awards generally will be industry based.
"superannuation agreement contributions" is the term that is central to these amendments. Broadly, the definition identifies the contributions which an employer or another person will be permitted to make, under a superannuation agreement, for the benefit of an eligible person claiming deductions under section 82AAT. By virtue of new subsection 82AAS(2A), superannuation agreement contributions will be excluded from the class of third party contributions which would otherwise cause a person to cease to be an eligible person for the purposes of section 82AAS and, consequently, to cease to be eligible for deductions for their own contributions to a non-employer sponsored superannuation fund (a "qualifying fund" for the purposes of section 82AAS).
Specifically, the term is defined to mean superannuation contributions that are made under one of two types of superannuation agreement, namely -

·
a superannuation agreement that has been made or ratified by an industrial tribunal in accordance with the "Commission's superannuation principles" - see above - (paragraph (a)); or
·
a superannuation agreement that has not been ratified by an industrial tribunal but has been entered into in connection with another superannuation agreement that has been made or ratified by an industrial tribunal in accordance with the Commission's superannuation principles. The Commissioner of Taxation must, however, be satisfied that the agreement is identical, or nearly identical, to a ratified superannuation agreement that relates to persons engaged in the same industry in which the relevant eligible person is engaged (paragraph (b)). This would cover situations where an industrial tribunal, because of limited powers, may be unable to ratify an agreement - for example, in respect of self-employed persons, such as in the transport industry, where those persons may have superannuation provision made for them by their prime contractors under an agreement more or less identical to that provided by those contractors for their employees.

"superannuation contributions" means contributions made by a person (usually an employer or a prime contractor) to any "eligible superannuation fund" (see above), to provide superannuation benefits for an eligible person claiming deductions under section 82AAT or for the dependants of an eligible person in the event of his or her death. The defined term is used in the definitions of both "superannuation agreement" and "superannuation agreement contributions".

Paragraph (b) of clause 12 will amend section 82AAS of the Principal Act by inserting a new subsection 82AAS(2A).

Under the existing subsection 82AAS(2), any person who, in relation to a year of income, could expect to be the recipient of superannuation benefits funded by the contributions of an employer or some other person is not an "eligible person". Under section 82AAT only eligible persons are entitled to deductions for their own superannuation contributions.

The proposed subsection 82AAS(2A) will exclude from the term "superannuation benefits", used in subsection 82AAS(2), those benefits attributable to or paid out of moneys representing "superannuation agreement contributions" (a defined term - see earlier notes), in relation to the person, or earnings from those superannuation agreement contributions. Consequently, the provision of such contributions will not cause the person for whose benefit they are made to cease to be an "eligible person" for the purposes of section 82AAT.

Under subclause 38(10) of the Bill, the amendments proposed to section 82AAS of the Principal Act by clause 12 will apply to assessments in respect of the year of income commencing on 1 July 1986 and all subsequent years of income. Essentially this means that the amendments of section 82AAS will apply in respect of superannuation agreement contributions made on or after 1 July 1986.

Clauses 13 and 14: Modified application of Act in relation to certain unit trusts

The measure proposed by clause 8 of this Bill in relation to certain dividends paid out of asset revaluation reserves (see earlier notes on that clause), will also apply to trustees of corporate unit trusts and public trading trusts that, in accordance with Divisions 6B and 6C respectively of Part III of the Principal Act, are treated as companies for income tax purposes.

Section 102L of the Principal Act modifies the application of several provisions of that Act to treat a corporate unit trust as a company and its distributions as dividends. Clause 13 will amend subsection 102L(2) to extend the mutatis mutandis application of sections 46 to 46D of the Principal Act in relation to trustees of corporate unit trusts to include the proposed new section 46E. By this amendment, asset revaluation dividends, as defined in new subsection 46E(1), paid to trustees of corporate unit trusts will not qualify for a rebate of tax under section 46 or 46A. Unitholders in receipt of unit trust dividends which fall within the scope of the proposed new section will also be ineligible for a rebate of tax under section 46 or 46A in respect of those unit trust dividends.

Section 102T of the Principal Act relates to trustees of public trading trusts that are taxed as companies under the income tax law and mirrors the provisions of section 102L of that Act discussed above. Clause 14 will amend section 102T in a manner identical to the amendment of section 102L proposed by clause 13 as explained in the preceding paragraph.

Clause 15: Private companies

This clause will repeal existing sections 108 and 109 of the Principal Act and substitute revised provisions in their place.

Sections 108 and 109 are designed to prevent the avoidance of tax by private companies and their shareholders through the use of disguised dividend distributions. They do this by enabling amounts to be deemed to be dividends where private companies make loans or advances to, or payments on behalf of, their shareholders ("loans or advances") which are disguised dividend distributions, thereby avoiding tax at the shareholder level (section 108), and where private companies pay excessive remuneration or retirement allowances to their shareholders and directors and their relatives, thus obtaining a deduction at the company level (section 109).

A basic deficiency in the provisions has been that, except for the limited circumstances covered by section 109, they do not extend to payments made to associates of shareholders, so that in such cases, even though the shareholder may directly benefit, the provisions would not operate to deem the amounts involved to be dividends.

Where amounts are deemed to be dividends by the operation of the provisions of section 108 or 109, they must also be paid out of profits if they are to be included as assessable income of a shareholder by the operation of subsection 44(1) of the Principal Act. However, the provisions of sections 108 and 109 refer to distributions of income and not profits. Because of this the provisions of subsection 44(1) will cannot be attracted in cases where section 108 or 109 applies but the private company making the payment has no "profits".

To the extent that section 109 permits amounts paid or credited to relatives of shareholders and directors to be deemed to be dividends, the provisions of subsection 44(1) of the Principal Act again stand in the way of assessment if the relevant amount is paid or credited to a relative who is not a shareholder. In addition, section 109 applies only to "sums paid or credited" by a private company, and it has been held that the transfer of an asset does not satisfy this condition. Accordingly, the provisions are able to be circumvented if a disguised dividend is satisfied by the transfer of an asset in satisfaction of a payment of remuneration.

Under the imputation system of company tax, income subject to tax in the corporate sector and distributed to resident individuals will be subject to only a single tier of taxation. The circumstances in which a tax avoidance advantage by way of disguised distributions will arise will therefore be reduced, but not eliminated, relative to the scope for disguised distributions under the classical two-tier system of corporate taxation which the imputation system replaced.

To ensure the effective operation of the provisions in cases where tax is sought to be avoided at either the company or shareholder level by the use of disguised distributions of profits in the context of the imputation system, the technical deficiencies in the existing sections 108 and 109 outlined above will be removed by the revised provisions now proposed. However, the revised provisions will not extend beyond the original underlying intention of those sections, i.e., they will apply only in relation to amounts that, in the opinion of the Commissioner of Taxation, represent disguised distributions of profits by private companies.

Section 108: Loans etc. to shareholders and associates deemed to be dividends

Proposed new subsection 108(1), which specifies the situations in which the provisions will apply and characterises the nature of the deemed distribution for income tax purposes, will apply to -

·
amounts paid by a private company by way of an advance or loan to an associated person (paragraph (a)); and
·
amounts paid, or credited, by a private company on behalf of, or for the individual benefit of, an associated person (paragraph (b)).

For these purposes, the term "associated person" (which includes a shareholder) is defined by proposed new paragraph 108(3)(c) - see notes below on that paragraph.

To the extent that an amount of the kind referred to above represents, in the opinion of the Commissioner, a distribution of profits, it will be deemed by this subsection to be a dividend paid by the company -

·
to the associated person as a shareholder, whether or not the recipient actually was a shareholder at the relevant time (paragraph (c));
·
out of profits derived by the company (paragraph (d)); and
·
on the last day of the year of income of the company in which the amount was paid or credited (paragraph (e)) .

Consistent with the terms of the section being replaced, the deemed dividend will not be treated as a dividend for withholding tax purposes. It also will not be a frankable dividend for the purposes of Part IIIAA, and will therefore be subject to tax in the hands of the recipient as an unfranked dividend.

Where a subsequent dividend is set-off by the company in satisfaction of an amount that had been deemed by subsection (1) to be a dividend, new subsection 108(2) will operate to treat that dividend as not being a dividend to a certain extent, other than for the purposes of Part IIIAA relating to the imputation system. The later dividend will be deemed not to be a dividend to the extent to which the amount set-off does not exceed the "unfranked part of the dividend", a phrase defined by paragraph (b) of proposed new subsection 108(3) - see later notes on that subsection.

Under Part IIIAA the extent to which a dividend is franked will determine, in accordance with the required franking rules, the amount of franking debit that arises on the day on which the dividend is paid. To ensure the proper application of the required franking rules and those relating to under-franking debits, the whole of a dividend to which proposed subsection (2) applies is to be taken into account for the purposes of Part IIIAA, that is, as if the deeming of any part of that dividend not to be a dividend had not been made.

A dividend, or a part of a dividend, that is deemed not to be a dividend is not to be taken to be exempt income for the purposes of sections 160APP and 160AQT, which are also contained in Part IIIAA. Under section 160APP a franking credit arises at the time a franked dividend is received except where the dividend is wholly or partly exempt income of the company by which it is derived, or in certain situations where the shareholder is a life assurance company or registered organisation within the meaning of Division 8 or 8A respectively of Part III of the Principal Act. By section 160AQT the "gross-up" amount (the imputation credit) relating to a franked dividend to be included in the assessable income of a shareholder if the dividend is not exempt income of the shareholder.

Because the unfranked part of a dividend which is offset against a loan etc. that has already been treated as a dividend would, in the absence of subsection (2), be included in the assessable income of the recipient, the effect of this subsection is to prevent the relevant amount effectively being subject to tax twice in the hands of the recipient; firstly as an unfranked deemed dividend under subsection (1) by virtue of the loan, etc. and again as the unfranked part of a subsequent dividend that is applied to offset the indebtedness, if any, to which the deemed dividend relates.

To the extent that the franked amount of a subsequent dividend is applied to offset an amount of a deemed dividend, it will remain assessable income of the shareholder so that the shareholder's entitlement to either a franking credit, in the case of a company, or a franking rebate, in the case of a resident individual, is retained.

Where a subsequent dividend is paid after the time at which the proposed section 108 will first apply, but is offset against an amount that had been deemed to be a dividend by subsection (1) of the existing section 108, a transitional measure contained in this Bill will ensure that the dividend is subject to the same rules as those contained in proposed subsection 108(2) - see later notes on clause 39.

Proposed new subsection (3) defines terms which are used in the section.

Paragraph (a) treats a transfer of property as equivalent to the payment of an amount equal to the value of the property. It will ensure that there can be no doubt that disguised distributions of profits effected by way of asset transfers are within the scope of subsection 108(1).

The unfranked part of a dividend is defined by paragraph (b) to be a reference to so much of the dividend as has not been franked in accordance with section 160AQF. That section, which is contained in Part IIIAA, sets out the requirements for a company to frank the dividends it pays. Only those dividends paid on or after 1 July 1987 are able to be franked. Accordingly, the whole amount of any dividends paid before that date will be unfranked.

Paragraph (c) defines the term "associated person" as -

(i)
a shareholder in a company; or
(ii)
an associate, within the meaning of section 26AAB of the Principal Act, of a shareholder in a company.

Subsection 26AAB(14) of the Principal Act defines the categories of persons who are included within the meaning of the term 'associate'. By that subsection a person is an associate of another person (referred to as a taxpayer) where the person is -

·
in relation to a taxpayer other than a trustee or partnership -

·.
a relative of the taxpayer;
·.
a partner of the taxpayer or a partnership in which the taxpayer is a partner;
·.
a spouse or child of a partner of the taxpayer;
·.
a trustee of a trust estate where the taxpayer or a person (who is, by reason of this definition, an associate of the taxpayer) benefits or is capable of benefiting under the trust either directly or through any interposed companies, partnerships or trusts;
·.
a company that is effectively controlled (either individually or collectively) by the taxpayer or by persons who are, by reason of this definition, associates of the taxpayer including any companies that are controlled by that company;

and, in addition, where the taxpayer is a company -

·.
a person who, either alone or together with persons who are, in the terms of this definition, associates of that person, is able effectively to control the taxpayer company; and
·.
persons who are, in the terms of this definition, associates of a person who controls the taxpayer company;

·
in relation to a taxpayer in the capacity of a trustee -

·.
any person who benefits or is capable of benefiting under the trust estate either directly or through any interposed companies partnerships or trusts; or
·.
persons who are, in the terms of this definition, associates of a person who benefits or is capable of benefiting under the trust;

·
in relation to a taxpayer being a partnership -

·
a partner in the partnership; or
·
persons who are, in the terms of this definition, associates of a partner in the partnership.

Proposed new subsection (4) is a drafting measure that will extend the operation of the definition of "associated person" in subsection (3). By this subsection, the term "relative" as defined in subsection 6(1) of the Principal Act, and the term "associate" as defined in subsection 26AAB(14), apply as if any reference they contain to the spouse of a person included a reference to a person who, although not legally married to the person, lives with that person on a bona fide domestic basis as the person's husband or wife.

Section 109: Excessive payments to shareholders, directors and associates deemed to be dividends

Proposed new subsection 109(1) specifies the situations in which the provisions will apply and also the nature of the excess amount for income tax purposes. The provisions will apply to an amount paid, or credited, by a private company as -

·
remuneration for services rendered by an associated person (paragraph (a)); or
·
an allowance, gratuity or compensation in consequence of the retirement of an associated person from an office or employment held by the associated person in the company, or upon the termination of any such office or employment (paragraph (b)) .

The meaning of the term "associated person" for the purposes of this section is defined by proposed new paragraph (2)(b) - see later notes on that paragraph.

The amount of remuneration or termination payment that exceeds a reasonable amount will not be an allowable deduction (paragraph (c)) and will be deemed by paragraph (d) to be a dividend paid by the company -

·
to the associated person as a shareholder, irrespective of whether the recipient actually was a shareholder at the relevant time (subparagraph (i));
·
out of profits derived by the company (subparagraph (ii)); and
·
on the last day of the year of income of the company in which the excessive payment or credit was made (subparagraph (iii)).

The deemed dividend will not be treated as a dividend for withholding tax purposes and will not be a frankable dividend for the purposes of Part IIIAA.

Proposed new subsection 109(2) defines terms which are used in the new section. A transfer of property by a company is deemed by paragraph (a) to be the payment of an amount equal to the value of the property.

Paragraph (b) defines the term "associated person" as -

·
a person who is, or has been, a shareholder in, or director of, the company (subparagraph (i)); or
·
an associate, within the meaning of section 26AAB of the Principal Act, of a shareholder in the company (subparagraph (ii)).

Subsection 26AAB(14) of the Principal Act defines the categories of persons who are included within the meaning of the term "associate". The scope of this subsection is explained in relation to new subsection 108(3) in the earlier notes on this clause.

New subsection (3) is a drafting measure that corresponds with proposed new subsection 108(4) which is explained in earlier notes on this clause.

By subclause 38(6), new sections 108 and 109 will apply in relation to amounts paid or credited, or property transferred, after 4 June 1987. Under subclause 38(5) the existing sections 108 and 109 will continue to apply in relation to amounts paid or credited, or property transferred, on or before 4 June 1987, but subject to transitional measures in relation to section 108 that are contained in clause 39 of the Bill and are explained in the note on that clause.

Clause 16: Rebates for dependants

This clause will amend the definition of "separate net income" in subsection 159J(6) of the Principal Act. Subject to specified conditions, including a separate net income test, section 159J authorises a rebate of tax to a taxpayer who contributes to the maintenance of certain dependants.

The present definition of "separate net income" does not include within its coverage amounts paid by the Commonwealth under a scheme for the provision of assistance in connection with the education of isolated children. The amendment by clause 16 will remove that exclusion as it applies for payments under the Assistance for Isolated Children Scheme (AIC) to students 16 years and over.

A new paragraph (c) is to be inserted in the definition of "separate net income" so that amounts paid under AIC for the purpose of maintenance or accommodation of a student dependant aged 16 years or over will form part of the student's separate net income.

By subclause 38(2) the inclusion of certain educational assistance under AIC within a student dependant's separate net income for the purposes of section 159J will apply for income received in respect of a period commencing on or after 1 January 1987.

Clause 17: Rebate in respect of certain pensions

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

·
an Australian social security or repatriation pension, allowance or benefit that is subject to tax in Australia (pensioner rebate - subsection 160AAA(1)); or
·
unemployment, sickness or special benefits paid under Part VII of the Social Security Act 1947, or education assistance paid under Part III of the Student Assistance Act 1973 - allowances under the AUSTUDY scheme (beneficiary rebates - subsection 160AAA(2)).

Paragraph (a) of clause 17 proposes to amend paragraph (a) of subsection 160AAA(1) to exclude from the availability of the pensioner rebate, students assessed on allowances paid under the Veterans' Children Education Scheme (VCES), that is, amounts paid under Part VII of the Veterans' Entitlements Act 1986. Under the existing law, VCES allowances are exempt from tax and therefore do not give the recipient of the allowances an entitlement to the pensioner rebate. The amendment proposed to subsection 160AAA(1) is consequential upon the amendment proposed by clause 5 of the Bill to remove the exemptions under paragraphs 23(z) and 23(zaa) of the Principal Act for income in the form of allowances paid under VCES in respect of students aged 16 years and over.

Reflecting the date from which subclause 38(2) of the Bill proposes that certain VCES allowances are to form part of a taxpayer's assessable income (1 January 1987), subclause 38(12) proposes that the amendment of paragraph 160AAA(1)(a) apply to assessments in respect of the 1986-87 income year and all subsequent income years.

Under existing subsection 160AAA(2), a married (including de facto married) taxpayer in receipt of an unemployment, sickness or special benefit or certain Commonwealth educational assistance may be entitled to a rebate of tax (referred to as a "beneficiary rebate") of $280. For other taxpayers in receipt of such benefit or assistance the rebate is $190. The rebates shade-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds a specified level - $9,436 in the case of a married taxpayer and $5,669 in any other cases.

By paragraph (b) of clause 17, subsection 160AAA(2) of the Principal Act will be amended to insert new paragraph (aa) that will extend the availability of the beneficiary rebates to taxpayers whose assessable income includes allowances paid under VCES and the Assistance for Isolated Children Scheme (AIC). Income derived by way of VCES and AIC in respect of students aged 16 years and over is, by clauses 5 and 38 of this Bill, to be included in the student's assessable income when paid in respect of a period commencing on or after 1 January 1987.

By subclause 38(13) of the Bill, the extension of the beneficiary rebates to recipients of assessable VCES and AIC allowances will apply to assessments in respect of the 1987-88 year of income and all subsequent years of income.

The Bill also proposes amendments to subsection 160AAA(2) to introduce new rebate levels for recipients of the relevant social security benefits or educational allowances. The new rebate levels are $430 for married (including de facto married) and $180 for other beneficiaries. Both rebates will shade-out at the rate of 12.5 cents for each dollar by which the taxpayer's taxable income exceeds new specified levels - $10,350 in the case of married taxpayers and $5,850 in any other case.

Paragraph (c) of clause 17 will amend paragraph 160AAA(2)(d) of the Principal Act to increase the maximum amount of rebate - from $280 to $430 - for a married taxpayer and the taxable income level - from $9,436 to $10,350 - at or below which the maximum rebate is available. The rebate will shade out at the rate of 12.5 cents for each dollar of taxable income in excess of $10,350 and will shade-out fully at a taxable income of $13,790.

Paragraph (d) of clause 17 proposes to amend paragraph 160AAA(2)(e) of the Principal Act to decrease the maximum amount of rebate from $190 to $180 for an unmarried taxpayer and increase the taxable income level - from $5,669 to $5,850 - at or below which the maximum rebate is available. The rebate will shade out at the rate of 12.5 cents for each dollar of taxable income in excess of $5,850 and will shade-out fully at a taxable income of $7,290.

The amendments of subsection 160AAA(2) to vary the maximum rebate amounts (and the income levels above which they shade-out) proposed by this clause will apply, by the operation of subclause 38(13), in assessments of the 1987-88 year of income and subsequent years of income.

Clauses 18 to 22: Franking of dividends

Introductory note

Part IIIAA was inserted in the Principal Act by section 14 of the Taxation Laws Amendment (Company Distributions) Act 1987. That Part provides the framework for the operation of the imputation system of company tax which effectively frees from tax in the hands of shareholders distributed income taxed at the corporate level. Central to the operation of the system are the rules governing the franking of dividends paid by resident companies, and the entitlement of residents in receipt of franked dividend income to franking credits and rebates.

Clauses 18 to 22 of this Bill will amend the rules governing entitlements to franking credits and rebates so that -

·
a franking credit will not arise where a dividend that would ordinarily give rise to a franking credit is paid to a company as part of a dividend stripping operation;
·
a 'gross-up amount' (representing imputed company tax) will not be included in the assessable income of a shareholder (thereby denying entitlement to a franking rebate) if a dividend that would otherwise require a gross-up amount to be included in assessable income (a franked dividend), is paid as part of a dividend stripping operation.

By subclause 38(14) of the Bill, the amendments proposed by clauses 18 to 22 will apply to dividends paid on or after 1 July 1987 - the date on which dividends were first able to be franked in accordance with the imputation system.

Specific notes on each of these clauses follow.

Clause 18: Interpretation

Section 160APA of the Principal Act defines terms used in Part IIIAA. Clause 18 will insert in section 160APA a definition of the term "scheme" which, where used in the amendments to Part IIIAA proposed by clauses 19 to 22 of the Bill is to have the same meaning as in section 177A of the Principal Act.

In section 177A, "scheme" means any agreement, arrangement, understanding, promise or undertaking whether express or implied and whether or not legally enforceable. Any scheme, plan, proposal, action, course of action or course of conduct, including such activity of a unilateral nature, is also treated as a "scheme".

Clause 19: Dividends paid as part of dividend stripping operation

This clause will insert in the Principal Act a new section - section 160APHA - to define the phrase 'dividend paid as part of a dividend stripping operation' that is used in the amendments proposed by clauses 20 to 22 of the Bill.

Under the proposed new section, a dividend is to be regarded as one that is paid as part of a dividend stripping operation if the payment of the dividend arose out of, or was made in the course of, a scheme that -

·
was by way of or in the nature of dividend stripping (paragraph (a)), or
·
had substantially the effect of a scheme by way of or in the nature of dividend stripping (paragraph (b)).

Schemes by way of, or in the nature of, dividend stripping schemes include those where a person purchases for a capital sum the shares in a target company that has accumulated profits, and then draws off the profits by effecting the payment of a dividend by the target company.

Schemes having substantially the same effect as dividend stripping schemes include those in which the profits of the target company are not stripped from it by a formal dividend payment, but where irrecoverable loans are made to entities that are associates of the dividend stripper, or where the profits are used to purchase assets from such entities at greatly inflated prices.

Schemes coming within the ambit of these provisions will include those where, with a view to gaining the benefit of imputation credits, persons pay amounts to companies in consideration for the issue of shares carrying dividend rights that are substantial in relation to the consideration given. A simple example is where a person enters into an arrangement with a company under which that company issues shares to the person for, say, $1.20, and those shares carry a one-off dividend right of, say, $1.00. Thereafter the shares effectively carry no further right to participate in profits or capital, or the value of any rights is insignificant in relation to the consideration given.

Clause 20: Receipt of franked dividends

Section 160APP of the Principal Act is to the effect that, on the day a franked dividend is paid to a resident company a franking credit accrues to that company. The accumulation of franking credits enables a resident company to frank to a corresponding extent the dividends it pays to its own shareholders who, if they are resident individuals will be entitled to franking rebates that free the dividends from tax or, if they are non-residents, are able to be paid the dividends free of withholding tax.

Clause 20 proposes to amend section 160APP of the Principal Act by inserting an additional subsection - subsection 160APP(6) - which will mean that no franking credit arises if a dividend was paid as part of a dividend stripping operation.

Clause 21: Extra amount to be included in assessable income where franked dividend paid

Section 160AQT of the Principal Act sets out the circumstances in which an imputation credit (representing imputed company tax attached to a dividend) is included in the assessable income of a shareholder. These circumstances are where -

·
a franked dividend is paid to a shareholder;
·
the shareholder is a natural person who is a resident at the time the dividend is paid, or is a trustee or a partnership; and
·
the dividend is not exempt income of the shareholder.

Where these circumstances exist the shareholder is required to include in assessable income an amount calculated by applying to the franked amount of the dividend the fraction 49/51, given the general company tax rate of 49 per cent.

Paragraph (a) of clause 21 will amend subparagraph 160AQT(1)(b)(i) of the Principal Act to remove any doubt about the nature of the requirement that a natural person must be a resident at the time of payment of the dividend for an imputation credit to be included in the assessable income of that person. This is to be done by appropriate use of the noun 'resident' in that subparagraph.

Paragraphs (b) and (c) of clause 21 are formal amendments that are necessary to facilitate the proposed insertion by paragraph (d) of that clause of a new paragraph - paragraph 160AQT(1)(d) - in the Principal Act which will impose a further condition before an imputation credit is to be included in assessable income. That condition is that the dividend was not a dividend paid as part of a dividend stripping operation. Where this condition is not met, i.e., a dividend is paid as part of a dividend stripping operation, new paragraph (d) will operate so that no 'gross up amount' will be included in the shareholder's assessable income, and no entitlement to a franking rebate will arise.

Clause 22: Schemes by way of dividend stripping

Division 7A of Part IIIAA of the Principal Act governs the modified application of the imputation system to trustees of corporate unit trusts and public trading trusts that are treated as companies for income tax purposes in accordance with Division 6B or 6C of Part III of the Principal Act.

Clause 22 proposes to insert a new section - section 160ARDCA - in Subdivision A of Division 7A to give effect to the amendments proposed by clauses 20 and 21 of this Bill as those amendments are to apply to corporate trust estates. A corporate trust estate is a trust estate that is, or has been, a corporate unit trust or public trading trust within the meaning of Division 6B or 6C of Part III of the Principal Act.

In applying new section 160APHA (which is to be inserted in the Principal Act by clause 19 - see earlier notes on that clause), proposed section 160ARDCA will treat a scheme involving the payment of a corporate trust dividend by a trustee of a corporate trust estate as being by way of, or in the nature of dividend stripping if, had the corporate trust dividend been a dividend paid by a company, the scheme would have been one by way of, or in the nature of dividend stripping or would have had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.

Clause 23: What constitutes a disposal or acquisition

Clause 23 proposes to insert three new subsections - subsections (11A), (11B) and (11C) - in section 160M of the Principal Act. Section 160M sets out the rules governing what constitutes a disposal or an acquisition of an asset for the purposes of Part IIIA - Capital gains and Capital losses - of the Principal Act.

New subsection 160M(11A) will modify the application of existing subsections 160M(8) and (11) which deem a taxpayer to have disposed of certain assets at the time when the taxpayer ceased to be a resident, or when a partnership in which the taxpayer is a partner ceased to be a resident partnership. Under the capital gains and capital losses provisions, resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated, while non-residents are liable to tax only on capital gains on the disposal of taxable Australian assets (defined in section 160T of the Principal Act). Subsections 160M(8) and (11) ensure that tax on gains on assets, other than taxable Australian assets, that accrued while the owner was a resident of Australia cannot be avoided if the owner acquires non-resident status.

By new subsection 160M(11A) a taxpayer will not be deemed to have disposed of a particular asset on ceasing to be a resident or on a partnership in which he or she is a partner ceasing to be a resident partnership (which in subsection 160M(11A) is referred to as at the "relevant time") if -

·
the taxpayer is a natural person (paragraph (a));
·
the taxpayer has been a resident of Australia for a total of less than five years in the period of ten years immediately before the relevant time (paragraph (b)); and
·
the asset to which subsection 160M(8) or (11) would otherwise apply, was either owned by the taxpayer immediately before the last occasion (if more than one) on which he or she became a resident prior to the relevant time (subparagraph (c)(i)), or was since that occasion acquired by the taxpayer as a beneficiary of the estate of a deceased person or as a surviving joint tenant (subparagraph (c)(ii)).

The amendment will relieve persons who take up residence in Australia for a short term from liability to tax on capital gains that accrue on assets held before taking up residency in Australia or that are received on the death of a person. Subsection 160M(8) or (11) will continue to deem an asset owned by the taxpayer to have been disposed of at the time residency ceases if the asset (not being a taxable Australian asset) was acquired by the taxpayer (other than in the circumstances referred to in subparagraph 160M(11A)(c)(ii)) since the time he or she became (or last became) a resident.

Subsection 160M(11B) also modifies the application of subsections 160M(8) and (11) by enabling a taxpayer to elect in accordance with the terms of the subsection that an asset not be deemed to have been disposed of when the taxpayer ceased to be a resident or when a partnership of which he or she is a partner ceased to be a resident partnership.

Paragraph (a) is to the effect that the subsection will apply when a taxpayer would otherwise have been deemed to have disposed of an asset by the operation of subsection 160M(8) or (11) at the time when he or she ceased to be a resident or a partnership in which the taxpayer is a partner ceased to be a resident partnership (referred to in subsection 160M(11B) as the "relevant time"). Paragraph (b) limits elections under subsection 160M(11B) to natural persons.

Paragraph (c) requires the taxpayer to elect in order that the subsection will apply. The terms of the election are set out in proposed subsection 160M(11C) (see notes below on that subsection). The election must be made in respect of all assets of the taxpayer that would otherwise be deemed to have been disposed of by the operation of subsection 160M(8) or (11) at the relevant time.

Where these conditions are satisfied, the taxpayer will not be deemed to have disposed of the asset at the relevant time by subsection 160M(8) or (11) (paragraph (d)). The asset, will instead continue to be regarded as a taxable Australian asset until immediately after the first of the following events occurs:

·
the taxpayer disposes of the asset (subparagraph (e)(i)); or
·
the taxpayer becomes a resident of Australia (subparagraph (e)(ii)).

This means that where the asset is disposed of before the taxpayer again becomes a resident of Australia, the disposal falls within the capital gains and capital losses provisions.

Where the asset is still owned and the taxpayer again becomes a resident of Australia, subparagraph 160M(11B)(e)(ii) modifies existing subsection 160M(12) so that the asset is not deemed to have been acquired for the purposes of Part IIIA - Capital gains and Capital losses - when the taxpayer becomes a resident. This is because the asset is deemed to be a taxable Australian asset until immediately after the taxpayer becomes a resident and subsection 160M(12) applies to assets owned immediately before a taxpayer becomes a resident with specific exceptions that include taxable Australian assets. In these cases, the gain or loss on an eventual disposal of the asset which is subject to the capital gains and capital losses provisions will be determined by reference to the full period of ownership by the taxpayer, including when the taxpayer was not a resident.

Subsection 160M(11C) sets out the requirements for the making of a valid election under subsection 160M(11B). The election must be made in writing no later than the date of lodgment of the taxpayer's income tax return for the year in which the taxpayer would otherwise, but for the operation of subsection 160M(11B), have been deemed to have disposed of the particular asset. The subsection also allows the Commissioner to extend the time by which the election is to be made.

By subclause 38(15) of the Bill the amendments to be made by clause 23 will apply in respect of income of the year of income in which 20 September 1985 occurred and of all subsequent years of income.

Clause 24: Capital gains and capital losses

The amendment proposed by clause 24 to section 160Z of the Principal Act is a drafting measure consequent upon the proposed amendment of section 160ZM by clause 25 (see notes below).

Clause 25: Return of capital on investment in trust

Clause 25 proposes an amendment of section 160ZM in Part IIIA of the Principal Act. Section 160ZM applies where the trustee of a trust pays an amount to a taxpayer that is not assessable income of the taxpayer, in respect of an interest or units in the trust, other than as proceeds of disposal of the interest or units. Broadly where section 160ZM applies, the cost bases of the interest or units in the trust are reduced by deeming the interest or units to have been disposed of and immediately re-acquired for an amount reduced by the amount of the payment by the trustee.

The clause proposes the omission of existing subsections 160ZM(2) and (3) and the insertion of new subsections (2), (3) and (3A). The effect of the new subsections will be substantially the same as those being omitted, except that the cost base or indexed cost base of the interest or units in the trust to the taxpayer will not be reduced to the extent that a payment made by the trustee after 17 December 1986 to the taxpayer is a distribution of the trust that was free of tax by the allowance under Division 10C or 10D of Part III of the Principal Act of a deduction in respect of income producing buildings. The whole of the payment (other than in respect of the disposal of the interest or units) will, however, be deducted from the reduced cost base (defined in section 160ZK of the Principal Act) of the interest or units. The reduced cost base of an asset is used for the purpose of determining whether a capital loss has been made on the disposal of the asset in accordance with paragraph 160Z(1)(b) of the Principal Act.

New subsection 160ZM(2) will apply, subject to subsection (4) which applies to a payment within 12 months after acquisition, to deem a taxpayer to have disposed of his or her interest or units in the trust at the time the payment is made by the trustee for a consideration equal to the amount of the indexed cost base. The taxpayer is also deemed to have immediately re-acquired the interest or units.

In determining whether a capital gain has accrued to the taxpayer on a subsequent disposal of his or her interest or units, paragraph (a) applies to deem the consideration on the re-acquisition of the interest or units to be either:

·
the amount by which, had the interest or units been disposed of at the time of the payment, the indexed cost base would have exceeded the amount of the "adjusted payment" (subparagraph (a)(i)). The term "adjusted payment" is defined in new subsection 160ZM(3A) (explained later) as the amount of the payment that is not attributable to any deduction allowed under Division 10C or 10D of Part III of the Principal Act; or
·
nil, where the amount that would have been the indexed cost base to the taxpayer in respect of the interest or units, if the interest or units had been disposed of at the time of the payment, did not exceed the amount of the adjusted payment (subparagraph (a)(ii)).

Paragraph (b) of section 160ZM(2) applies to determine whether a capital loss is incurred when the taxpayer disposes of the interest or units. The consideration on the re-acquisition of the interest or units is deemed, for these purposes, to be either -

·
the amount by which, if the interest or units had been disposed of at the time of the payment, the reduced cost base would have exceeded the amount of the payment (subparagraph (b)(i)); or
·
nil, where the amount that would have been the reduced cost base to the taxpayer in respect of the interest or units did not exceed the amount of the payment (subparagraph (b)(ii)).

New subsection 160ZM(3) applies, subject to subsection (4), where the amount of the "adjusted payment" (refer subsection 160ZM(3A)) exceeds the amount of the indexed cost base of the interest or units, and deems a capital gain equal to the excess to accrue to the taxpayer at the time of the payment.

The term "adjusted payment", which is used in subsections 160ZM(2) and (3), is defined in proposed subsection 160ZM(3A). It means that part of the payment made by the trustee to the taxpayer which is not attributable to a deduction allowed under Division 10C or 10D of Part III of the Principal Act. These Divisions allow deductions in certain circumstances for expenditure of a capital nature incurred in respect of traveller accommodation or certain income-producing buildings. Where the payment made by the trustee includes amounts relating to such deductions as well as other amounts, the trustee would need to identify the amount relating to the deduction allowed under Division 10C or Division 10D. This means that, in these cases, unitholders or beneficiaries who have identical interests in the trust would receive identical allocations of such deductions by the trustee.

By subclause 38(16) of this Bill, these amendments will apply in relation to a payment made by a trustee after 17 December 1986.

Clause 26: Time of acquisition of certain bonus units

Clause 26 proposes the repeal of section 160ZYD of the Principal Act and the substitution of a new section 160ZYD, to change the rules which determine the time at which bonus units issued to a taxpayer will be deemed to have been acquired for the purposes of Part IIIA - Capital gains and Capital losses - of the Principal Act.

Section 160ZYD is part of Division 7 of Part IIIA which has application where the trustee of a unit trust (other than a corporate unit trust or a public trading trust within the meaning of Divisions 6B and 6C of Part III of the Principal Act) makes a bonus issue of units to unitholders.

Division 7 of Part IIIA applies, broadly, where an amount (referred to in section 160ZYC as a "relevant amount") is payable to a taxpayer by a trustee in respect of units in a trust and the amount is applied wholly or partially by the trustee in payment or part payment of bonus units issued by the trustee in the trust.

Existing section 160ZYD, deems the bonus units to have been acquired when the taxpayer acquired the original units, if no part of the relevant amount was included in the taxpayer's assessable income. Thus, where the relevant amount is not included in the taxpayer's assessable income and the original units were acquired before 20 September 1985, the bonus units are also taken to have been acquired before 20 September 1985.

New section 160ZYD, in common with the repealed section, will apply where no part of the "relevant amount" (as defined in section 160ZYC) was included in the taxpayer's assessable income in any year of income under the Principal Act. Paragraph 160ZYD(a) applies where:

·
the bonus units were issued after 1pm Eastern Summer Time in the Australian Capital Territory on 10 December 1986 (subparagraph (a)(i));
·
the original units in respect of which the bonus units are issued were acquired by the taxpayer before 20 September 1985 (subparagraph (a)(ii)); and
·
after 1pm on 10 December 1986, the taxpayer paid or was required to pay money to the trustee of the unit trust in respect of the bonus units (subparagraph (a)(iii)).

In these circumstances, the bonus units will be deemed to have been acquired at the time when the liability arose to pay the money that was first paid in respect of the bonus units. This will apply either if the payment is made by the taxpayer to whom the bonus units were issued or by another person on behalf of the taxpayer, e.g., the taxpayer's spouse. The payment or giving of consideration otherwise than in cash would also be taken for these purposes to be the payment of money in respect of the bonus units issued, in accordance with the general rule contained in section 21 of the Principal Act.

Where paragraph (a) does not apply, for example, where the original units were acquired after 19 September 1985, paragraph 160ZYD(b) will deem the bonus units , in the same manner as the repealed section 160ZYD, to have been acquired when the taxpayer acquired the original units.

This means that the non-application of the tax on capital gains on the disposal by a taxpayer of bonus units issued after 1pm Eastern Summer Time on 10 December 1986 in respect of original units acquired before 20 September 1985, will only operate where no amount is subsequently paid by or on behalf of the taxpayer in respect of the bonus units. In other cases, the bonus units will be deemed to have been acquired on a date after 19 September 1985 and the capital gains provisions will apply to a subsequent disposal of them.

Clause 27: Consideration in respect of acquisition

This clause proposes an amendment to section 160ZYE of the Principal Act, which determines for the purposes of the capital gains provisions the consideration that a taxpayer is taken to have paid in respect of the acquisition of bonus units. The amendment is consequential upon the insertion of new section 160ZYD in the Principal Act by clause 26, and is to the effect that section 160ZYE will only apply to bonus units in respect of which paragraph 160ZYD(b) applies. The cost base of bonus units to which paragraph 160ZYD(a) applies will be determined by reference to new section 160ZYEA, which clause 28 proposes to insert in the Principal Act (refer to notes on that clause).

Clause 28: Cost base etc. of certain bonus units

Clause 28 proposes to insert new section 160ZYEA in the Principal Act. Section 160ZYEA will determine for the purposes of Part IIIA - Capital gains and Capital losses - the consideration that a taxpayer is to be taken to have paid in respect of the acquisition of bonus units to which proposed new paragraph 160ZYD(a) of the Principal Act will apply (see notes on clause 26). The new section has the effect that the cost base, indexed cost base or reduced cost base to the taxpayer of the bonus units will include the amount of the market value of the bonus units immediately before the time of acquisition referred to in paragraph 160ZYD(a).

The amount so included will not include any part of the market value of the bonus units that is attributable to an amount that would otherwise be taken into account in determining the cost base, indexed cost base or reduced cost base of the bonus units. For example, where an amount that is to be paid in respect of the bonus units might increase the market value of the bonus units before that amount is actually paid, that increase in the market value would not be taken into account under section 160ZYEA. The amount paid would, however, be included in the cost base, indexed cost base or reduced cost base of the bonus units under section 160ZH of the Principal Act.

Clause 29: Application

Existing Division 8 sets out special rules for the purposes of the provisions relating to capital gains and capital losses, as regards the date on which certain bonus shares are to be deemed to be acquired, the amount of consideration that is deemed to have been paid for the bonus shares and the original shares (i.e., the shares that gave entitlement to the bonus shares) and the date on which the consideration is to be taken as being paid. Section 160ZYF in Division 8 specifies the basic conditions under which Division 8 is to apply. The amendment proposed by clause 29 to insert a new paragraph (c) in section 160ZYF of the Principal Act is a drafting measure consequential upon the insertion of a new Division 8A in Part IIIA. Division 8 will only apply to the issue of bonus shares where new Division 8A (which is to be inserted by clause 32 of this Bill) does not apply to the bonus shares.

Clause 30: Time of acquisition of bonus shares

By clause 30 it is proposed to repeal section 160ZYG in Division 8 of Part IIIA of the Principal Act and substitute a new section 160ZYG which will continue to determine the date of acquisition of bonus shares to which Division 8 applies. As indicated in the notes on clause 29, Division 8 will only apply to the issue of bonus shares where proposed new Division 8A of Part IIIA (to be inserted by clause 32 of this Bill) does not apply to the bonus shares.

Division 8 of Part IIIA sets out special rules for the provisions relating to capital gains as regards the date on which certain bonus shares are to be deemed to have been acquired, the amount of consideration that is deemed to have been paid for the bonus shares and the original shares and the date on which the consideration is to be taken as being paid.

Under existing section 160ZYG, bonus shares to which this Division applies are deemed to have been acquired by the shareholder at the time when the shareholder acquired the shares that gave entitlement to the bonus shares. Thus, where the original shares were acquired before 20 September 1985, the bonus shares are also taken to be acquired before that date.

New paragraph (a) of section 160ZYG will apply to determine the time when bonus shares are to be taken to have been acquired by a shareholder where:

·
the bonus shares were issued after 1pm by legal time (Eastern Summer Time) in the Australian Capital Territory on 10 December 1986 (subparagraph (a)(i));
·
the original shares in respect of which the bonus shares are issued were acquired by the shareholder before 20 September 1985 (subparagraph (a)(ii)); and
·
after 1pm on 10 December 1986, the taxpayer paid or was required to pay money to the company in respect of the bonus shares (subparagraph (a)(iii)).

In these circumstances, the bonus shares will be deemed to have been acquired at the time when the liability arose to pay the money that was first paid in respect of the bonus shares. This will apply either if the payment is made by the shareholder to whom the bonus shares were issued or by another person on behalf of the shareholder, e.g., by the shareholder's spouse. The payment or giving of consideration otherwise than in cash would also be taken for these purposes to be the payment of money in respect of the bonus shares issued, in accordance with the general rule contained in section 21 of the Principal Act.

Where paragraph (a) does not apply, for example, where the original shares were acquired after 19 September 1985, paragraph 160ZYG(b) will, in the same manner as repealed section 160ZYG, deem the bonus shares to have been acquired when the shareholder acquired the original shares.

Clause 31: Consideration in respect of acquisition

Clause 31 proposes an amendment to section 160ZYH of Division 8 of Part IIIA of the Principal Act, which determines the consideration that a shareholder is deemed to have paid to acquire certain original shares and bonus shares, and the time at which the consideration is deemed to have been paid, for the purposes of the provisions relating to capital gains. As a consequence of the changes proposed to Division 8 by clause 30, the clause will insert new subsection 160ZYH(1A) to provide that section 160ZYH will not apply where proposed section 160ZYHA (see notes on clause 32) applies to the bonus shares.

Clause 32: Cost base etc. of certain bonus shares

Clause 32 proposes to insert new section 160ZYHA and new Division 8A - Bonus shares issued after 30 June 1987 where paid-up value is a dividend - in Part IIIA of the Principal Act.

New section 160ZYHA relates to the determination for the purposes of the capital gains provisions of the consideration that a taxpayer is taken to have paid in respect of the acquisition of bonus shares to which new paragraph 160ZYG(a) applies (see notes on clause 30). The new section has the effect that the cost base, indexed cost base or reduced cost base to the taxpayer of the bonus shares will include the amount of the market value of the bonus shares immediately before the time of acquisition referred to in paragraph 160ZYG(a).

However, the amount so included will not include any part of the market value of the bonus shares that is attributable to an amount that would otherwise be taken into account in determining the cost base, indexed cost base or reduced cost base of the bonus shares. For example, where an amount that is to be paid in respect of the bonus shares might increase the market value of the bonus shares before that amount is actually paid, that increase in the market value would not be taken into account under section 160ZYHA. The amount paid would, however, be included in the cost base, indexed cost base or reduced cost base of the bonus shares under section 160ZH.

Division 8A - Bonus shares issued after 30 June 1987 where paid-up value is a dividend

New Division 8A sets out the rules relating to the application of the capital gains and capital losses provisions where certain bonus shares are issued to a shareholder after 30 June 1987.

Section 160ZYHB specifies the conditions under which Division 8A is to apply. These are that -

·
a person (referred to as the "shareholder") holds shares in a company (paragraph (a));
·
the company issues after 30 June 1987 bonus shares to the shareholder in the circumstances mentioned in subsection 6BA(1) of the Principal Act (paragraph (b)); and
·
some or all of the paid-up value of the bonus shares is a dividend (paragraph (c)).

This has the effect that, broadly, new Division 8A will apply to all issues of bonus shares made after 30 June 1987, except where no part of the paid-up value of bonus shares is a dividend (as defined in section 6 of the Principal Act) because the bonus shares are declared out of funds in a share premium account. In that case, existing Division 8, as modified by this Bill, would continue to determine the treatment of the bonus shares issued for the purposes of the provisions relating to capital gains.

Division 8A does not specify the time of acquisition of the bonus shares subject to the Division. This will be determined having regard to the general provisions of Part IIIA relating to the time of disposal and acquisition of an asset contained in section 160U of the Principal Act, and would be based on when the bonus shares were issued to the shareholder.

Clause 32 will also insert new section 160ZYHC which specifies that the cost base, indexed cost base or reduced cost base to the shareholder of bonus shares to which Division 8A applies will be determined as if the amount of the consideration paid in respect of the acquisition of the bonus shares were increased by the amount of the paid-up value of the bonus shares that is a dividend. Other amounts actually paid in respect of the bonus shares would be included in the cost bases of the bonus shares under section 160ZH of the Principal Act.

In cases where new Division 8A applies, the cost base, indexed cost base or reduced cost base of the bonus shares is determined solely by reference to the terms of Part IIIA. This contrasts with the determination of the cost base, indexed cost base or reduced cost base of bonus shares to which Division 8 applies, which requires reference to section 6BA of the Principal Act.

Clause 33: Liability to pay instalments of tax

The amendments made by this clause will omit subsection 221AC (2) of the Principal Act.

Under subsection 221AC (2) instalments of tax are not payable in respect of the income of a company of a year of income unless the relevant Act that imposes income tax on the income of companies of the year of income, or the preceding year of income, provides that instalments of tax are payable in respect of income of the year of income.

As it is considered that there is no legal requirement to formally impose a liability to pay instalments of company tax the necessity for subsection 221AC(2) has been removed. A related amendment - by clause 5 of the Income Tax Amendment Bill (No.2) 1987 - will repeal section 10 of the Income Tax Act 1986 which provided for the payment of instalments of tax by a company and by a trustee of a prescribed unit trust in respect of the 1986-87 financial year.

By subclause 38(11), the amendments made by this clause are to apply in relation to the year of income commencing on 1 July 1986 and all subsequent years of income.

Clause 34: Estimated income tax

This clause will correct a drafting oversight by removing from subparagraph 221AG(8)(a)(i) of the Principal Act (that specifies various credits that are to be deducted in determining estimated income tax for the purpose of varying instalments of company tax) a reference to section 45 which was repealed on 1 July 1987 when the foreign tax credit system commenced.

Clause 35: Interpretation

As part of the pay-as-you-earn (PAYE) system, section 221C of the Principal Act requires an employer to deduct tax instalments from "salary or wages", a term given an extended meaning by the definition contained in subsection 221A(1).

This clause will amend the definition of "salary or wages" in subsection 221A(1) by inserting new paragraph (n) in the definition of that term. By paragraph (n) payments of assessable educational allowances to students 16 years and over under the Commonwealth's Assistance for Isolated Children Scheme (AIC) and Veterans' Children Education Scheme (VCES) are to be brought within the meaning of "salary or wages" and made subject to the PAYE provisions of the Principal Act.

The inclusion of AIC and VCES payments within the meaning of "salary or wages" will first take effect for tax instalment deduction purposes under the PAYE system from the date of commencement of the amending legislation.

However, by subclause 38(18) of the Bill, the amended definition of "salary or wages" will apply for the purposes of the taxing arrangements for unearned income of unmarried minors (Division 6AA of Part III of the Principal Act), to AIC and VCES payments made in respect of any period commencing on or after 1 January 1987. In effect, this will mean that AIC and VCES allowances, that are to be included within a taxpayer's assessable income by clause 5 and subclause 38(2) of this Bill, will be treated as excepted assessable income for the purposes of Division 6AA effective from the time they first became assessable income. The allowances will therefore be excluded from those provisions that would otherwise tax the income at a penalty rate of tax.

Clause 36: Liability to provisional tax

This clause will omit subsection 221YB(3) of the Principal Act.

Under subsection 221YB(3) provisional tax in respect of the income of a year of income is not payable unless the Act imposing income tax upon taxable income of that year or the previous year provides that provisional tax is to be payable. As it is considered that there is no legal requirement to formally provide for the imposition of provisional tax, subsection 221YB(3) is not necessary.

By subclause 38(11), the amendment made by this clause is to apply in relation to the year of income commencing on 1 July 1986 and all subsequent years of income.

A related amendment - to be effected by clause 5 of the Income Tax Amendment Bill (No 2) 1987 - will repeal sections 8 and 9 of the Income Tax Act 1986 which provide for the payment of provisional tax in respect of the 1986-87 and 1987-88 years on income.

Clause 37: Provisional tax for 1987-88 year

The purpose of subclause (1) of clause 37, which will not amend the Principal Act, is to specify the basis for calculating the 1987-88 provisional tax payable by provisional taxpayers who do not "self-assess" by seeking a variation of provisional tax on the basis of his or her estimate of possible income for the relevant year. Broadly, the subclause requires that the provisional tax is to be calculated by applying 1987-88 rates of tax (without regard to the arrangements for pro-rating of the tax-free threshold) and Medicare levy to 1986-87 taxable incomes increased by 11 per cent. With the exception of the rebate available to Christmas Island residents on Island and ex-Australia source income and averaging rebates, which are discussed below, rebates are to be taken into account as allowed in the taxpayer's 1986-87 income tax assessment.

Where an amount of a net capital gain has been included in a taxpayer's 1986-87 assessable income by virtue of Part IIIA of the Principal Act, the provisional tax for 1987-88 will be calculated by reference to the amount that would have been the taxable income for 1986-87 if the net capital gain amount had not been included in the taxpayer's assessable income for that year.

Where a taxpayer chooses to "self-assess" the provisional tax will be, basically, the amount calculated by applying 1987-88 rates of tax and Medicare levy to the taxpayer's estimated taxable income for that income year and deducting estimated 1987-88 rebates. By virtue of subsection 221YDA(1AA) of the Principal Act, an estimate of taxable income for this purpose is to be made on the basis that the assessable income will not include the amount of any net capital gain that may be included in the taxpayer's assessable income by virtue of Part IIIA of the Principal Act.

For taxpayers deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premiums) or section 158D (abnormal income of authors or inventors) of the Principal Act, provisional tax, before deduction of rebates, is to be calculated by applying to 1986-87 taxable income increased by 11 per cent, the 1987-88 rate of tax applicable to their 1986-87 notional income. That is, the rate of tax is not to be increased to reflect an 11 per cent increase in notional income.

Taxpayers who were under 18 years of age at 30 June 1987 were liable for tax for 1986-87 under the special provisions applying to minors if, in the case of a non-resident, the minor had any eligible taxable income for the purposes of Division 6AA of Part III of the Principal Act for that year or if, in the case of a resident, that eligible taxable income exceeded $416. For purposes of the 1987-88 provisional tax calculation, the portion of a minor's taxable income, as increased by 11 per cent, that is to be taken as eligible taxable income is to be in the same proportion as that which the 1986-87 eligible taxable income of the taxpayer bore to his or her taxable income for that year.

Where the 1986-87 eligible taxable income of a taxpayer to whom the provisions of Division 6AA of Part III of the Principal Act applied for that year includes a net capital gains amount, the eligible taxable income for that year is, for purposes of the 1987-88 provisional tax calculation, adjusted to the amount that would have been the taxpayer's eligible taxable income if that net capital gains amount had not been included in the taxpayer's 1986-87 assessable income.

For primary producers who do not "self-assess" the subclause will require that, for provisional tax purposes, any averaging rebate to which the primary producer is entitled be recalculated using 1986-87 taxable income (as adjusted for any income equalization deposit withdrawals, capital expenditure on a qualifying Australian film or subscription to shares in licensed management and investment companies) as increased by 11 per cent. 1987-88 rates of tax will be applied in the calculation on the basis of the average income used for 1986-87 assessment purposes. Average income will not be recalculated to reflect the notional 11 per cent increase in taxable income for provisional tax purposes. A primary producer may qualify for a partial averaging benefit only in 1986-87 because his or her income other than from primary production in that year exceeded $5,000. In such a case the subclause will ensure, in effect, that the proportion of the averaging adjustment - the same proportion as income from primary production bears to total taxable income - to be taken into account in calculating 1987-88 provisional tax is the same as the 1986-87 proportion. That is, it is not to be reduced to reflect the notional 11 per cent increase in income other than from primary production.

Where an amount of income tax or Medicare levy was payable in 1986-87, an amount additional to the provisional tax (if any) otherwise payable representing Medicare levy for 1987-88 is to be incorporated in the 1987-88 provisional tax calculation. In these situations the Medicare levy component of provisional tax will be calculated by applying the 1987-88 year Medicare levy rate of 1.25 per cent to 1986-87 taxable income as increased by 11 per cent. The increased low income thresholds to apply for levy purposes in 1987-88 will be taken into account. In addition, wherever a part or full exemption from levy was had by an individual in his or her 1986-87 assessment, the same exemption will be provided in the calculation of levy for 1987-88 provisional tax purposes.

For Christmas Island residents entitled in 1986-87 income tax assessments to a rebate of tax under section 160ACD of the Principal Act, 1987-88 provisional tax will be calculated by taking into account one-half of that 1986-87 rebate entitlement reflecting the reduction in the rate of rebate available for the 1987-88 year of income.

For a taxpayer whose 1986-87 taxable income reflects a deduction allowed for capital moneys expended in producing a qualifying Australian film or for subscriptions to shares in licensed management and investment companies, 1987-88 provisional tax will be calculated as if no such deduction had been allowed, with the taxable income so adjusted increased by 11 per cent.

Subclause (2) of clause 37 is a drafting measure which ensures that the basis of calculation of 1987-88 provisional tax provided for in this clause applies to provisional tax that is payable under both the single payment system and the new instalment system that first operates in the 1987-88 year.

Clause 38: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relevant to certain amendments proposed in Part II of the Bill.

In terms of subclause (1), the term "amended Act", as used in the clause, means the Income Tax Assessment Act 1936 as proposed to be amended by the Bill.

Subclause (2) specifies that the amendments to be made by clause 5 of the Bill to remove the exemption in respect of income derived under the Commonwealth's Assistance for Isolated Children Scheme and the Veterans' Children Education Scheme by students aged 16 or over, and by clause 16 to treat Assistance for Isolated Children allowances paid to a student aged 16 or over as separate net income for concessional rebate purposes, will apply in relation to income received in respect of a period commencing on or after 1 January 1987.

Subclause (3) specifies that the amendments proposed to be made to sections 46A and 46B of the Principal Act by clauses 6 and 7 of the Bill to limit or deny the intercorporate dividend rebate on dividends paid as part of a dividend stripping operation which gives rise to a capital gain or a capital loss, are to apply in relation to dividends paid after 4 June 1987, other than dividends declared on or before that date.

Subclause (4) will specify for the purposes of subclause (3) when a dividend is to be taken to have been declared in certain cases where a declaration is not in fact made. Paragraph (a) will ensure, in cases where the Principal Act deems an amount paid or credited (e.g., under sections 108 or 109) or deems assets distributed (e.g., a liquidator's distribution under section 47) to be a dividend paid by a company, that the dividend is to be taken to have been declared at the time when the amount was in fact paid or credited, or the assets were in fact distributed, as the case may be. Under paragraph (b), where, by virtue of a provision in the constituent document of a company a dividend may become payable without any declaration being made by the company, any such dividend that has become payable is to be taken to have been declared at the time when it became payable.

Subclause (5) is a technical provision to make clear that, notwithstanding the amendments to be made to subsections 50L(2) and (3), in association with the replacement of sections 108 and 109, of the Principal Act (see earlier notes on clauses 9 and 15 respectively), each of the existing provisions will continue to apply to amounts paid or credited, or assets transferred, on or before 4 June 1987 as if the existing sections 108 and 109 had not been repealed. Subclause (6) specifies that the proposed new sections 108 and 109, and the appropriately amended subsections 50L(2) and (3), are to apply to amounts paid or credited, or assets transferred, after 4 June 1987. Both subclauses 38(5) and (6) are subject to the provisions of clause 39 (see notes on that clause) which deals with dividends set off after 4 June 1987 against loans or advances made on or before that date have been deemed to be dividends by the application of the existing section 108.

Subclauses (7), (8), and (9) are the application provisions which relate to the amendments being made to the gift provisions of the income tax law, the operation of which is explained in the notes on clause 11 to which those subclauses relate.

Under subclause (10) of the Bill, the amendments proposed to section 82AAS of the Principal Act by clause 12 will apply to assessments in respect of the year of income commencing on 1 July 1986 and all subsequent years of income. Essentially this means that the amendments of section 82AAS will apply in respect of superannuation agreement contributions made on or after 1 July 1986.

By subclause (11) the amendments made by paragraphs 13(b) and (c) and 14(b) and (c) (relating to corporate trust estates), and by clauses 33 and 36 (relating to liability to instalments of company tax and to provisional tax respectively), are to apply in relation to the year of income commencing on 1 July 1986 and all subsequent years of income.

Subclause (12) is to the effect that the amendment to be made by paragraph 17(a) of the Bill - to exclude recipients of assessable educational allowances payable under Part VII of the Veterans' Entitlements Act 1986 from entitlement to the pensioner rebate under subsection 160AAA(1) of the Principal Act - is to apply to assessments for the 1986-87 income year and all subsequent income years.

By subclause (13), the amendments to be made by the Bill to subsection 160AAA(2) of the Principal Act that will -

·
extend the availability of the beneficiary rebates to recipients of assessable educational allowances paid under the Assistance for Isolated Children Scheme or the Veterans' Children Education Scheme (paragraph 17(b) of the Bill); and
·
vary the maximum rebate amounts and the income levels above which the rebates shade-out (paragraphs 17(c) and (d) of the Bill),

are to apply to assessments for the 1987-88 income year and all subsequent income years.

By subclause (14), the amendments to be made by clauses 18 to 22 to deny franking credits on franking rebates on dividends paid as part of a dividend stripping operation are to apply to such dividends that are paid to a shareholder on or after 1 July 1987 when the imputation system commenced.

Subclause (15) ensures that the amendments made by clause 23 to the capital gains and capital losses provisions apply to assessments in respect of the year of income in which 20 September 1985 occurred, and all subsequent years of income.

By subclause (16), the amendments made by clauses 24 and 25 to the capital gains and capital losses provisions relating to the return of capital on an investment in a trust are to apply in relation to a payment made by a trustee of a trust after 17 December 1986.

Under subclause (17) the removal by clause 34 of the Bill of the reference to section 45 in section 221AG of the Principal Act is to apply from the end of the 1986-87 income year from which date section 45 was repealed.

Certain items of income, including "salary or wage" income as defined in subsection 221A(1) of the Principal Act, are excluded from the operation of Division 6AA of Part III of the Principal Act that subjects the unearned income of unmarried minors to a penalty rate of tax. Subclause (18) will ensure that Division 6AA of Part III does not apply to payments of income under the Assistance for Isolated Children Scheme and the Veterans' Children Education Scheme.

Clause 39: Transitional-section 108 of the Principal Act

This is a technical measure to ensure that the rules applicable to deemed dividends as contained in the proposed subsection 108(2) - see earlier notes on clause 15 - will also be applicable where a dividend, or part of a dividend, paid after the time from which the new section 108 is to apply is set-off against an amount that had been deemed to be a dividend by subsection (1) of the existing section 108. In this way, the provision will ensure appropriate application of the set-off rules where a dividend is set-off after 4 June 1987 against a loan, etc., made on or before that date which has been deemed to be a dividend under the provisions of the existing subsection 108(1) .

This result will be achieved by preserving the provisions of the existing section 108 in such cases (by subclause 38(5)), other than subsection (2) of that section which will be treated as if it had been replaced by subsections (2) and (3) as set out in this clause. Those subsections have the same effect as the proposed new subsection 108(2) which is explained in the earlier notes on clause 15.

Clause 40: Amendment of Assessments

Clause 40, which will not amend the Principal Act, is a standard measure that 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 to give effect to the various amendments contained in Part II of the Bill

PART III - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 41: Principal Act

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

Clause 42: Modification of limitation laws applying to the recovery of tax debts

Clause 42 will make a clarifying amendment of section 14ZKA which was inserted in the Principal Act by the Taxation Administration Amendment (Recovery of Tax Debts) Act 1986 (Act No. 144 of 1986) to modify any application of State or Territory limitation laws to tax debts. The effect of the modification is to extend the limitation period in respect of a tax debt that relates to an assessment (or a decision of the Commissioner) against which an objection has been lodged. In such cases, the limitation period is taken to end on the day on which it would have ended if it had commenced on the day on which the objection and appeal process is finalised, rather than when it may have ended under a limitation law.

The amendment of section 14ZKA by clause 42 will make it clear that, as intended, the modification of the application of State and Territory limitation laws applies not only to the primary taxes outstanding, but also to any additional tax for late payment of those taxes.

Subsection 14ZKA(1) of the Principal Act defines certain terms used in section 14ZKA. Paragraph (a) of clause 42 will insert definitions of the terms "late payment penalty" and "primary tax debt" in subsection 14ZKA(1) which are relevant to new subparagraph 14ZKA(2)(a)(i) (see later notes on paragraph (e) of this clause). By paragraph (a) -

"late payment penalty" is defined to mean a tax debt (see following notes) that is payable as a consequence of the late payment, or non-payment, of another tax debt;
"primary tax debt" is defined in relation to a late payment penalty to mean the tax debt in respect of which the late payment penalty arises.

The term "tax debt", which is relevant to each of the definitions being inserted, is defined in existing subsection 14ZKA(1) to mean an amount due and payable under a law of which the Commissioner of Taxation has the general administration.

Paragraph (b) of clause 42 will insert a new subsection - subsection 14ZKA(1A) - in the Principal Act to make it clear that, for the purposes of the definitions of "late payment penalty" and "primary tax debt", the fact that a tax liability is subject to an extension of time for payment (paragraph (a)), or an instalment payment arrangement (paragraph (b)), does not have the effect that the liability is not due and payable.

Subsection 14ZKA(2) has operation only if a limitation law applies, or has applied, by virtue of section 64 of the Judiciary Act 1903, in relation to a cause of action to recover a tax debt. As a drafting measure, paragraph (c) of clause 42 will amend subsection 14ZKA(2) with the effect that a reference in that subsection to a "current tax debt" is a reference to the tax debt to which a particular cause of action relates. The term "current tax debt" is relevant to new subparagraph 14ZKA(2)(a)(i) - see later notes on paragraph (e).

Paragraph (d) will substitute the word "called" for the words "referred to as" in subsection 14ZKA(2) to reflect a change in drafting style.

Subparagraphs 14ZKA(2)(a)(i) and (ii) of the Principal Act specify the two conditions that must be met before section 14ZKA can operate to extend any applicable limitation period. The condition specified by existing subparagraph (a)(i) is that a person lodges, or has lodged, an objection against an assessment or a decision of the Commissioner relating to the tax debt. Paragraph (e) of clause 43 will substitute a new subparagraph 14ZKA(2)(a)(i) to make it clear that section 14ZKA may have application in the case of both late payment penalty (sub-subparagraph 14ZKA(2)(a)(i)(A)), and primary tax (sub-subparagraph 14ZKA(2)(a)(i)(B)). The condition specified by existing subparagraph (a)(ii) - that is, broadly, that the limitation period would have ended on a later day if it had commenced on the date of finalisation of the objection and appeal process - will continue to apply.

Paragraph 14ZKA(2)(b) ensures that additional taxes payable under specified provisions of taxation laws - but not including additional tax for late payment - are not to be taken to be a penalty. The effect of the paragraph is that such additional taxes are not subject to a shorter limitation period that may apply to penalties. Paragraph (f) of clause 42 will make a minor drafting amendment of paragraph 14ZKA(2)(b).

Paragraph (g) of clause 42 will amend sub-subparagraph 14ZKA(2)(b)(x)(B) to reflect the fact that the term "late payment penalty" is now a defined term - see earlier notes on paragraph (a).

Clause 43: Application of amendments

By subclause 43(1), the clarifying amendments of section 14ZKA of the Principal Act apply in relation to causes of action accruing before and after the commencement of clause 43 - that is, the date on which the amending Act receives the Royal Assent (see notes on clause 2).

By subclause 43(2), the amendments of paragraph 14ZKA(2)(a) will have no application to a taxpayer in respect of whom a court had, before 14 August 1987 (the date of announcement of the decision to make the clarifying amendment) given a judgment, or made an order, determining a cause of action to recover a late payment penalty (paragraph (a)) and, in the relevant action or proceeding, the application of paragraph 14ZKA(2)(a) was raised as an issue (paragraph (b)). In such cases, paragraph 14ZKA(2)(a), as amended by this Act, does not apply (paragraph (c)) and the amendments being made by this Act are to be disregarded in determining whether paragraph 14ZKA(2)(a) applied.

PART IV - AMENDMENT OF THE TAXATION LAWS AMENDMENT ACT (NO.2) 1987

Clauses 44 and 45: Application and transitional provisions

The operative clause - clause 45 - is a technical provision which will omit the reference to section 11 in subsection (2) of section 47 - the application provisions - of the Taxation Laws Amendment (No.2) 1987. Section 11 of that Act amended section 46A of the Income Tax Assessment Act 1936 to narrow the scope of the provisions of the latter section which deal with the restrictions on the entitlement to the intercorporate dividend rebate on private company dividends paid in respect of a dividend stripping operation.

The amendment proposed by this clause will ensure that the amendment made by section 11 of the Taxation Laws Amendment Act (No.2) 1987 applies in respect of dividends paid in the year of income commencing on 1 July 1986 or any later year.

Income Tax Amendment Bill (No 2) 1987

Introductory Note

This Bill will amend the Income Tax Act 1986 to formally impose - at the rates declared by the Income Tax Rates Act 1986 - the tax payable for the 1987-88 and all subsequent financial years by -

·
individuals and trustees generally;
·
trustees of superannuation funds and ineligible approved deposit funds; and
·
companies, registered organisations, corporate unit trusts and public trading trusts, and certain other trusts.

The general rates of tax for resident taxpayers for 1987-88 and subsequent years are as follows:

For Parts of Taxable Income
Exceeding But Not Exceeding Rate $ $ %
0 5,100 NIL
5,100 12,600 24
12,600 19,500 29
19,500 35,000 40
35,000 - 49

Tax payable by resident taxpayers may be calculated from the following table:

Parts of Taxable Income
Exceeding But Not Exceeding Rate $ $ %
0 5,100 NIL
5,100 12,600 NIL + 24 cents for each dollar of taxable income in excess of $5,100
12,600 19,500 $1,800 + 29 cents for each dollar of taxable income in excess of $12,600
19,500 35,000 $3,801 + 40 cents for each dollar of taxable income in excess of $19,500
35,000 - $10,001 + 49 cents for each dollar of taxable income in excess of $35,000.

The general rates of tax for non-residents for the 1987-88 and subsequent years are:

For Parts of Taxable Income
Exceeding But Not Exceeding Rate $ $ %
0 19,500 29
19,500 35,000 40
35,000 - 49

Tax payable by non-resident taxpayers may be calculated from the following table:

Parts of Taxable Income
Exceeding Not Exceeding Tax on Total Taxable Income $ $  
0 19,500 29 cents for each dollar of taxable income
19,500 35,000 $5,655 + 40 cents for each dollar of taxable income in excess of $19,500
35,000 - $11,855 + 49 cents for each dollar of taxable income in excess of $35,000

Other rates applicable for 1987-88 and subsequent years include:

·
49 per cent for further tax payable under section 94 of the Income Tax Assessment Act 1936 (the "Assessment Act") on uncontrolled partnership income;
·
49 per cent on income assessed to a trustee under section 99A of the Assessment Act;
·
49 per cent, subject to shading-in arrangements above $416, on the unearned income of resident minors subject to the provisions of Division 6AA of Part III of the Assessment Act.
·
49 per cent for companies, corporate unit trusts, public trading trusts and trustees assessed under subsection 98(3) of the Assessment Act;
·
20 per cent for registered organisations; and
·
the following rates for trustees of superannuation funds or ineligible approved deposit funds:

·.
for a superannuation fund to which -
. section 121CA or 121CB applies 49 per cent
. section 121 CC applies 24 per cent
. section 121 DA applies. 49 per cent
. section 121 DAB applies 40 per cent
·.
for an ineligible approved deposit fund to which section 121 DAA applies 40 per cent

Notes on the clauses of the Bill are set out below.

Clause 1: Short Title etc.

By subclause (1) of this clause, the amending Act is to be cited as the Income Tax Amendment Act (No 2) 1987.

Subclause (2) facilitates references to the Income Tax Act 1986 which, in this Bill, is referred to as "the Principal Act".

Clause 2: Commencement

By this clause, 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 the date of Assent.

Clause 3: Imposition of income tax

Clause 3 will amend subsection 5(2) of the Principal Act to delete the reference to section 128T of the Assessment Act. Subsection 5(2) excludes from the scope of the Principal Act taxes that are payable in accordance with various sections of the Assessment Act and which are imposed by separate Acts. Section 128T, which was part of the "branch profits tax" provisions, was repealed from 1 July 1986 as a consequence of the introduction of the imputation system of company tax.

Clause 4: Levy of tax

Clause 4 will amend section 7 of the Principal Act which operates to formally levy the tax imposed by section 5 of that Act. By this clause, section 7 will be extended so that tax, at the rates declared by the Income Tax Rates Act 1986, is to be levied and payable for the 1987-88 and all subsequent financial years.

Clause 5: Repeal of sections 8,9,10

This clause will repeal sections 8,9 and 10 of the Principal Act which deals with the imposition of liabilities to pay provisional tax and instalments of company tax.

As it is considered that there is no legal requirement to formally impose these liabilities the relevant sections are being repealed. Complementary amendments are being made to repeal subsections 221AC(2) and 221YB(3) of the Assessment Act by clauses 33 and 36 respectively of the Taxation Laws Amendment Bill (No 3) 1987.

Clause 6: Application of amendment

By this clause the amendment made by clause 3 is to apply for the 1986-87 and all subsequent years of income.

Medicare Levy Amendment Bill 1987

This Bill will amend the Medicare Levy Act 1986 to declare and impose the rate of Medicare levy for the 1987-88 and subsequent financial years. The Bill will also increase the level of the income thresholds below which levy is not payable.

Clause 1: Short title etc.

By subclause (1) of this clause, the amending Act will be cited as the Medicare Levy Amendment Act 1987.

Subclause (2) facilitates references to the Medicare Levy Act 1986 which, in this Bill, is referred to as "the Principal Act".

Clause 2: Commencement

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

Clause 3: Amendment of Principal Act

By clause 3 the Principal Act is to be amended as set out in the Schedule. The particular amendments are discussed hereunder.

Rate of Levy (section 6)

The Schedule proposes amendments to section 6 of the Principal Act to omit the references therein to a rate of Medicare levy of 1.145 per cent and to substitute the new rate of 1.25 per cent. By clause 4 of the Bill the amendments will apply in respect of the 1987-88 and all subsequent financial years.

Subsection 6(1) of the Principal Act applies in relation to individual taxpayers and the amendment proposed by the Schedule will fix a rate of levy of 1.25 per cent. By section 251S of the Income Tax Assessment Act 1936 (referred to as the "Assessment Act"), levy is payable on the taxable income of an individual who is a resident of Australia for any part of the income year.

Subsection 6(2) declares the rate of levy, now to be 1.25 per cent, to be payable by the trustee of a trust estate assessable under section 98 of the Assessment Act. Trustees are liable to be assessed under that section in respect of trust income to which a beneficiary who is under a legal disability, e.g., infancy, is presently entitled and may, by section 251S of the Assessment Act, be subject to the levy.

Subsection 6(3) also declares the rate of levy, now 1.25 per cent, on income assessable to a trustee under section 99 or section 99A of the Assessment Act. A trustee is assessable under those sections in respect of trust income to which no beneficiary is presently entitled. Liability for levy in these circumstances is created by section 251S of the Assessment Act, other than where the trustee is a trustee of a deceased estate.

Levy in Cases of Small Income (section 7)

Section 7 of the Principal Act gives relief from Medicare levy to taxpayers on low incomes and phases in the levy for those taxpayers with taxable incomes that exceed the threshold below which no levy is payable.

The Schedule proposes amendments of subsections 7(1) and (2) of the Principal Act to omit the references therein to $8,030 and to substitute references to $8,980. As a consequence of the amendment of subsection 7(1), a taxpayer whose taxable income is $8,980 or less will not be required to pay Medicare levy. By clause 4 of the Bill the amendment applies for 1987-88 and all subsequent income years.

A further amendment of subsection 7(2) proposes to omit a reference to $8,517 and to insert a reference to $9,578. The levy for a taxpayer whose taxable income exceeds $8,980 but does not exceed $9,578, will be limited to 20 per cent of the excess of the taxable income over $8,980. By clause 4 of the Bill this amendment also applies for 1987-88 and all subsequent years.

The amount of levy ascertained in this way is further reduced by any reduction to which the person is entitled by reason of the family income threshold provisions in section 8 of the Principal Act, or because the taxpayer is exempt from payment of the levy for part of the year of income (section 9 of the Principal Act).

Another amendment by the Schedule will omit a reference to $441 in subsection 7(4) of the Principal Act and substitute a reference to $443. As a consequence, Medicare levy payable by a trustee (other than the trustee of a deceased estate) who is assessable and liable to pay tax under section 99 of the Assessment Act, will be shaded-in at 20 per cent in the income range $417 to $443.

Amount of Levy - Person who has Spouse or Dependants (section 8)

Section 8 of the Principal Act grants full relief from Medicare levy in respect of a year of income to a person who has a family if two conditions are satisfied -

·
the person is legally or de facto married (as defined) on the last day of the year of income or the person is entitled to a rebate in his or her assessment in respect of the year of income for a daughter-housekeeper or a housekeeper or as a sole parent; and
·
the "family income" of the person in respect of the year of income (i.e., the taxable income of the person plus that of his or her spouse, if any) does not exceed the "family income threshold" in relation to the person.

By the Schedule the basic level of the "family income threshold" for a taxpayer, defined in subsection 8(5) of the Principal Act, is to be increased from $13,370 to $15,090. The level of that threshold in a year of income will be increased by a further $2,100 for each dependent child or student in respect of whom the taxpayer or his or her spouse, if any, would have been entitled to an income tax dependant rebate in that year if those rebates had not been replaced by family allowances.

The amendments proposed by the Schedule to certain components of the formula in subsection 8(2) of the Principal Act will ensure the continued operation of that subsection and subsections (3) and (4) in shading-in the amount of Medicare levy payable by a couple, or a sole parent, where the couple or sole parent is not entitled to exemption from levy by subsection 8(1), because the "family income" exceeds the "family income threshold" by a small or moderate amount. The change to the components of the formula will limit the levy payable by the taxpayer (before any reduction under section 9 to which the taxpayer is entitled as a part year prescribed person) to 20 per cent of the excess of the "family income" over the "family income threshold".

The Schedule also proposes amendments to subsection 8(6) of the Principal Act to account for the increase in the basic level of the "family income threshold" to $15,090 and to change a reference to Part VI of the Social Security Act 1947 to Part X following a renumbering of that Act, effective from 2 July 1987.

By clause 4 of the Bill the amendments to section 8 of the Principal Act will apply for 1987-88 and all subsequent financial years.

Financial Years for which Levy is Payable (section 11)

By the amendment proposed by subsection 11(1) to the Principal Act the Medicare levy, imposed by section 5 of the Principal Act, is payable for 1987-88 and for all subsequent financial years.

The amendments to omit subsections 11(2) and (3) are consequential upon the operation of the Medicare Levy Act 1986, as amended, to declare and impose the Medicare levy for all subsequent financial years.

Clause 4: Application of Amendments

By this clause the amendments proposed to be made by the amending Bill apply for the financial year commencing on 1 July 1987 and for all subsequent financial years.


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