House of Representatives

Taxation Laws Amendment Bill (No. 4) 1988

Taxation Laws Amendment Act (No. 4) 1988

Income Tax Amendment Bill 1988

Income Tax Amendment Act 1988

Medicare Levy Amendment Bill 1988

Medicare Levy Amendment Act 1988

Explanatory Memorandum

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

TABLE OF CONTENTS

  Page
General Outline 1
Financial Impact 5
Main Features 7
Notes on Clauses 21

INDEX OF SPECIFIC MEASURES

Measure Main Features Notes on Clauses*   Page Page
Depreciation 7 59
Prepaid Expenses 8 73
Tax Exempt Entities 9 46
Unfranked Dividends 10 48
Section 26AAA 10 44
Mains Electricity 11 69
Natural Increase 11 45
Pensioner Rebate 11 97
Beneficiary Rebate 12 97
Special Temporary Allowance 12 43
Provisional Tax 12 104
Non-Cash Business Benefits 13 41
Debt Creation Arrangements 15 83
Public Trading Trusts 17 79
Substantiation Rules 17 73
Gifts 17 71
Remote Area Housing 18 21
Section 14ZKA 19 107
Imposition of tax 20 109
Medicare Levy 20 112
* Main notes on clauses commence on this page

GENERAL OUTLINE

TAXATION LAWS AMENDMENT BILL (NO.4) 1988

This Bill will amend various taxation Acts to give effect to a number of announced proposals as outlined below:

Income Tax Assessment Act 1936

Business Tax Review - 1988 May Economic Statement

Depreciation changes

·
to repeal, with effect from 26 May 1988:

-
the general 5/3 accelerated depreciation concession for plant;
-
the special 5 year depreciation concession for certain primary production plant; and
-
the special write-off allowed for capital expenditure on plant used in general mining or petroleum mining activities, except for expenditure on plant for use in exploration or prospecting;

and to replace those arrangements with depreciation at effective life rates;
·
to increase, with effect from 26 May 1988, the existing special loading on effective life depreciation rates from 18% to 20%;
·
to require, from 26 May 1988, a taxpayer to adopt a uniform depreciation method to apply to all plant that first becomes depreciable in any income year;

Prepaid expenses

·
to provide for certain expenditure incurred in advance to be deductible over the period during which the relevant services are to be provided, subject to a maximum write-off period of 10 years;

Dividends paid by tax-exempt entities

·
to deny the intercorporate dividend rebate in respect of dividends paid by tax-exempt entities;

Unfranked dividends received by private companies

·
to deny, with certain exceptions, the intercorporate dividend rebate in respect of the unfranked part of dividends received by private companies;

Termination of section 26AAA

·
to abolish, for property disposed of after 25 May 1988, the provision which includes as assessable income profits on the sale of property within 12 months of purchase, and so bring short term property sales within the ambit of the general capital gains and capital losses provisions;

Mains electricity

·
to replace the immediate write-off for capital expenditure on certain mains electricity facilities with a write-off over 10 years;

Cost-price of natural increase

·
to permit a taxpayer to bring natural increase of live stock to account at actual cost of production if the taxpayer can demonstrate the actual cost is less than the minimum values prescribed in respect of natural increase of live stock; and

Pensioner rebate

·
to increase the level of the pensioner rebate of tax from $250 ($308 for service pensioners) to $430, and the income level above which the rebate begins to shade-out.

1988-89 Budget

Beneficiary rebate

·
to increase from $430 to $600 for married taxpayers (and de facto couples), and from $180 to $260 for other taxpayers, the 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, Formal Training Allowances or certain Commonwealth educational allowances;

Special temporary allowance

·
to exempt from tax the special temporary allowance payable to certain social security or repatriation pensioners; and

1988-89 provisional tax

·
to provide the method of calculating provisional tax for the 1988-89 income year.

Other proposals

Non-cash business benefits

·
to tax non-cash business benefits that are in the nature of income (proposal announced on 4 February 1985);
·
to exclude from deductible business expenditure the arm's length value of any private non-cash benefit, including any other non-deductible benefit, received by a taxpayer as a result of incurring the business expenditure;

Debt creation arrangements

·
to deny deductions for interest incurred by non-resident companies and foreign controlled Australian companies on borrowings made in connection with the acquisition of assets from related parties (proposal announced on 30 April 1987);

Public trading trusts

·
to extend the range of business activities that may be conducted by the trustee of a public unit trust without the trust being taken to be a public trading trust, the trustee of which is taxed as a company (proposals announced on 24 February 1988 and 1 July 1988);

Substantiation rules

·
to replace the requirement that information in respect of income tax deduction claims for car expenses be specified in income tax return forms with a requirement that the information be specified, in a form approved by the Commissioner of Taxation, in records retained by the taxpayer; and

Gifts

·
to amend the income tax gift provisions to reflect the change in name of an organisation (the Duke of Edinburgh's Study Conference Account) currently listed in the provisions.

Fringe Benefits Tax Assessment Act 1986

Remote area housing

·
to introduce rules for the amortisation, over a period of 5 to 7 years, of the taxable value of housing assistance provided to employees under a remote area home ownership scheme (proposal announced on 29 October 1986);
·
to extend the existing 50% discounting of the taxable value of benefits relating to the provision of remote area housing to:

-
the acquisition of land on which, broadly, an employee builds a home within 6 to 18 months of acquisition;
-
an employer's reimbursement, in whole or part, of expenditure incurred by an employee to acquire or construct a home;
-
the payment, by an employee to an employer, of an option fee in return for a right to purchase (or repurchase) the employee's home;
-
the purchase of an employee's home by his or her employer; and

·
to allow an employer's fringe benefits taxable amount to be reduced appropriately when, under a remote area home ownership scheme, that employer purchases an employee's home at less than its market value.

Taxation Administration Act 1953

Repeal of section 14ZKA

·
to repeal Section 14ZKA of the Act which modifies the State and Territory limitation laws applying to the recovery of tax debts.

INCOME TAX AMENDMENT BILL 1988

This Bill will amend the Income Tax Act 1986 to formally impose tax payable for the 1988-89 financial year and the subsequent year, at the rates of tax declared by the Income Tax Rates Act 1986.

MEDICARE LEVY AMENDMENT BILL 1988

This Bill will amend the Medicare Levy Act 1986 -

·
to impose a basic rate of Medicare levy of 1.25 per cent for 1988-89 and the subsequent income year; and
·
to exempt from the levy individuals with taxable incomes of $9,560 or less and families and sole parents with family incomes of $16,110 or less; the family or sole parent threshold to be raised by a further $2,100 for each dependent child or student (1988-89 Budget announcement).

FINANCIAL IMPACT

TAXATION LAWS AMENDMENT ACT (NO.4) 1988

The proposed changes to the depreciation arrangements are estimated to result in a revenue saving of $190m in 1989-90, $450m in 1990-91, $1,030m in 1991-92 and $1650m in 1992-93. The savings are expected to settle at an annual gain of around $1,250m in the mid to late 1990's.

The revenue gain from the new write-off arrangements that are to apply to prepaid expenditure is estimated to be $35 million in 1989-90 and $20 million in subsequent income years.

The denial of the intercorporate dividend rebate in respect of dividends paid by tax-exempt entities will prevent the loss to revenue from equity capital raisings by such entities. However, it is not possible to provide any revenue estimates.

The gain to revenue from the denial of the intercorporate dividend rebate in respect of the unfranked part of dividends received by private companies is estimated at $50 million in 1989-90, $55 million in 1990-91 and $60 million in 1991-92.

The cost to revenue of the amendment to abolish the provision which taxes profits on the sale on property within 12 months of purchase, and so tax those gains under the capital gains provisions, is estimated to be $5 million in 1988-89 and $30 million in 1989-90.

The amendment of the concession for mains electricity connections is expected to produce revenue savings of $5 million in 1988-89 and subsequent years.

The amendments of the live stock valuation provisions will have minimal effect on revenue.

The estimated cost of the increase in the level of the pensioner rebate is estimated to be $55m in 1988-89 and $210m in 1989-90.

The increase in the level of the beneficiary rebates available for recipients of certain social security benefits and of certain educational allowances is expected to cost $20m in 1988-89 and each subsequent income year.

The revenue cost of exempting the special temporary allowance will be negligible in 1988-89 and is estimated at $5m in 1989-90 and $6m in 1990-91.

The adoption of a 12% uplift factor for the calculation of 1988-89 provisional tax will result in an estimated gain to revenue of $105 million in 1988-89.

The nature of the proposed amendments in relation to public trading trusts and those to tax non-convertible non-cash benefits and to exclude from business expenditure the 'arm's length' value of any private benefit is such that a reliable estimate of the potential revenue effect cannot be made.

The amendments to deny deductions for interest incurred under debt creation arrangements involving non-residents are expected to prevent significant but unquantifiable revenue losses.

The amendments to the substantiation rules and gift provisions will have no effect on revenue.

The amendments of the Fringe Benefits Tax Assessment Act 1986 concerning remote area housing schemes are expected to cost less than $1m in relation to the fringe benefits tax (FBT) transitional year that commenced on 1 July 1986 and for all subsequent FBT years.

The repeal of Section 14ZKA of the Taxation Administration Act 1953 will have no effect on revenue.

INCOME TAX AMENDMENT BILL 1988

This Bill will formally impose tax payable for the 1988-89 financial year.

MEDICARE LEVY AMENDMENT BILL 1988

The increase in the Medicare levy low income thresholds is estimated to cost $11m in 1988-89, $27m in 1989-90 and $23m in 1990-91.

MAIN FEATURES

Taxation Laws Amendment Bill (No.4) 1988

The main features of this Bill are as follows:

Amendment of the Income Tax Assessment Act 1936 (Part III)

Removal of accelerated depreciation concessions and related changes (Clauses 23, 25 to 39, 42 and 47 to 49)

This Bill will give effect to proposals, announced in the May 1988 Economic Statement, to withdraw certain special concessional arrangements for the write-off of capital expenditure on the cost of plant and equipment used for the purpose of producing assessable income. The amendments proposed by the Bill will terminate:

·
the general accelerated depreciation concession allowing write-off of most plant over 3 or 5 years (section 57AL of the Income Tax Assessment Act 1936);
·
the special 5 year depreciation arrangements for storage facilities for hay, grain and fodder (section 57AE), and for new primary production plant (section 57AH); and
·
the special write-off for capital expenditure incurred on plant used in general mining or petroleum mining activities (Divisions 10 and 10AA), except for expenditure on plant for use in exploration or prospecting. Expenditure to which the amendments will apply is currently deductible over the lesser of 10 years or the life of the mine or petroleum field, commencing in the year in which the expenditure is incurred.

Plant which was previously eligible for write-off under these arrangements will now be depreciated at the rate determined for that plant by the Commissioner of Taxation. The Commissioner's determination is based on the estimated effective life of the plant. Depreciation may be claimed on either the prime cost or diminishing value method and depreciation will commence to be allowable in the year in which the plant is first used, or installed ready for use, for the purpose of producing assessable income.

The Bill will also increase, from 18% to 20%, the special statutory loading that is allowed on the effective life rates of most items of plant.

The Bill will also require each taxpayer to elect, on a year-by-year basis, which of the two depreciation methods (prime cost or diminishing value) is to apply to all plant that first becomes depreciable by the taxpayer in that year. The method elected will continue to apply to that plant throughout its depreciable life in the hands of that taxpayer. Only one depreciation method may be adopted by a taxpayer in respect of each year and, once the election is made, it will be irrevocable. These amendments will replace the existing arrangements under which the diminishing value method applies unless, or until, the taxpayer elects to apply the prime cost method.

The amendments under this heading will apply in respect of:

·
plant acquired under a contract entered into after 25 May 1988;
·
plant constructed by the taxpayer under a contract entered into after 25 May 1988, or under a series of contracts the first of which was entered into after that date;
·
where there is no contract for the construction, plant commences to be constructed after 25 May 1988; and
·
any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.

Period of deductibility of certain advance expenditure (Clauses 20, 22 and 45)

The Bill will give effect to the May Economic Statement proposal to limit the immediate deductibility of expenditure incurred in advance of the provision of the relevant services. Expenditure incurred in advance under agreements entered into after 25 May 1988 will generally be written off, on a straight line basis, over the period during which the relevant services are to be provided, subject to a maximum write-off period of 10 years.

The new rules will not apply to expenditure where:

·
the relevant services will be provided within 13 months of the date on which the expenditure is incurred;
·
the prepayment is required by order of a court or by law;
·
the amount of the expenditure is less than $1000; or
·
the expenditure is in respect of salary or wages.

Where, at the end of a year of income, a taxpayer no longer has any rights under a prepaid agreement - either because of the discharge of the agreement or the transfer of the remaining rights under the agreement to a third party - any undeducted expenditure will be brought forward and allowed as a deduction in the year of discharge or transfer.

In the case of a transfer of rights under a prepaid agreement as a consequence of the formation, reconstitution or dissolution of a partnership, the person or partnership holding the rights after the change will be entitled to the deductions that would have been available to the person or partnership that incurred the expenditure. A proportionate deduction will be allowable in the year of change.

Dividends paid by tax-exempt entities (Clauses 17 and 18)

The Bill will give effect to the Government's proposal, announced on 25 May 1988, to deny the intercorporate dividend rebate in relation to dividends paid by corporate entities which, under certain provisions of the Principal Act, are exempt from tax on their income.

In raising capital through conventional borrowings tax-exempt entities do not obtain the tax benefit of deductibility of servicing costs that is ordinarily available to taxpaying entities, while the servicing costs are taxed as income of the lenders of the funds. By restructuring the raising of capital through the issue of equity instruments rather than debt securities, tax-exempt entities have been able to pay the providers of the funds a return in the form of dividends. Because dividends are normally fully rebateable, that is, effectively tax-free, in the hands of corporate investors, such investors would be willing to provide funds, as equity, at a before-tax rate of return which is equivalent to the after-tax return they would receive in the form of interest on a conventional loan.

The raising of capital in the form of equity represents an advantage to tax-exempt entities derived at the expense of the Commonwealth revenue. The denial of the intercorporate dividend rebate on dividends paid by a tax-exempt entity will remove that tax advantage. The rebate that would otherwise be available will be denied whether or not the dividend was paid as part of a dividend stripping operation.

The amendments proposed by clauses 17 and 18 will apply in relation to dividends paid after 25 May 1988 other than those paid on shares or stock issued on or before 25 May 1988. For dividends paid on shares or stock issued on or before 25 May 1988, the amendments will apply in relation to dividends paid after the amending Act comes into operation.

Unfranked part of dividends received by private companies (Clause 19)

It is proposed to amend the intercorporate dividend rebate provisions of the Principal Act to deny the rebate to private companies to the extent the dividends they receive are not franked. Denial of the rebate in these circumstances will remove the tax deferral incentive for private companies to be used as repositories for dividends which are not fully franked.

The rebate will not be denied in relation to the unfranked part of a dividend which is a phasing-out dividend for the purposes of the arrangements for the phasing-out of undistributed profits tax, or where both the company paying the dividend and the company receiving the dividend belong to the same company group.

The proposed measure will apply in relation to dividends paid to private companies after 25 May 1988, the day on which the proposal was announced, other than dividends declared on or before that date.

Termination of Section 26AAA (Clause 15)

Clause 15 will give effect to the 25 May 1988 Business Tax Reform proposal that the provision in the income tax law (section 26AAA) that includes in assessable income profits in respect of short-term property sales will cease to apply to sales of property after that date. The effect of terminating the operation of section 26AAA is that transactions formerly taxed under that section will now be subject to the capital gains and capital losses provisions. This will mean that capital gains arising from short term property sales will qualify for the five year notional averaging of liabilities under the capital gains provisions and that short term capital gains may be offset against allowable capital losses. In addition, the exemptions contained in the capital gains provisions, for example the principal residence exemption, will extend to assets bought and sold within 12 months.

Cost of mains electricity connections (Clauses 21, 23, 40 and 55)

The Bill will implement the proposal, announced in the May Economic Statement, to replace with a write-off over 10 years the immediate deductibility of capital expenditure incurred in connecting mains electricity facilities (or upgrading an existing connection) to a property on which a business is carried on . The amendment will apply to capital expenditure incurred under contracts entered into after 25 May 1988.

Cost price of natural increase of live stock (Clause 16)

The income tax law provides that live stock on hand at the end of a year of income may be valued at cost price, market selling value or such other value as circumstances may justify. Where the cost price of natural increase of a particular class of live stock has not previously been taken into account, the taxpayer may select a cost price per head in respect of natural increase of that class. The amount selected then continues to be used by the taxpayer in subsequent years unless the Commissioner of Taxation agrees to the adoption of another cost price. The amount selected may not be less than the minimum cost price prescribed in respect of the particular class of live stock.

In the May Economic Statement it was announced that the prescribed minimum cost prices are to be increased, for natural increase occurring after 30 June 1988, from $1 to $4 for sheep, from $5 to $20 for cattle and horses and from $4 to $12 for pigs. Minimum values of $20 and $4 respectively are to be prescribed in respect of deer and goats.

For taxpayers whose actual cost of production of natural increase of a class of live stock is less than the minimum cost price prescribed in respect of that class, the natural increase may be brought to account at actual cost. The actual cost of production is to be calculated on the same basis as is used by manufacturers for the purposes of determining the cost price of manufactured goods - that is, on an absorption cost basis.

Rebates in respect of certain pensions, benefits, etc (Clause 51)

The Bill will give effect to the May 1988 Business Tax Reform proposal to increase, for the 1988-89 and subsequent income years, the level of the maximum rebate of tax, from $250 ($308 for service pensioners) to $430, available for taxpayers in receipt of Australian social security or repatriation pensions. The income level at which the rebate begins to shade-out will also be increased from $6142 ($6384 for service pensioners) to $6892. The maximum rebate will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $6892. No rebate will thus be available at taxable incomes in excess of $10331.

Beneficiary rebate (Clause 51)

The Bill will also give effect to the 1988-89 Budget proposal to increase for 1988-89 and subsequent income years the maximum rebates of tax, and the income levels above which the rebates shade-out, for taxpayers in receipt of a social security unemployment, sickness or special benefit, a Formal Training Allowance or an allowance paid under certain Commonwealth educational schemes. For married taxpayers (and de facto couples) the maximum rebate will be increased from $430 to $600 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $11059. For other taxpayers the maximum rebate will increase from $180 to $260 and will shade-out at the rate of 12.5 cents for each dollar of taxable income in excess of $6184. No rebate will be available at taxable incomes in excess of $15,858 for married taxpayers and $8,263 for others.

Exemption of Special Temporary Allowance (Clause 14)

The Bill will give effect to a Budget proposal to exempt from income tax a special temporary allowance payable under the Social Security Act 1947 or the Veterans' Entitlements Act 1986.

The special temporary allowance is payable to a surviving pensioner by fortnightly instalments for twelve weeks following the death of his or her pensioner spouse. In that twelve week period, a surviving pensioner continues to receive the amount of pension that would have been payable to him or her if the spouse had not died. In addition, the surviving pensioner is paid an amount, called a special temporary allowance, equal to the pension that would have been payable to the deceased spouse if he or she had not died.

The exemption will apply for an allowance received in the 1988-89 or subsequent income years.

Provisional tax for 1988-89 year (Clause 56)

Provisional tax for the 1988-89 year of income is to be calculated by applying 1988-89 rates of tax and Medicare levy to 1987-88 taxable incomes increased by 12 per cent. Rebates, other than those on franked dividends which are to be increased by 12 per cent, and credits allowed in 1987-88 income tax assessments will be taken into account as appropriate in calculating the 1988-89 provisional tax.

Non-cash business benefits (Clauses 12, 13, 24 and 54)

This Bill will implement, subject to some minor variations, the proposal which was announced on 4 February 1985 to tax non-cash business benefits.

The proposal was announced to overcome practices that became more prevalent following the adverse decision of the Full Federal Court in F C of T v. Cooke & Sherden 80 ATC 4140; (1980) 10 ATR 696 concerning non-transferable overseas trips given to some soft drink vendors under a sales incentive scheme sponsored by the manufacturer. The Court held that the existing law taxes non-cash business benefits only if the benefits are convertible to cash and are in the nature of income according to ordinary concepts. The overseas trip being non-transferable was not convertible to cash and was accordingly held to be not subject to tax under any provision of the Principal Act. The benefits were also held not to be assessable under subsection 26(e) of the Principal Act as the taxpayers had not rendered any services to the manufacturer.

The decision highlighted a substantive defect in the application of the charging provisions of the Principal Act.

In addition to more prevalent income-type benefits, there had been an increase in non-cash benefits provided to induce business taxpayers to purchase items of plant or equipment.

To implement the proposal the Bill proposes separate simple rules to deal with the following types of practices described in the announcement:

(a)
the provision of non-cash business benefits that (apart from their non-convertibility to cash) are in the nature of income; and
(b)
the provision of non-cash benefits to induce business taxpayers to purchase any items of plant or equipment.

The practice of providing non-cash business benefits that are in the nature of income but that had been held to be tax free because they are not-convertible to cash is dealt with by providing that the benefits be treated as if they were convertible into cash. A new section - section 21A - is to be inserted in the Principal Act, and will operate to treat non-convertible cash benefits as convertible into cash. In addition, the new section contains a valuation rule to apply to convertible non-cash business benefits, which are presently taxable subject to the ordinary concepts of income. In determining the income derived by a taxpayer, the new section will require the taxpayer to include the arm's length value of any non-cash business benefit, whether or not it is convertible to cash, if it is otherwise income by ordinary concepts of income.

The new section 21A will place all non-cash business benefits in the same category as cash items of income . The assessment of non-cash business benefits would depend on whether the benefits are income items under ordinary concepts of income, i.e., subject to the same common law rules that determine whether cash items are income items. The new section will apply to non-cash benefits provided after 4 February 1985 (the date of announcement).

The second proposed change deals with a practice of providing non-cash business benefits to induce business taxpayers to purchase items of plant or equipment (including practices relating to agreements for services). Another new section - section 51AK - is to be inserted to exclude from business expenditure the arm's length value of any private benefit received by a taxpayer. This will ensure that where a benefit is received as a result of business expenditure, an amount attributable to the private benefit will not be deductible or form part of the cost of unit of property for depreciation purposes. The new provision will apply in respect of non-cash business benefits provided after the date of introduction of this Bill.

Under the new section 21A for taxing non-cash business benefits that are not-convertible to cash as if they were convertible to cash, the normal rules that apply for the taxation of convertible non-cash benefits will be automatically applied. It is therefore unnecessary to include provisions to give effect to special rules set out in the Announcement relating to:

(a)
the year in which a benefit is to be taxed;
(b)
the taxpayer who is to pay the tax;
(c)
reduction of the taxable value where the benefit is otherwise deductible; and
(d)
depreciation on the basis of the benefit's taxable value.

To ensure that there is no element of retrospectivity in the application of the new section 21A, special transitional provisions are included in the Bill so that benefits provided on or before the date of introduction of the Bill are taxed on the basis of the special rules set out in the announcement of 4 February 1985.

Corporate Restructures - Debt Creation Involving Non-Residents (Clause 50)

The Bill will implement a proposal, announced on 30 April 1987, to incorporate into the income tax law with effect from 1 July 1987 corporate restructure (debt creation) rules. These rules will have similar effect to those previously imposed administratively in the application of foreign investment policy as a condition of approval of certain foreign investment proposals. Previously, approval of proposals for restructuring of existing foreign investments by way of transfer of shares or assets between related companies was conditional on no additional debt being introduced into the group to finance the restructure.

These amendments will similarly apply to corporate restructure (debt creation) arrangements that involve the sale of assets between certain foreign owned companies. The aim of the rules is to ensure that there is no increase in the interest-bearing debt where assets are transferred between a related buyer and seller.

In the absence of rules to control these arrangements, additional debt introduced from outside the group has a twofold potential detriment to the revenue.

First, the additional debt to a foreign shareholder or a foreign associate enables profits to be shifted offshore in the form of tax deductible interest payments instead of as non-deductible dividends. Even if the additional debt is initially owed to an Australian resident, it may be refinanced offshore at a later date. Accordingly, the provisions will apply to both local and offshore interest-bearing debt introduced under a corporate restructure arrangement.

Secondly, receipt of the sale proceeds by the seller places the seller in a position where a tax free capital payment can be made to its overseas shareholders in substitution for dividend payments.

The former foreign investment policy administrative procedures prevented corporate restructure arrangements from taking place. The Bill will achieve a comparable result by effectively preventing interest-bearing debt from being introduced to fund acquisitions of assets from related companies. The new provisions will deny a deduction for interest incurred to an associate or to a local or foreign lender where the interest is incurred in connection with an acquisition of an asset from a related company. The rules will only apply where foreign shareholders together with their foreign associates (referred to as foreign controllers) have a 50% interest, or greater, in both the buyer and the seller of the asset acquired. This interest is determined by reference to beneficial entitlement to any capital distribution from the company.

The legislation will apply to deductions claimed in respect of interest incurred in connection with the acquisition of an asset where an interest-bearing debt becomes owing in any of the following situations:

·
a non-resident company sells an asset to its resident subsidiary;
·
a resident subsidiary sells an asset to the Australian branch of its non-resident parent; or
·
a resident company sells an asset to another resident company where both have the same foreign controller.

Where a foreign controller does not have a 100% interest in both the buyer and the seller the denial of the interest deduction will be reduced proportionally to reflect the lower of the beneficial interests of the foreign controller in the buyer and seller of the asset. For example, where a foreign controller holds 75% of the capital entitlement in the seller of a wholly-owned asset and 70% in the buyer, the beneficial interest of the foreign controller in the buyer and seller would be 70% (i.e., the lower of 75% and 70%).

If any part of the buyer's interest in the asset is acquired from a non-related seller (i.e., a seller in which the foreign controller does not have the required 50% interest) then the denial of interest will be further reduced to reflect the proportion of the interest in the asset acquired from the related seller. So, in the example in the previous paragraph, if the related seller had only a 50% interest in the asset then the proportion of the buyer's deduction that will be disallowed will be 35% (i.e., 70% multiplied by 50%).

The new provisions will apply with effect from 1 July 1987 (the date on which the foreign investment policy administrative controls ceased to apply). Specifically, the provisions will apply to interest incurred on or after 1 July 1987 unless either the contract for the acquisition of the asset was entered into, or the acquisition of the asset occurred, before that date.

As a transitional measure, the proposed legislation will only apply before 20 June 1988 where the foreign controller had a 100% interest in both the buyer and the seller of the asset.

Taxation of public trading trusts (Clause 46)

This clause will affect the operation of Division 6C of Part III of the Income Tax Assessment Act 1936, which taxes as a company the trustee of a public unit trust that carries on a trade or business (known as a "public trading trust"). Division 6C does not apply to a public unit trust the business of which consists solely of "eligible investment business". The amendment made by this clause will extend the meaning of the term "eligible investment business", thereby enabling a public unit trust to conduct a wider range of business activities than is presently possible without being taxed as a public trading trust. The amendment applies in relation to business conducted by a public unit trust in the year of income that commenced on 1 July 1987 or in a subsequent year of income.

Retention of car records (Clauses 44 and 52)

Taxpayers are to be permitted to retain particular records rather than - as the present law requires - lodge them with the Commissioner of Taxation in completed income tax returns. The records are those that relate to income tax deduction claims for car expenses. This amendment reflects similar amendments to the fringe benefits tax law proposed by Taxation Laws Amendment Bill (No. 3) 1988.

The Duke of Edinburgh Study Conferences (Clause 41)

At present gifts to the Duke of Edinburgh's Study Conference Account maintained by the Commonwealth are allowable deductions for income tax purposes under paragraph 78(1)(a)(xvi) of the Income Tax Assessment Act 1936.

Under new arrangements the Account is not to be maintained by the Commonwealth but will be maintained by a new organisation - HRM the Duke of Edinburgh's Commonwealth Study Conferences (Australia) Incorporated.

This Bill will amend the gift provision so that gifts to the new organisation are deductible from the date on which it was incorporated, i.e., 24 April 1986.

To reflect the fact that the new organisation and the Account maintained by the Commonwealth have operated concurrently since 24 April 1986 the amendment will operate to allow income tax deductions for gifts to both the new organisation and the existing Account between 24 April 1986 and 1 January 1989.

From 1 January 1989 donations will only be deductible if made to the new organisation.

Amendment of the Fringe Benefits Tax Assessment Act 1986 (Part II)

Amortisation of remote area housing fringe benefits (Clauses 1 to 8)

This Bill provides for a spreading, generally over a five to seven year period, of the impact of the fringe benefits tax presently imposed on remote area employers who provide employees with specified types of housing assistance. In broad terms, the taxable value of a remote area housing benefit consisting of:

·
a discount on the purchase of a home or of land on which to build a home;
·
a reimbursement of the cost of buying land and/or building a home; or
·
an option fee entitling the employer to first choice in repurchasing the house,

and where there is a related restriction of the home buyer's freedom to transfer title to the house is to be subjected to fringe benefits tax by prorating the taxable value of the benefit over the period during which freedom of transfer is restricted. In contrast, the present law subjects the whole of the relevant benefits to tax in the year in which they are provided.

The remote area housing schemes eligible for this concessional treatment are ones designed as incentives to employees to acquire their own housing and thus establish themselves in the communities where they live and work. The concession does not extend to any contrived attempt by an employer to reduce its effective tax rate by taking advantage of the concessional treatment afforded to remote area fringe benefits in general and to these types of benefits in particular. Such a scheme would be struck down by section 67 of the Principal Act. As a further safeguard, it is to be a condition of eligible remote area housing schemes that the restraints on transfer of title be kept in place for a five year minimum period.

The amortisation concession is to be spread over a minimum of five years and a maximum of seven years. If no upper limit were in place, fringe benefits tax could be postponed indefinitely.

Remote area employers may see a need to purchase the homes of their employees. Indeed, some remote area home ownership schemes have a repurchase arrangement as a central feature. If a repurchase occurs before the amortisation period expires, i.e., before the whole of the taxable value of a fringe benefit provided in connection with the purchase of a remote area residence has been brought to account, the unamortised balance is to be brought to account in the fringe benefits tax year in which the purchase takes place.

Where an employer's purchase (or repurchase) of an employee's house gives rise to a fringe benefit (for example, where the price paid is above market value) that benefit is fully exposed to fringe benefits tax in the year of purchase. However, that part of an 'excessive' repurchase price which is less than a 'guideline price' will qualify for the remote area fringe benefits discount, i.e., a 50 per cent reduction in what would otherwise be the taxable value of the benefit. The guideline price is, broadly, the market value of the house at the time of its original purchase by the employee, adjusted for movements in the Consumer Price Index.

Finally, the Bill provides for a reduction of an employer's fringe benefit taxable amount in a year in which an employee is forced, by the terms of a remote area housing obligation (i.e., by a contractual buy-back arrangement), to incur a loss on the disposal of his or her home to the employer. This could occur, for example, where house prices rose sharply but the employee was locked into a below-market figure. The rationale for this reduction - which is to be limited to one half of the loss incurred by the employee - is that, taking an overall view, any fringe benefit given to the employee to facilitate the original purchase of the house (and on which benefit the employer has been subjected to fringe benefits tax) is being offset, wholly or partly, by the loss on its subsequent resale to the employer. The reductions provided for by the Bill will not, however, give rise to a negative fringe benefits amount capable of being carried forward.

Amendment of the Taxation Administration Act 1953 (Part IV)

Repeal of Section 14ZKA (Clause 59)

Clause 59 repeals a provision (section 14ZKA) which was inserted into the Act by the Taxation Administration (Recovery of Tax Debts) Act 1986. That Act was a consequence of the decision of the Full Supreme Court of Queensland in Federal Commissioner of Taxation v Moorebank Pty Ltd 86 ATC 4560. In that case the Court held that a State Limitations Act applied to taxation debts by virtue of section 64 of the Judiciary Act 1903. The decision overturned a long held legal principle that the recovery of tax debts could commence at any time. Section 14ZKA was then inserted into the Act to give immediate protection to the revenue. The Commissioner of Taxation appealed against the Full Supreme Court's decision in Moorebank and on 9 June 1988 the High Court of Australia found that State and Territory Limitation Acts did not apply to taxation debts, hence section 14ZKA is now redundant.

Income Tax Amendment Bill 1988

This Bill will amend the Income Tax Act 1986 to impose for 1988-89 and the subsequent financial year the rates of tax payable as declared by the Income Tax Rates Act 1986.

Medicare Levy Amendment Bill 1988

The Medicare levy will, by this Bill, be payable on taxable incomes for 1988-89 and the subsequent income year. The amendments to the levy arrangements contained in the Bill will -

·
impose the Medicare levy in respect of 1988-89 and the subsequent financial year 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 $9,560; or
·.
a married (including de facto) couple where the sum of the couple's taxable incomes does not exceed $16,110, or by a sole parent where his or her taxable income does not exceed $16,110; 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.4) 1988

PART 1 - PRELIMINARY

Clause 1: Short title

This clause allows the amending Act to be cited as the Taxation Laws Amendment Act (No. 4) 1988.

Clause 2: Commencement

Subclause 2(1) provides that the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this 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.

Subclause 2(2) provides that amendments concerning the definition of a car proposed by paragraph (a) of clause 43 and by subclause 53(11) of the Bill will come into operation immediately after the Taxation Laws Amendment Act (No.3) 1988 comes into operation. That Act will also amend the definition being amended by paragraph 43(a). The Taxation Laws Amendment Act (No.3) 1988 had not received Royal Assent at the time of introduction of this Bill.

PART II - AMENDMENT OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Clause 3: Principal Act

This clause facilitates reference to the Fringe Benefits Tax Assessment Act 1986 which, in this Part, is referred to as the 'Principal Act'.

Clause 4: Reduction of taxable value - remote area housing

This clause proposes the addition of new subsections to section 60 of the Principal Act. Broadly, that section discounts by 50 per cent the taxable value of a fringe benefit relating to the provision of assistance to enable an employee to acquire a 'unit of remote area accommodation' (typically, a house in a remote area of Australia). The present range of section 60 benefits will be expanded, by the new subsections, to assistance in the form of expense payment benefits and specified types of property benefits. As is the case with the existing section 60 benefits, the taxable value of the benefits described in the new subsections 60(4) to 60(6) (a value determined under Part III of the Principal Act) will be reduced by 50 per cent.

New subsection 60(4) will apply where housing assistance is in the form of an expense payment fringe benefit, i.e., a reimbursement by an employer of the whole or part of an employee's expenditure (paragraph (a)) in respect of remote area residential property (paragraph (b)). An example of such expenditure would be where an employee buys materials to use in constructing or extending a house in a remote area to be used as his or her principal residence.

The expenditure to which subsection 60(4) will apply, and the conditions to be met if the taxable value of the benefit is to be discounted by 50 per cent, are contained in clause 8: see, in particular, the notes on proposed new subsection 142(2C) in the notes on that clause. In broad terms, however, the expense payment benefit must:

·
relate to an employee's expenditure incurred wholly to acquire land on which a dwelling exists or will be constructed by the employee; or
·
enable the employee to construct or extend a dwelling on land in which the employee has an estate or interest.

Further, if the expenditure reimbursed was outlaid to acquire land or construct a dwelling, the employee must make 'sustained reasonable efforts' to:

·
commence construction within 6 months; and
·
occupy the dwelling as a principal residence within 18 months of incurring the expenditure.

In addition, if the employee is acquiring or extending an existing residence, the employee must, as soon as possible after incurring the relevant expenditure, occupy the dwelling as his or her principal residence. The land must also be located in a remote area and the common conditions detailed in clause 8 (in proposed new subsection 142(2E)) must be satisfied if the discount is to apply. Broadly, those conditions are that -

·
it is customary for employers in the particular industry to provide housing assistance to their employees; and
·
it is necessary for the employer to provide such assistance.

Subsection 60(5) will apply where the employee receives a property fringe benefit (paragraph (a)) in the form of a 'remote area residential property option fee' (paragraph (b)). This term is explained in clause 8 (see notes on proposed subsection 142(2A)). Broadly, it refers to where an employer pays an employee a fee in consideration for the employee granting the employer an option to acquire the employee's home, or land on which the employee will construct a home within specified time limits. The usual requirements that the property must be in a remote area and that the 'common conditions' detailed in proposed subsection 142(2E) must be met also apply.

To be eligible for the 50 per cent discount, the fee paid by the employer must be paid in respect of an option agreement that was entered into no later than when the employee acquired an interest in the relevant land.

Additionally, the option agreement in respect of which the option fee is paid must constitute a 'recognised remote area housing obligation'. This term is defined in clause 8 - see the notes on proposed new subsection 142(2D) - but the general requirements to be met in respect of a 'recognised remote area housing obligation' are that there is a contractual obligation entered into by the employee with the employer (or associate) not to dispose of the estate or interest, except to the employer at a price determinable under the contract. This contract must restrict the disposal rights of the employee in this way for a minimum of 5 years.

A 'remote area residential property option fee' might typically be paid where, as part of a home ownership scheme operated by an employer in a remote area, the employer sells a house to an employee at market value, but also pays the employee a fee in return for:

·
an option to repurchase the property from the employee; and
·
the employee's agreement not to dispose of the property to anyone else for, say, 5 years.

Subsection 60(6) will apply where the employee receives a property fringe benefit (paragraph (a)) in the form of a 'remote area residential property repurchase consideration' (paragraph (b)). The meaning of this term is explained in clause 8 (see notes on proposed subsection 142(2B)). Broadly, it means that an employer buys an employee's estate or interest in land containing the employee's home, or on which the employee intends to construct his or her home. As is the case with subsections (4) and (5), the land must be in a remote area and the conditions detailed in proposed subsection 142(2E) must be satisfied.

To be eligible for the discount, the purchase consideration must be paid to the employee in accordance with a 'remote area housing obligation' (see notes on proposed subsection 142(2D) in clause 8) entered into at or before the time when the employee acquired his or her estate or interest in the land.

Example: As part of a remote area home ownership scheme, an employer enters into an option agreement to repurchase an employee's home. At or before that time, the employer sells the home to the employee at market value. The option agreement restricts the employee's right to dispose of the property for 5 years. If, in accordance with that agreement, the employer later repurchases the home from the employee and the purchase consideration exceeds the market value at the time of that repurchase, the taxable value of the benefit attributable to that excess will attract a 50 per cent discount, subject to the operation of subsection (7).

The rationale behind this concessional treatment of the abovemarket component of the repurchase price is that, typically, the market value of housing in mining towns - where the major remote area housing schemes operate - is likely to be low once the mine is worked out or if it becomes uneconomic. Buy-back schemes of this type encourage stability in the local work force by facilitating the purchase (and eventual disposal) by employees of housing on reasonable terms.

Subsection 60(7) is intended to limit the extent to which the 50 per cent discount under subsection 60(6) will be available. It will deny the discount on that portion of a benefit, arising on repurchase, that is attributable to the employer paying an excessive above market repurchase price under a buy-back clause in a remote area housing agreement. The subsection provides a basis for working out whether a repurchase price is excessively generous.

Subsection 60(7) will apply where there is a property benefit to which subsection 60(6) applies (paragraph (a)) and the amount of consideration paid by the provider exceeds both:

·
the market value of the employee's estate or interest in the property at the time of the repurchase (subparagraph (b)(i)); and
·
the 'guideline price' of that estate or interest at the time of purchase (subparagraph (b)(ii)).

The 'guideline price' is to be determined in accordance with proposed new section 60AA of the Principal Act (see notes on clause 5). Broadly, it is the market value of the estate or interest of the employee when he or she acquired that interest, indexed up by reference to the index used to index the cost base of assets under the capital gains tax provisions of the income tax law.

When the requirements outlined above are satisfied, the taxable value referred to in subsection 60(6) will be that part of the taxable value attributable to the 'guideline price'.

Example: On 1 April 1988 an employee entered a remote area home ownership scheme which placed restrictions on his or her right to deal freely with the property for 5 years. On 31 March 1990 the employee resigns and the employer purchases the employee's house. Assume:

·
the market value of the house at 1 April 1988 was $58,000 and its market value at 31 March 1990 is $63,000;
·
the guideline price of the house at 31 March 1990 is $68,000;
·
the employer purchases the house for $74,000.

Subsections 60(6) and (7) will apply as follows:

The 50 per cent discount is limited to the benefit attributed to the 'guideline price', i.e.,

$68,000 less $63,000 = $5,000

. The 'excess' consideration over the guideline price

(i.e., $74,000 less $68,000 = $6,000)

does not attract the 50 per cent discount. The taxable value of the fringe benefit is therefore:

($5,000 * 50%) + $6,000 = $8,500

.

Note: Where the market value exceeds the guideline price no fringe benefit arises unless an above-market value price is paid. In that event, subject to transitional provisions in subclause 9(2), the 50 per cent discount is not available because the taxable value is not attributable to the amount of the guideline price.

Clause 5: Guideline price for repurchase of remote area residential property

This clause inserts new section 60AA in the Principal Act which will provide for the indexation of the 'guideline price' used in quantifying fringe benefits flowing from an employer's repurchase of remote area residential property. The expression 'guideline price' is explained in the clause 4 notes on proposed subparagraph 60(7)(b)(ii). The new subsection is along the lines of section 160ZJ of the Income Tax Assessment Act 1936 which allows an indexation factor to be used in the calculation of the cost base of an asset for capital gains tax purposes.

Subsections (4) and (5) contain the operative provisions of proposed section 60AA.

Subsection (4) declares that the reference in subsection 60(7) to the 'guideline price' of an estate or interest in land is a reference to the market value when the employee acquired that estate or interest multiplied by the factor derived from subsections (5) and (6), provided that factor exceeds 1 (paragraph (a)) or, where the factor so obtained does not exceed 1, the market value at that time (paragraph (b)).

Subsection (5) provides a mathematical method for calculating the indexation factor to be used in subsection (4) in determining the 'guideline price'.

Clause 6: Insertion of new Divisions

Introductory note

Clause 6 proposes the insertion of 2 new Divisions into Part III of the Principal Act. The effect of these Divisions, in conjunction with other amendments proposed by this Bill, is:

·
to provide a scheme for the spreading (or 'amortisation') of certain remote area housing scheme fringe benefits over the period in which they are effectively enjoyed (Division 14A comprising sections 65CA and 65CB); and
·
to permit a reduction in an employer's fringe benefits taxable value for a fringe benefits tax year where, taking into account subsequent transactions, it is demonstrated that previous remote area housing fringe benefits have been effectively overstated (Division 14B comprising section 65CC).

Division 14A - Amortisation of taxable value of fringe benefits relating to remote area home ownership schemes

Section 65CA: Amortisation of taxable value of fringe benefits relating to remote area home ownership schemes

Proposed subsection 65CA(1) will define the types of benefits and the conditions which must be satisfied if a benefit provided to an employee is to qualify for amortisation. The amortisation rules will be applied to three types of benefits. They are:

·
property benefits where the relevant property is 'remote area residential property' (a term defined in subsection 142(2) of the Principal Act, as proposed to be amended by this Bill - see notes on clause 8 (subparagraph (a)(i));
·
property fringe benefits where the property is a 'remote area residential property option fee' (a term defined in proposed subsection 142(2A) of the Principal Act - see notes on clause 8 (subparagraph (a)(ii))); and
·
expense payment benefits in respect of 'remote area residential property' (subparagraph (a)(iii)).

Paragraph (b) sets out a further condition to be met where the benefit is a property fringe benefit given in relation to remote area residential property. The condition is that at or before the time when the benefit was given, the employee had entered into a 'recognised remote area housing obligation' (a defined term - see notes on clause 8 concerning proposed subsection 142(2D) dealing with limits on the employee's right to deal freely with the property).

A similar condition is imposed by paragraph (c) where the benefit provided is an expense payment fringe benefit. There, the recognised remote area housing obligation has to have been entered into at or before the time when the employee acquired a relevant interest in land on which (in the main) the employee is building a residence.

Paragraph (d) sets out how the 'overall amortisation period' (the period over which the relevant benefit may be amortised) is to be calculated. The start of the period is ascertained as follows:

·
if the benefit is a property benefit and the property is either 'remote area residential property' or a 'remote area residential property option fee', the overall amortisation period commences when the benefit is provided (subparagraph (i)); alternatively
·
if the benefit is an expense payment benefit in respect of 'remote area residential property', that period commences when the expenditure is incurred (subparagraph (ii)).

The time when an 'overall amortisation period' commences is described as the 'benefit time'. That latter expression is used in subparagraph (d)(vii). The 'overall amortisation period' will end when the earliest of five events specified in subparagraphs 65CA(1)(d)(iii) to (vii) occurs. Those events are:

·
when the employee ceases to be subject to the 'recognised remote area obligation' (refer to the notes on proposed subsection 142(2D)in clause 8). Generally, this will be when the obligation period expires (subparagraph (iii));
·
when the employee ceases to be employed by the employer. If the employee resigns, for example, the 'overall amortisation period' will end at that time (subparagraph (iv));
·
when the employee ceases to use the relevant dwelling as his or her usual place of residence. The amortisation concession will only apply while the employee so uses the property or is in the process of constructing it as his or her residence (subparagraph (v));
·
when the employee dies (subparagraph (vi)); and
·
when seven years have passed since the 'benefit time' (see the note following those on subparagraphs (i) and (ii)). This places an upper limit of seven years on the 'overall amortisation period' (subparagraph (vii)).

The overall amortisation period must start and end in different years of tax for the amortisation concession to apply to a particular benefit.

Subsection (2) provides that the 'notional amortisation period' is the period from the 'benefit time' (refer to the note following those on subparagraphs (1)(d)(i) and (ii)) to the earlier of either:

·
the end of the period specified in the 'recognised remote area obligation' (a defined term - see notes on proposed subsection 142(2D) in clause 8) as the period during which the employee's right to dispose of a relevant estate or interest (other than to the employer at a price ascertainable in the obligation contract) is restricted (paragraph (a)); or
·
when seven years have elapsed since the 'benefit time' (paragraph (b)).

Subsection (3) contains the formula to be used to calculate the 'amortised amount', i.e., that part of the fringe benefits taxable amount to be included in a particular year of tax as part of the process of spreading the taxing of the benefit over a period. The 'amortised amount' is the proportion of the taxable value of an "amortised fringe benefit" (a defined term - see notes on proposed changes to subsection 136(1) in clause 7) to be included in an employer's fringe benefits taxable amount in the particular year (called the 'current year of tax').

The components of the formula are defined terms previously explained in the clause 6 notes on proposed subsections 65CA(1) and (2). The formula is:

(Taxable Value) * ((Current amortisation period)/(Notional amortisation period))

where:
Taxable value is the taxable value of the fringe benefit in the relevant benefit year of tax;
Current amortisation period is the whole number of months (or part months) in the current year of tax that are included in the notional amortisation period; and
Notional amortisation period is the whole number of months (or part months) in the notional amortisation period: refer to the clause 6 notes on proposed subsection 65CA(2).

Example: If the 'current year of tax' were the year 1 April 1988 to 31 March 1989 and the notional amortisation period were the period from 15 July 1988 to 15 July 1993:

·
the current amortisation period would be 9 months (July 1988 to March 1989, inclusive, with the period from 15 to 31 July 1988 treated as if it were a whole month); and
·
the notional amortisation period would be 60 months

((5 years) * (12 months))

.

Subsection (4) will apply when the 'overall amortisation period' (refer to notes on subparagraph (1)(d)) ends during a current year of tax. In this instance, the amortised amount will be:

(Taxable value) - (Previously amortised amounts)

where:
Taxable value is the same amount as in the previous formula (refer to subsection (3)); and
Previously amortised amounts is the sum of all amortised amounts that have been brought to tax in previous years under proposed subsection (3) in relation to the particular amortised fringe benefit.

Proposed subsections (3) and (4) combine to spread the taxable value of an 'amortised fringe benefit' (refer to notes on subsection (1)) over the life of the 'recognised remote area obligation' under which the benefit was provided. Subsection (3) will be used to calculate the amortised amount in years where any of the five events described in paragraph (1)(d) has not occurred, and subsection (4) will apply to bring any previously unamortised amounts to tax when such an event occurs during a current year of tax.

New subsection (5) will modify the operation of subparagraph (1)(d)(ii) when the relevant expense payment benefit is provided on or after 1 July 1986 in relation to an employee's expenditure incurred before 1 July 1986. Where this happens, the 'benefit time' - and hence the 'overall amortisation period' - will be treated as commencing on 1 July 1986. But for this subsection, subparagraph (1)(d)(ii) would cause that time and period to start when the employee's expenditure was incurred, i.e., before the fringe benefits tax legislation came into operation. This subsection thus ensures that an 'overall amortisation period' cannot commence on a date before the date of commencement of the application of the fringe benefits tax.

Examples of the operation of the amortisation formulae

Example 1: On 15 July 1988, under a remote area home ownership scheme, an employee bought a house from his or her employer for less than its then market value. Suppose that:

·
the market value of the house on 15 July 1988 was $58,000;
·
the employee paid $31,700; and
·
the 'recognised remote area housing obligation' entered into restricted, for five years, the employee's right to sell the house (other than to the employer and at a price stated in the obligation contract).

The taxable value of the property benefit is:

$58,000 - $31,700 = $26,300

, reduced by 50 per cent (by subsection 60(3)) to $13,150.

That taxable value will be amortised as follows:

·
for the fringe benefits tax (FBT) year ending 31 March 1989 (applying the subsection 65CA(3) formula) -

$13,150 * (9)/(60) = $1,972.50

;
·
in each of the next 4 full FBT years, the amortised amount will be:

$13,150 * (12)/(60) = $2,630

.

That is, a further $10,520

($2,630 * 4)

is amortised over the four FBT years period from 1 April 1989 to 31 March 1993.

Because the employee's contractual obligation ceases on 15 July 1993, the subsection 65CA(4) formula is applied for the FBT year to 31 March 1994 to calculate an amortised amount of:

$13,150 - ($1,972.50 + $10,520) = $657.50

In summary, the taxable value ($13,150) of the benefit provided is amortised:

. in the FBT year ending 31 March 1989 $ 1,972.50
. in the four FBT years ending 31 March 1990 and 10,520.00;
. in the FBT year ending 31 March 1994 657.50
TOTAL $13,150.00

Example 2: If, in Example 1, above, the employee resigned on 31 March 1990 (or if any other event specified in proposed subparagraphs 65CA(1)(d)(iii) to (vii) then occurred), the taxable value ($13,150) of the fringe benefit provided would be amortised as follows:

·
for the FBT year ending 31 March 1989 (applying subsection 65CA(3)) -

$13,150 * (9)/(60) = $1,972.50

·
for the FBT year ending 31 March 1990 (applying subsection 65CA(4)) -

$13,150 - $1,972.50 = $11,177.50

Section 65CB: Amendment of assessments

Proposed section 65CB makes it clear that the Commissioner of Taxation is authorised to make any amendments necessary, at any time, to give effect to the amortisation concessions in proposed Division 14A.

Division 14B - Reducible fringe benefits relating to remote area home repurchase schemes

The fringe benefits tax legislation brings to tax those benefits provided to employees participating in remote area home ownership schemes on a basis which, essentially, compares the circumstances of an employee in such a scheme with those of an employee not in one.

A 'recognised remote area housing obligation' will usually provide that, for a specified time, an employee may only dispose of his or her estate or interest in land (i.e., typically, a home) to the employer at a price ascertainable in the obligation contract. Under such an obligation, an employee could suffer a loss if required to sell for a price below the market value at the time of the sale. The overall benefit to the employee of being in a remote area home ownership scheme would be reduced to the extent of that loss. That is, the 'up-front' benefit to an employee of buying a home from his or her employer at a discount of, say, $20,000 on market value, will be wholly negated if that home is later repurchased by that employer for a price that the employee is bound to accept and which is $20,000 below its then market value. For all practical purposes, the employee would be in the same position as one who was never in a remote area home ownership scheme.

Accordingly, proposed Division 14B, consisting of proposed section 65CC, allows an employer, who has been subjected to tax on earlier remote area home ownership scheme benefits given to employees, to effectively reduce the fringe benefits tax payable in a later year where those earlier benefits have been wholly or partly negated.

Section 65CC: Reducible fringe benefits relating to remote area home repurchase schemes

Proposed subsection (1) lists requirements, all of which must be satisfied, for a fringe benefit to be a 'reducible fringe benefit'. They are:

·
that the recipient of the fringe benefit is the employee of the employer and the benefit is a property fringe benefit (paragraph (a));
·
that the recipients property is 'remote area residential property repurchase consideration' - see notes on proposed subsection 142(2B) in clause 8 (paragraph (b));
·
the taxable value of the fringe benefit in relation to that year of tax is NIL (paragraph (c)); and
·
the market value of the estate or interest in the land exceeds the amount paid by the provider to buy that estate or interest (paragraph (d)).

Subsection (2) provides that the reduction amount of a 'reducible fringe benefit' will be 50 per cent of the gap between the market value and the (lesser) amount paid as 'remote area residential property repurchase consideration'. The 50 per cent reduction is consistent with the concessional fringe benefits tax treatment given to remote area housing assistance in the Principal Act.

The reduction amount calculated under subsection (2) may be applied to reduce what would otherwise be the fringe benefits taxable amount in a year of tax - see notes on clause 7.

Example: On 1 April 1988, an employee entered into a remote area home ownership scheme. On 31 March 1990, the employee resigns and the employer purchases the employee's house on that date. Assume:

·
the market value of the house on 1 April 1988 was $58,000 and, at 31 March 1990, $63,500; and
·
the employer purchases the house pursuant to a 'recognised remote area housing obligation' for $59,000.

The 'reduction amount' will be 50 per cent of the amount of the excess of the market value on 31 March 1990 over the consideration paid, i.e.,

·

50 per cent of ($63,500 - $59,000) = $2,250.

Clause 7: Interpretation

This clause proposes to vary a definition in subsection 136(1) of the Principal Act and to insert two new definitions to facilitate the drafting and understanding of amendments proposed by this Bill.

First, by paragraph (a), the existing definition of "fringe benefits taxable amount" is to be replaced by an expanded definition under which the "fringe benefits taxable amount", in relation to an employer in a particular year of tax (called the 'current year of tax'), will be the sum of:

·
the total of taxable values of all fringe benefits (except amortised fringe benefits) provided by an employer during the year (paragraph (a)); and
·
the total of all the 'amortised amounts' in relation to that year, of all the amortised fringe benefits for the current year and other years of tax (paragraph (b));

reduced by the sum of all reduction amounts (see notes on clause 6 on proposed section 65CC) in relation to the current year of tax.

This change to the definition will facilitate the operation of proposed sections 65CA and 65CC - see, generally, the notes on clause 6.

This clause also proposes, by paragraph (b), to insert definitions of "amortised fringe benefit" and "reducible fringe benefit" in subsection 136(1) of the Principal Act. The terms will have the meaning given in proposed sections 65CA and 65CC respectively: see the clause 6 notes on those sections.

Clause 8: Remote area housing

This clause proposes to amend section 142 of the Principal Act by expanding the scope of subsection 142(2) and inserting five new subsections. The amendment of subsection 142(2) will widen the meaning of 'remote area residential property'. The new subsections proposed to be inserted will define the types of fringe benefits the taxable value of which may be reduced by applying either the rules in subsection 60(3) of the Principal Act, or those in proposed subsections 60(5) to (7) - refer to the notes on clause 4 those latter subsections. The clause will also expand the meaning of the term 'housing assistance' contained in subsection 142(3) of the Principal Act, and make minor technical amendments of subsections 142(1) and (1A).

Paragraph (a) will make a minor technical amendment of section 142 of the Principal Act to consolidate the requirements in the paragraphs being omitted and place them in proposed new subsection (2E). That subsection is explained later in these clause notes. The amendment does not change the effect of the existing law.

Paragraph (b) will extend the definition of 'remote area residential property' in subsection 142(2) of the Principal Act to include land on which an employee will shortly build his or her home. This change is effected by placing the omitted words in their own paragraph (paragraph (aa)) and then adding a new category of such property, viz, land on which an employee proposes to build, or finish building a house for use as his or her usual place of residence. The employee's intention to build that house must be held when he or she acquires the relevant land (paragraph (ab)). The Commissioner of Taxation must be satisfied that the employee has pursued 'sustained reasonable efforts' to start building within 6 months of acquiring the land (subparagraph (ac)(i)) or, within 18 months of that time, to occupy the house as his or her usual place of residence (subparagraph (ac)(ii)).

Paragraph (c) proposes a technical amendment of subparagraph 142(2)(a)(i) of the Principal Act. The change is consistent with the amendment being made (by paragraph (b)) to remove the requirement that a house be on the property immediately after the provision time if land is to be regarded as 'remote area residential property'.

Paragraph (d) proposes a technical amendment comparable to that effected by paragraph (a) of this clause. The amendment will not change the operation of the law.

Paragraph (e) widens the scope of an existing anti-avoidance provision of the Principal Act to guard against arrangements under which benefits, which might technically but not in substance constitute remote area benefits, seek access to the residential property amortisation concessions available in proposed new Division 14A of Part III.

By paragraph (f), new subsections (2A) to (2E) are to be inserted in section 142 of the Principal Act. Each of subsections (2A) to (2C) explains the meaning of a shorthand description of a particular type of remote area fringe benefit. In each case, the relevant fringe benefit may attract the concessional treatment afforded by section 60 of the Principal Act as proposed to be amended by this Bill, and the amortisation concession proposed by the Bill.

New subsection 142(2A) explains what is meant by the term 'remote area residential property option fee'. Such a fee is a type of property fringe benefit and its taxable value may be reduced under proposed subsection 60(5) (refer to the clause 4 notes on that subsection). The fee may also be eligible for the amortisation concessions provided for in this Bill. A 'remote area residential option fee' is property consisting of a fee paid to an employee in return for the employee's granting, to the employer, an option to buy an estate or interest in land. The following conditions must be satisfied:

·
the employee must hold an estate or interest in the land to which the option relates (paragraph (a));
·
the land must, at the time when the option fee was paid to the employee, either have a house on it which is the employee's usual place of residence (subparagraph (b)(i)) or be land on which the employee intends to build such a house (subparagraph (b)(ii));
·
if the employee intends to build, the Commissioner of Taxation must be satisfied that he or she has sought to commence building within 6 months (subparagraph (c)(i)) and to occupy the house within 18 months (subparagraph (c)(ii)) of the time when the option fee was paid;
·
when the option fee is paid, both the land (subparagraph (d)(i)) and the employee's usual place of employment (subparagraph (d)(ii)) must be located in a remote area;
·
the contract under which the option fee is paid must be entered into no later than when the employee obtains an estate or interest in the land subject to the option, and the option must also constitute a 'recognised remote area housing obligation' restricting the employee's right to dispose of the interest in the land - see the later notes on proposed subsection 142(2D) (paragraph (e));
·
the 'common conditions' of proposed subsection 142(2E) must be satisfied at the time the option was granted to the employer (paragraph (f));
·
the option fee must be paid to the employee under an arm'slength transaction (subparagraph (g)(i)) and not paid to secure access to the concessional arrangements (for reducing the taxable value of the option fee benefit) provided by section 60 of the Principal Act or the amortisation benefits in proposed new Division 14A (subparagraph (g)(ii)).

Proposed subsection 142(2B) explains the term 'remote area residential property repurchase consideration'. It means property that consists of an amount paid to an employee by his or her employer for the purchase of that employee's estate or interest in land. Such a consideration will constitute a property fringe benefit the taxable value of which may be reduced under new subsection 60(6) - see the clause 4 notes on that subsection.

Paragraphs (a) to (e) are to the same effect as the corresponding paragraphs in new subsection 142(2A) but relate to 'remote area residential property repurchase consideration' rather than option fees.

Paragraph (f) means that only property benefits arising from a house purchase under a 'recognised remote area housing obligation' that imposes disposal restraints will constitute 'remote area residential property repurchase consideration'.

Paragraphs (g) and (h) are to the same effect in relation to property repurchase consideration as the corresponding paragraphs ((f) and (g) respectively) of new subsection 142(2A) are in relation to option fees.

Proposed subsection (2C) sets out the type of expenditure that will constitute 'recipients expenditure in respect of remote area residential property' and which, when reimbursed, will give rise to an expense payment fringe benefit the taxable value of which may be reduced under new subsection 60(4) - see the clause 4 notes on that subsection. The expenditure must be in relation to:

·
the employee's acquisition of land on which he or she will build a house (paragraph (a));
·
the building of a house on land held by the employee (paragraph (b));
·
the acquisition of land on which there is already a house (paragraph (c)); or
·
the extension of a house on the employee's land (paragraph (d)).

The following conditions must also be satisfied:

·
when expenditure described in paragraphs (a) and (b) is incurred by the employee, he or she must have an intention to occupy the house as a residence (subparagraph (e)(i));
·
the Commissioner of Taxation must be satisfied that after that time the employee consistently attempted to commence building within 6 months (sub-subparagraph (e)(ii)(A)) and to occupy the house as a usual place of residence within 18 months (sub-subparagraph (e)(ii)(B)).

By paragraph (f), if the expenditure relates to the acquisition of land with a house on it or to the extension of a house (as in paragraphs (c) and (d) above), the employee must use the dwelling as a private residence as soon as reasonably practicable after incurring the expenditure.

Paragraph (g) requires that the same conditions as are set out in proposed subparagraphs 142(2B)(d)(i) and (ii) (and explained in the earlier notes on those subparagraphs) be satisfied when the employee incurred the relevant expenditure.

By paragraph (h), the 'common conditions' of proposed subsection 142(2E) must be satisfied at the time when the employee incurred his or her expenditure: see the later notes on that subsection.

Paragraph (j) is to the same effect as paragraph 142(2A)(g): see the earlier notes on that paragraph.

New subsection (2D) defines a 'recognised remote area housing obligation' to be a contractual obligation, binding the employer (or associate) and the employee, which restricts the employee's ability to dispose of his or her estate or interest in the relevant land other than to the employer (or associate) (paragraph (a)) and for a price that can be determined by reference to the contract (paragraph (b)).

The restriction is to exist for a period of at least 5 years from:

·
for a property fringe benefit in relation to 'remote area property repurchase consideration' - the time when the employee acquired his or her interest in the land (paragraph (c));
·
for any other type of property fringe benefit - the time when the benefit was provided to the employee (paragraph (d)); and
·
for an expense payment fringe benefit - the time when the expenditure was incurred by the employee (paragraph (e)).

New subsection (2E) lists the 'common conditions' (referred to, for example, in paragraphs (2A)(f), (2B)(g) and (2C)(h)) which must be satisfied if the various fringe benefits described in this Bill are to qualify as remote area housing fringe benefits and thus be eligible for the concessions already in the Principal Act and those provided by the Bill. Broadly, the 'common conditions' are that:

·
it is customary in the particular industry for employers to provide housing assistance to employees (paragraph (a)); and
·
it is necessary for the employer to provide or arrange housing assistance for employees for the following reasons:

-
the nature of the employer's business is such that employees are liable to frequent movement from one residential location to another (subparagraph (b)(i));
-
in the area in which the employee is employed there is not sufficient suitable residential accommodation otherwise available (subparagraph (b)(ii)); or
-
because of the custom in the employer's industry to provide housing assistance to employees (subparagraph (b)(iii)).

The new subsection will not alter the practical effect of the present law. It facilitates the drafting and understanding of that law and of the changes being made by the Bill.

Paragraph (g) effects a minor drafting change to facilitate the changes being made by paragraph (h).

By paragraph (h), new paragraphs are added to subsection 142(3) of the Principal Act. That subsection explains what is meant by 'housing assistance'. The new paragraphs make it clear that expense payments benefits provided in relation to the acquisition or building of a house (new paragraph (e)) and the provision of a residential property ownership scheme involving options to buy an employee's house (new subparagraph f(i)) or the purchase of an employee's house (new subparagraph (f)(ii)) will constitute 'housing assistance'.

Paragraph (j) will insert new subsection 142(4) in the Principal Act. This subsection makes it clear that the Commissioner of Taxation may amend any fringe benefits tax assessment to give effect to the paragraphs listed in the subsection. Each of the specified paragraphs requires an employee to pursue 'sustained reasonable efforts' to:

·
start building a home within 6 months of receiving a fringe benefit connected with the acquisition of land on which to build it; and
·
occupy that home within 18 months of receiving that benefit.
If, for example, the required efforts cease prematurely, the Commissioner is empowered by the subsection to amend assessments to adjust appropriately any relevant fringe benefit concessions already given, e.g., a reduction, under section 60 of the Principal Act, in the taxable value of a fringe benefit.

Clause 9: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the operation of the various amendments contained in Part II of the Bill.

The general application rule expressed in subclause (1) is that the amendments apply to fringe benefits tax assessments for the transitional and later years of tax. As such, the concessional amendments being introduced by this amending Bill will apply from the date of introduction of the fringe benefits tax law, 1 July 1986.

The effect of subclause (2) is to remove certain fringe benefits from the operation of new subsection 60(7) of the Principal Act which section, but for this transitional measure to avoid retrospectively disadvantaging employers, would deny them the 50 per cent concessional taxable value generally available to remote area housing fringe benefits. Proposed subsection 60(7) provides that, if an above-market value price is paid by an employer in buying back an employee's house, only 50 per cent of the gap between market value and the 'guideline price' (if the 'guideline price' is the higher figure) will be subjected to fringe benefits tax on the benefit arising from the employer's payment of an above-guideline price. The gap between the 'guideline price' and any higher price paid will be taxed, however - because of subsection 60(7) - without the benefit of the 50 per cent discounting of the taxable value.

Nevertheless, in specified circumstances, this subclause will protect employers against the denial of that discount. It will permit the discount to apply where an above-market repurchase price was paid before 1 August 1987 (the time when details of how the guideline price system would operate were made known) (paragraph (a)) or was paid on or after that date, under a contract made before then and binding (as distinct from permitting) the employer to pay an ascertainable price which, in the event, exceeds both the guideline price and market value (paragraph (b)).

Subclause (3) varies the general application provision so that the amendments of the definition of "fringe benefits taxable amount" proposed by clause 7 do not apply to instalments of tax in respect of the transitional year of tax. It follows that amendments of transitional year assessments to give effect to the fringe benefits tax concessions in this Bill will affect only the overall liability to tax of transitional year taxpayers, and will have no bearing on their instalments in that year.

Clause 10: Amendment of assessments

This clause will give the Commissioner of Taxation authority to re-open a fringe benefits tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to amendments proposed by the Bill.

PART III - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 11: Principal Act

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

Clause 12: Where consideration not in cash

This clause ensures that the valuation rules outlined in clause 13 are an exclusive code for the determination of the value of any non-cash business benefit, whether or not the benefit is convertible into cash.

Clause 13: Non-cash business benefits

The purpose of this clause is to insert a new section - section 21A - in the Principal Act to treat non-cash benefits received from business relationships that are not convertible into cash as if they were convertible to cash and to bring within assessable income non-cash business benefits, whether convertible or not, provided they are of an income nature.

The new section is to apply to non-cash business benefits provided on or after 5 February 1985.

If a non-cash business benefit is of an income nature, the amount to be assessable is to be the arm's length value of the benefit less any cash contributions made by the recipient.

Subsection 21A(1) establishes that a non-cash non-convertible business benefit is to be treated as a convertible benefit for purposes of the Principal Act. This provision will overcome an interpretation that limits the scope for non-convertible items to be treated as income under ordinary concepts of income. By the operation of this new subsection, non-cash business benefits which are not convertible into cash will be treated in the same manner as non-cash benefits that are convertible.

Subsection 21A(2) specifies a valuation rule to determine the assessable value of non-cash benefits, convertible and non-convertible (including those treated as convertible by subsection 21A(1)) that are in the nature of income.

By paragraph 21A(2)(a) the amount to be included as assessable income is the arm's length value of the non-cash benefit less any amount contributed by the recipient in acquiring the benefit. In calculating the arm's length value of a benefit, paragraph 21A(2)(b) operates to disregard any conditions or limitations that might otherwise preclude the placing of a monetary value on the benefit.

Subsection 21A(3) ascribes particular meanings to a number of terms and expressions that are used in the section.

'arms length value', in relation to a non-cash business benefit, is defined to mean the amount the recipient of the benefit would have paid to the provider for the benefit in a relationship where the recipient and provider were strangers to each other and who bore no special duty, obligation or relation to each other. In cases where a value cannot be placed on the benefit by the use of this test, the Commissioner is entitled to assign a reasonable amount as being the arm's length value of the benefit.
'non-cash business benefit'is defined to mean benefits provided after 4 February 1985 in the form of property or services in any business relationship. As the new section 21A only applies to benefits that are income according to ordinary concepts, benefits received in a personal or private capacity would not constitute non-cash benefits for purposes of this section. A Christmas gift by a retailer to a customer would be an example of a private benefit. This would not usually have an income character because it would not be likely to be the product of an income-earning activity and is not provided on a periodic basis.
'provide' is given an extended meaning in relation to property and services. In relation to property, it includes disposal of the beneficial interest or the legal ownership, whether by assignment, declaration of trust or otherwise. In relation to services it includes allow, confer, give, grant or perform.
'recipient's contribution', is defined to mean the total amount of consideration paid by the recipient to the provider of the benefit less any amount reimbursed to the recipient by the provider.
'services' is defined to include any right, privilege, service or facility, including a right relating to real or personal property, whether provided under an arrangement in relation to -

·
the performance of work;
·
the provision of entertainment, recreation or instruction, or the use of facilities therefor; or
·
the conferring of rights, benefits or privileges for which remuneration is payable by way of royalty, tribute or levy, or provided under an insurance contract or a money-lending arrangement.

Subsection 21A(4) ensures that only money consideration may constitute a recipient's contribution for purposes of this section.

Clause 14: Exemption of certain pensions

This clause proposes amendments of section 23AD of the Principal Act which sets out the circumstances in which pensions, benefits or allowances paid under social security, repatriation or other welfare legislation are subject to, or exempt from, tax. The amendments will exempt from income tax a special temporary allowance payable under section 172 of the Social Security Act 1947 or section 65 of the Veterans' Entitlements Act 1986.

The broad scheme of section 23AD is that subsection (3) exempts from tax all pensions, allowances or benefits paid under the relevant legislation other than those included within the term "excepted payment", which is defined in subsection (1). The term "excepted payment" includes certain payments which are assessable irrespective of the age of the recipient, and other payments, specified in the definition of "excepted pension" in subsection (1), which are assessable only when the recipient is a prescribed person, e.g., a man or woman of age pension age.

An allowance, called a special temporary allowance, is payable to a surviving pensioner, following the death of his or her pensioner spouse, by fortnightly instalments for a period of twelve weeks commencing on the day after the date of death. The amount of the fortnightly allowance is equal to the amount of the pension that would have been payable in that period to the deceased spouse if he or she had not died.

The special temporary allowance is not the subject of an exemption under section 23AD of the Principal Act when received by certain pensioners, such as age or service pensioners. This occurs because the allowance comes within the meaning of the terms "excepted payment" and "excepted pension" defined in subsection 23AD(1). As already explained, a payment that is an "excepted pension" is, in certain circumstances, also an "excepted payment" - an "excepted payment" is not exempt from tax in the terms of section 23AD and to the extent it is income under ordinary concepts is therefore assessable income.

Paragraphs (a) and (b) of clause 14 will operate to exclude from the definition of "excepted payment" an amount of pension to which subsection 65(7) of the Veterans' Entitlements Act 1986 applies.

Subsection 65(7) of the Veterans' Entitlements Act 1986 applies where the special temporary allowance is payable to a service pensioner but, in the period following the death of the pensioner's spouse, the pension of the deceased spouse continues to be paid into an account at a financial institution that was held jointly or in common by the service pensioner and the spouse. In these circumstances, the special temporary allowance otherwise payable is reduced by the amount of the pension that has been paid into the account.

The amendment by paragraph (b) will exempt the amount of pension of the deceased spouse that continues to be paid into the joint or common account. This pension is taken as paid to the surviving pensioner in lieu of the special temporary allowance and will receive the same exempt status.

Paragraph (c) of clause 14 proposes the insertion of a new paragraph (3)(aaa) in section 23AD of the Principal Act that will exempt all payments of special temporary allowance made under the Veterans' Entitlements Act 1986.

Similarly, paragraphs (d) and (e) will operate to include a new paragraph (3)(e) in section 23AD that will exempt all payments of special temporary allowance made under the Social Security Act 1947.

The taxation treatment of the pension that continues to be paid to a surviving pensioner during the twelve week period after the death of the spouse under paragraph 172(3)(a) of the Social Security Act 1947 or subsection 65(3)(a) of the Veterans' Entitlements Act 1986 is not affected by these amendments.

The amendments of section 23AD proposed by this clause will apply, by the operation of subclause 53(21), in assessments of the 1988-89 and subsequent income years.

Clause 15: Assessable income from property purchased and sold within 12 months

Clause 15 will terminate the operation of section 26AAA of the Principal Act for sales of property after 25 May 1988. That section taxes profits arising from short term property sales, ie. sales of property within 12 months of purchase. The effect of the proposed amendment is that property sales previously taxed under section 26AAA will, with effect from 26 May 1988, be subject to Part IIIA (the capital gains and capital losses provisions) of the Principal Act. The amendment will ensure that capital gains arising from short term property sales are eligible for the notional averaging of liabilities under Part IIIA and that short term capital gains may be offset against allowable capital losses. Furthermore, the exemptions provided under Part IIIA for certain assets, for example a taxpayer's principal residence, will extend to assets sold within 12 months of purchase.

Clause 15 amends section 26AAA by inserting new subsection (1A). The subsection terminates the operation of section 26AAA in circumstances where a sale of property, or an interest in property, occurs after 25 May 1988. Subsection (1A) provides that where the sale occurs after that date, but because of subsections 26AAA (3) or (3A) the sale would be treated as having occurred on or before 25 May 1988, section 26AAA will not apply to the sale. In effect, the amendment ensures that a sale after 25 May 1988 pursuant to an option granted, or an agreement entered into, on or before that date will not be taxed under section 26AAA.

In the case of a sale of land, existing paragraph (1)(g) treats the sale as occurring on the date the contract is made. No change has been made to that paragraph. Accordingly, if a contract for the sale of land is made on or before 25 May 1988, the sale may attract the operation of section 26AAA; for a sale pursuant to a contract made after 25 May 1988, the capital gains and capital losses provisions would apply.

Clause 16: Cost price of natural increase

Clause 16 will amend section 34 of the Principal Act which specifies the basis on which the cost price of natural increase of live stock is to be determined for trading stock purposes. Paragraph 34(1)(a) provides that, where a cost price per head of natural increase of a particular class of live stock has been previously taken into account by the taxpayer, that cost price is to continue to be adopted unless, with the leave of the Commissioner of Taxation, the taxpayer selects another cost price. Where a cost price per head of natural increase of a particular class of live stock has not previously been taken into account by the taxpayer, paragraph 34(1)(b) permits the taxpayer to select a cost price, subject to the condition that the amount selected not be less than the minimum cost price prescribed in respect of live stock of that class. A taxpayer who does not select a cost price in accordance with paragraph 34(1)(b) is deemed, by the operation of subsection 34(2), to have selected the prescribed minimum cost price.

Paragraphs (a) and (b) of clause 16 will make minor drafting changes to paragraph 34(1)(a).

New subparagraph 34(1)(a)(iii), being inserted by paragraph (c) of clause 16, will permit a taxpayer who had previously taken natural increase of a particular class of live stock into account to change to an actual cost basis of valuing natural increase of that class. A taxpayer may change to an actual cost basis if the taxpayer makes an election that subparagraph (iii) apply in relation to live stock of the particular class (sub-subparagraph (iii)(A)) and the actual cost per head of natural increase of that class is less than the relevant prescribed minimum cost price (sub-subparagraph (iii)(B)).

The actual cost of natural increase is to be calculated on the same basis as applies for the purposes of calculating the cost of manufactured goods - that is, the absorption cost basis. This basis is explained in Taxation Ruling No. IT2350.

New subparagraph (b)(i) is to the same effect as existing paragraph 34(1)(b) (see above notes). Subparagraph (b)(ii) mirrors new subparagraph (a)(iii), which is explained in the above notes, but applies where a taxpayer has not previously brought live stock of the particular class to account.

Paragraph (d) of clause 16 will omit existing subsection (2) and substitute new subsections (2) and (2A). New subsection (2) will apply in a year of income in which natural increase of a particular class of live stock is first taken into account and the taxpayer has neither selected a cost price (paragraph (2)(a)) nor elected to value the natural increase at actual cost (paragraph (2)(b)). In the circumstances, the taxpayer will be taken to have selected the minimum cost price prescribed in respect of the particular class of live stock.

Subsection (2A) specifies that an election under subparagraph (1)(a)(iii) or (b)(ii) is to be made in writing to the Commissioner of Taxation (paragraph (a)). The election must be lodged with the Commissioner on or before the date of lodgment of the taxpayer's return of income for the year of income in which the natural increase occurred or before such later time as the Commissioner may allow (paragraph (b)).

Clause 17: Rebate on dividends

Section 46 of the Principal Act contains rules governing the entitlement of shareholders that are resident companies to a rebate of tax for dividends included in their taxable income.

Clause 17 will amend section 46 by inserting a new subsection - subsection (9) - that will operate to deny resident companies the intercorporate dividend rebate to the extent the dividends are paid to them by entities which are exempt from income tax under paragraph (d), (e), (ea) or (f) of section 23 of the Principal Act. The types of entity which are exempt from tax on their income under these paragraphs include local governing bodies, public authorities, religious, scientific, charitable or public educational institutions, public and non-profit hospitals, trade unions and employer associations.

In accordance with subclauses 53(4) and (5) the date from which dividends paid by the specified types of tax-exempt entity will not be rebateable will depend upon the date of issue of the shares or stock in respect of which the dividends are paid. A resident company that has received dividends on shares issued by an entity of the specified kind on or before 25 May 1988 will need to exclude from dividend rebate calculations the amount of such dividends as are paid after the date of commencement of the subclauses (that is, after the Bill receives Royal Assent). The amount of dividends paid after 25 May 1988 by an entity of the specified kind, other than on shares issued on or before that date, will also need to be excluded from dividend rebate calculations.

For the purpose of calculating a company's rebate entitlement under subsection 46(2) the relevant dividends are to be excluded from the amount of dividends included in the company's taxable income.

Example: A resident company derived dividends during the income year ended 30 June 1988 as follows:

Date paid Type of dividend Amount
31 January 1988 Unfranked dividend paid by resident company $30,000
1 June 1988 Unfranked dividend paid on stock issued 1 March 1988 by company exempt under para.23(d). $16,000
30 June 1988 Unfranked dividend paid on stock issued 31 May 1988 by company exempt under para.23(d). $ 5,000

·
The effect of the proposed amendment will be to deny the intercorporate dividend rebate in respect of the 30 June dividend only.
·
The maximum rebate the company would be entitled to under section 46 or 46A would be $22,540, ie. 49% of $46,000.
·
Unfranked dividends paid on the stock issued 1 March 1988 will continue to be rebateable until the date of commencement of the amending Act (on Royal Assent). Unfranked dividends paid on that stock after that date will then cease to be rebateable.

Clause 18: Rebate on dividends paid as part of a dividend stripping operation

Where dividends are paid in the course of a dividend stripping operation, section 46A of the Principal Act overrules section 46 in setting the rules which govern the entitlement of shareholders that are resident companies to a rebate of tax for the dividends they receive. It effectively provides a rebate for the net amount of dividends received in a dividend stripping operation, that is, after the cost of shares to the shareholder has been deducted.

The amendment of section 46A proposed by clause 18 is to the same effect as the amendment proposed by clause 17. Section 46A will be amended by the insertion of a new subsection - subsection (16). The new subsection will operate to deny a resident company the intercorporate dividend rebate to which it would otherwise be entitled under section 46A where the dividends it received were paid by a tax-exempt entity of the kind specified in the subsection. The tax-exempt entities to which the new subsection refers are those whose income is exempt from tax under paragraphs (d), (e), (ea) or (f) of section 23 of the Principal Act.

As with the identical amendment of section 46 by clause 17, subclauses 53(4) and (5) provide for the date from which dividends paid by the specified types of tax-exempt entity will cease to be rebateable under section 46A - see later notes on those subclauses.

Clause 19: Rebate not allowable for certain unfranked dividends paid to private company

The amendment proposed by clause 19 will insert a new section - section 46F - in the Principal Act. This section will give effect to the announcement on 25 May 1988 that the intercorporate dividend rebate is to be denied, with certain exceptions, in respect of the unfranked portion of dividends, paid after 25 May 1988, that are received by private companies. The object of the amendment is to prevent tax deferral by removing the incentive for private companies to be used to derive and retain unfranked dividend income. The exceptions to the denial of the rebate will apply to:

·
dividends paid where both the company paying the dividend and the company receiving the dividend form part of a wholly-owned corporate group;
·
dividends paid under the arrangements specified in Division 7 of Part III of the Principal Act for the phasing-out of undistributed profits tax; and
·
dividends paid after 25 May 1988 which were declared on or before that date.

Section 46F will override the application of the rules in sections 46 and 46A which govern the entitlement of resident companies to a rebate of tax in relation to the dividends they receive. It sets out the circumstances in which private companies are to be denied the intercorporate dividend rebate otherwise available.

Certain terms used in the new section are defined in subsection (1) as follows:

"group company" is defined in the same way as in section 160AFE of the Principal Act. That section provides for the transfer of excess foreign tax credit from one resident company to another resident company where there is 100% common ownership. Subsection 160AFE(2) provides that a company is to be regarded as a group company in relation to another company in relation to a year of income if, throughout the year of income, one of the companies was a subsidiary of the other company, or each of the companies was a subsidiary of the same parent company. The relationship between the companies must be satisfied during the whole of the year of income or, if either or both of the companies were not in existence for part of the year, the relationship must be satisfied for the part of the year in which both companies were in existence. Where certain requirements are satisfied, a shelf company acquired during the 1987-88, or a subsequent, year of income is taken not to have been in existence during its dormant period. The common ownership test may therefore be satisfied in that part of the year in which the shelf company is regarded as being in existence. The nature of the subsidiary relationship between companies is defined in terms of beneficial ownership of all the shares in a company. Safeguarding provisions preclude the existence of the subsidiary relationship where an arrangement is in force during any part of the period in which the relationship is sought to be established which affects the rights of the holding company, or of a subsidiary of the holding company, in relation to the subsidiary either during or after the relevant period.
"unfranked part" is defined in relation to a dividend to mean the amount of the dividend that, for imputation purposes, has not been franked. Under the imputation provisions contained in Part IIIAA of the Principal Act, the franked amount of a dividend is the percentage of the dividend that the company paying it has declared to be franked. The franked amount of dividends determines the extent to which:

·
certain resident shareholders become entitled to franking rebates in relation to their dividend income;
·
non-resident shareholders are exempt from withholding tax on their dividend income; and
·
the dividend income derived by resident companies gives rise to franking credits.

The definition makes it clear that a dividend can have an unfranked part even though it is not a frankable dividend. The term 'frankable dividend' is defined in section 160APA to be a dividend that is capable of being franked. Dividends which are not capable of being franked include dividends paid by co-operative companies for which a deduction is allowable under section 120 and amounts which are deemed to be dividends under sections 108 or 109 of the Principal Act.

Subject to the exceptions contained in subsequent subsections of new section 46F and those contained in subclause 53(6)(a), subsection (2) is the operative provision that will deny a shareholder that is a private company the rebate of tax otherwise available under section 46 or section 46A of the Principal Act in respect of the unfranked part of a dividend paid to the shareholder after 25 May 1988. Under section 46, a resident company is entitled to a rebate of tax on dividends received from other resident companies thereby freeing dividend income from tax as it passes through the corporate sector. Under section 46A, a resident company's entitlement to the rebate is limited where the dividend was paid to it in the course of a dividend stripping operation. The effect of denying private companies the intercorporate dividend rebate in respect of the unfranked part of the dividends they receive will be to subject that dividend income to tax. By subjecting the dividend income to tax, resident private companies will accrue franking credits which will allow them to fully frank the dividends they pay out of the after-tax income to their own shareholders.

Subsection (3) sets out one of the general exceptions to the denial of the intercorporate dividend rebate under the new section 46F. The operative provision of section 46F (see notes on subsection (2) above) is not to apply if the shareholder, that is, a private company in receipt of a dividend, is a group company in relation to the income year in which the dividend is paid. The term "group company" is defined in subsection 46F(1) - (see earlier note).

Example: During the year ended 30 June 1988, private company A Pty Ltd received dividends totalling $15,100 from its subsidiaries as follows:

Date paid Type of dividend Amount
31 May 1988 Unfranked dividend paid by B Pty Ltd (wholly-owned by A Pty Ltd since 1985) $3,000
31 May 1988 Fully franked dividend paid by C Pty Ltd (51% owned by A Pty Ltd) $5,100
30 June 1988 Unfranked dividend paid by D Pty Ltd (50% owned by A Pty Ltd since 1985 and 50% owned by B Pty Ltd since 1986) $5,000
30 June 1988 80% partly franked dividend paid by E Pty Ltd (20% owned by A Pty Ltd and 80% owned by C Pty Ltd) $2,000

·
On the basis of these facts the effect of new section 46F will be to deny the intercorporate dividend rebate in respect of the unfranked part ($400) of the dividend paid by E Pty Ltd since E Pty Ltd was not a group company, as defined, in relation to A Pty Ltd.
·
The availability of the rebate in respect of the dividends paid by B Pty Ltd, C Pty Ltd and D Pty Ltd will not be affected by section 46F as both B Pty Ltd and D Pty Ltd were group companies in relation to A Pty Ltd during the year of income and the dividend paid by C Pty Ltd was fully franked.
·
The maximum rebate to which A Pty Ltd would be entitled under section 46 or 46A would be $7203, ie.

49% of $14,700

($15,100 - 400)

.

Subsection (4) sets out the other general exception to the denial of the intercorporate dividend rebate under the new section 46F. The operative provision of section 46F (see earlier note on subsection (2)), is not to apply in respect of the unfranked part of dividends paid on or after 26 May 1988 to a shareholder where a phasing-out amount, notified to the shareholder under the arrangements for the phasing-out of undistributed profits tax, relates either in whole or in part to the unfranked part, but only to the extent the phasing-out amount does not exceed the company's distributable income of the year of income for the purposes of Division 7 of Part III of the Principal Act.

Phasing-out arrangements

Under the arrangements for the phasing-out of undistributed profits tax, a private company which has a phasing-out amount must distribute, during the prescribed period in relation to the company's year of income, as unfranked dividends (including the unfranked part of any franked dividends) an amount not less than the phasing-out amount. If it fails to do so, the company will become liable to additional tax under Division 7. For the 1987/88 and later years of income, a company's phasing-out amount is the amount of phasing-out dividends included in its distributable income.

In the situation where a private company has paid, during the prescribed period, unfranked or partly-franked dividends of an unfranked amount greater than the phasing-out amount, the company is required to allocate the phasing-out amount among the shareholders to whom it has paid the dividends, and notify those shareholders of the phasing-out amount allocated in relation to the unfranked parts of dividends paid to them.

In the situation where the company has become liable to undistributed profits tax but has paid some unfranked, or partly-franked, dividends to shareholders during the prescribed period, its phasing-out amount will be limited to the amount of the unfranked part of the dividends. The company is required to notify each of the shareholders of the allocation of the phasing-out amount up to the respective unfranked amounts of the dividends paid to them.

Notices issued to shareholders specifying the phasing-out amount allocated in relation to the dividends paid to them should, if completed in accordance with paragraph 18 of Taxation Ruling No. IT 2439 issued on 6 August 1987 by the Commissioner of Taxation, specify the date of payment of the dividend or dividends or, alternatively, the period during which the dividends concerned were paid, in relation to which the phasing-out amount of the company has been allocated.

Post-25 May 1988 phasing-out dividends

Where it is possible, from the information contained on a statement notifying a shareholder of a phasing-out amount allocation, to ascertain that some or all of the phasing-out amount has been allocated in relation to particular dividends paid on or before 25 May 1988, then it will also be possible to ascertain the extent to which unfranked, or the unfranked part of, dividends paid to the shareholder after 25 May 1988 are not phasing-out dividends.

Section 46F will operate to deny the intercorporate dividend rebate in respect of only the unfranked parts of post-25 May 1988 dividends that are not phasing-out dividends.

Example: During the year of income ended 30 June 1988 X Pty Ltd received dividends from another private company, Y Pty Ltd (having a year of income ending 31 August) as follows:

Date paid Type of dividend Amount
31 March 1988 Unfranked dividend $2,000
31 May 1988 80% franked dividend (with a deemed franking percentage under subsection 160AQF(1A) of 100%) $5,000
30 June 1988 50% franked dividend $4,000

On 14 July 1988, Y Pty Ltd notified X Pty Ltd that a phasing-out amount of $3,000 had been allocated to the company in relation to the dividends paid 31 March and 31 May.

On the basis of these facts, as no part of the phasing-out amount relates to the 30 June dividend the maximum rebate to which X Pty Ltd would be entitled under sections 46 or 46A, would be calculated as follows:

. Unfranked dividend paid before 26 May 1988 $2,000
. Partly franked dividend where the unfranked part is a post-25 May 1988 phasing-out dividend $5,000
. Franked amount of 30 June dividend $2,000
49% of $9,000

Where there is uncertainty as to whether the phasing-out amount allocated to the shareholder can be said to relate to particular dividends paid on or before 25 May 1988 rather than dividends paid after that date, the apportionment by the shareholder of the phasing-out amount among the two classes of dividends will determine the extent to which unfranked, or the unfranked part of, dividends paid to the shareholder after 25 May 1988 are not phasing-out dividends. Section 46F will operate to deny the intercorporate dividend rebate in respect of those dividends.

Example: During the year of income ended 30 June 1988 X Pty Ltd received dividends from another private company, Z Pty Ltd (having a year of income ending 31 August) as follows:

Date paid Type of dividend Amount
30 April 1988 Unfranked dividend $3,000
31 May 1988 Unfranked dividend $2,000
30 June 1988 Unfranked dividend $2,000

On 21 July 1988, Z Pty Ltd notified X Pty Ltd that a phasing-out amount of $3,000 had been allocated to the company in relation to the dividends paid during the period 1 July 1987 to 30 June 1988.

On the basis of these facts, the phasing-out amount could be apportioned on the following basis:

·
$2,000 in relation to the 30 June dividend
·
$1,000 in relation to the 31 May dividend
The maximum rebate to which X Pty Ltd would be entitled under sections 46 or 46A would be calculated as follows:

. Unfranked dividend paid before 26 May 1988 $3,000
. Part of 31 May dividend that is a phasing-out dividend $1,000
. Whole of 30 June dividend, which is a phasing-out dividend $2,000
49% of $6,000

Deemed dividends

Subclause 53(6) provides that amounts paid or credited before 26 May 1988 which are deemed by section 108 of the Principal Act to be dividends paid on the last day of the relevant income year of the company, where that day occurs on or after 26 May 1988, will not be regarded as dividends paid on or after 26 May 1988 for the purposes of new section 46F. Such amounts will remain rebateable if paid or credited to shareholders that are resident companies.

Dividends declared on or before 25 May 1988

Subclause 53(6) also provides that private companies in receipt of dividends paid after 25 May 1988 which were declared on or before that date are not to be denied the intercorporate dividend rebate in relation to those dividends under new section 46F.

Clauses 20 to 23: Consequential amendments of current year loss provisions

Introductory Note

Clauses 20 to 23 propose technical amendments of the "current year loss" provisions that are contained in Subdivision B of Division 2A of Part III of the Principal Act. The amendments are consequential upon other amendments proposed by the Bill in relation to accelerated depreciation, expenditure on mains electricity connections and expenditure incurred in advance.

In broad terms, the current year loss provisions divide an income year into "relevant periods" that are separated by a "disqualifying event" - for example, the occurrence of a 50 per cent or greater change in shareholders' dividend, capital or voting rights. A net loss incurred in one relevant period is not to be offset against net income derived during another relevant period of the same year unless the company satisfies a "continuing ownership" test or the alternative "same business" test.

For the purposes of the current year loss provisions, deductions generally fall into one of two categories. Broadly, deductions that may be taken into account in a particular relevant period or pro-rated over a number of relevant periods are known as divisible deductions and deductions that are taken into account in calculating the company's actual taxable income for the whole of the year of income are known as full-year deductions. Similarly, an amount of assessable income may be either a divisible amount of assessable income or a full-year amount.

Clause 20: Calculation of taxable income

Section 50C of the Principal Act provides for the basis of calculation of the taxable income for a year in which a disqualifying event has occurred. Paragraph 50C(2)(d) specifies those full-year deductions that may be deducted without limitation from the sum of the notional taxable incomes of relevant periods and the full year amounts of assessable income - that is, those full-year deductions that may give rise to a carry forward loss. The full-year deductions specified in existing paragraph 50C(2)(d) are bad debts (whether allowable under the general deduction provisions of section 51 or the specific bad debts provisions of section 63) and deductions under the trading stock valuation adjustment provisions of Subdivision BA of Division 3 that applied in respect of the years of income ended 30 June 1977, 1978 and 1979.

Paragraph (a) of clause 20 will substitute new paragraph 50C(2)(d) with the effect that an amount that is a full-year deduction by virtue of new paragraph 50F(1)(aa) (that is, so much of an advance expenditure as is allowed in a year of income by the operation of Subdivision H of Division 3 - see notes on clause 45) may also give rise to a carry forward loss. As a consequence, paragraphs (b) and (c) of clause 20 will amend subsection 50C(3) which specifies the basis on which other full-year deductions are to be deducted.

Clause 21: Divisible amounts of asessable income

Paragraph (a) of clause 21 will insert new paragraph 50E(1)(ga) in the Principal Act with the effect that a recoupment of expenditure on a mains electricity connection (see notes on paragraph (c) of clause 40) will be a divisible amount of assessable income for the purposes of the current year loss provisions.

Paragraph (b) of clause 21 will insert paragraphs 50E(2)(ha) and (hb) to specify the basis on which a recoupment of expenditure on a mains electricity connection is to be allocated between relevant periods. Paragraph (ha) will apply if an amount is included in a company's assessable income in a respect of a recoupment of mains electricity expenditure (subparagraph (i)) in the first year of income in which the company incurred expenditure on the mains electricity connection (subparagraph (ii)) and where the expenditure was incurred before the commencement of, or during, the relevant period (subparagraph (iii)). In such cases, the recoupment will be pro-rated between the relevant periods according to the number of days in the relevant period after the expenditure was incurred relative to the number of days in the year of income after the expenditure was incurred.

Paragraph (hb) will apply where an amount is included in a company's assessable income in respect of a recoupment of mains electricity expenditure (subparagraph (i)) in a year of income subsequent to the year in which the company incurred the relevant expenditure (subparagraph (ii)). In such cases, the recoupment will be pro-rated between the relevant periods according to the number of days in each relevant period.

Clause 22: Full year deductions and partnership deductions

By virtue of paragraph 50F(1)(aa), being inserted in the Principal Act by clause 22, so much of an advance expenditure as is allowable in a year of income by the operation of section 82KZM (see notes on clause 45) will be a full-year deduction for the purposes of the current year loss provisions.

Clause 23: Divisible deductions

Paragraphs (a) to (e) of subclause 23(1) will make minor technical amendments to section 50G by removing from that section all references to sections 57AE and 57AH, which provide for special accelerated depreciation allowances. As these sections are proposed to be repealed by clauses 32 and 34, the references to them in section 50G are also to be omitted.

The amendments made by paragraphs (a) to (e) will apply on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Paragraph (a) of subclause 23(2) will amend paragraph 50G(1)(a) of the Principal Act with the effect that a deduction allowable under section 70A, as amended by clause 40, will be a divisible deduction.

Paragraph (b) of subclause 23(2) will insert paragraphs 50G(2)(ea) and (eb) to specify the basis on which a deduction under section 70A is to be allocated between relevant periods. Paragraph (ea) will apply if a deduction under section 70A is allowable (subparagraph (i)) in the first year of income in which a company incurred expenditure on a mains electricity connection (subparagraph (ii)) and where the expenditure was incurred before the commencement of, or during, the relevant period (subparagraph (iii)). In such cases, the deduction will be pro-rated between the relevant periods according to the number of days in the relevant period after the expenditure was incurred relative to the number of days in the year of income after the expenditure was incurred.

Paragraph (eb) will apply where a disqualifying event occurs in one of the 9 years of income subsequent to the year in which a company incurred expenditure on a mains electricity connection. In such cases, the section 70A deduction that is allowable in that year will be pro-rated between the relevant periods according to the number of days in each relevant period.

Clause 24: Agreements for the provision of non-deductible non-cash business benefits

The purpose of this clause is to insert a new section - section 51AK - in the Principal Act which will operate, from the date of introduction (i.e., on Royal Assent), to exclude from business expenditure the arm's length value of any private benefit received by a taxpayer in incurring the business expenditure. This section will ensure that any part of a business expense which relates to the provision of a non-business or private benefit will not be deductible as business expenditure nor form part of the cost of acquiring a business asset for any purposes of the Principal Act.

Proposed subsection 51AK(1) specifies the situation in which the new section will apply to:

·
expenditure incurred by a taxpayer (subparagraph 51AK(a)(i));
·
provision of a non-cash benefit to a taxpayer or another person as a result of the expenditure (subparagraph 51AK(a)(ii)); and
·
the benefit is not of a kind for use or application to produce the assessable income of the taxpayer (paragraph 51AK(1)(b)).

In any such situation the new subsection 51AK(1) will operate to deem the expenditure relating to the benefit as having been incurred in respect of the benefit. The situations will include benefits for private or domestic use, benefits sold by the taxpayer/recipient to a third party and the case where the benefit is used to produce exempt income of the taxpayer. The deductibility of the expenditure relating to such a benefit will, however, be subject to the operation of the other provisions of the Principal Act, for example, subsection 51(1) of the Principal Act. Similarly, whether depreciation is available, if the benefit is a unit of property, would be governed by the depreciation provisions of the Principal Act.

Example: A taxpayer purchases a computer for business purposes for a total expenditure of $10,000 and also receives from the supplier a watch worth $500 for private use of the taxpayer. By operation of section 51AK, the amount of $500 will be taken to be the expenditure incurred in respect of the watch. For purposes of the depreciation provisions of the Principal Act, the cost of the computer (unit of property) would in these circumstances be $9,500. The expenditure relating to the watch ($500) would be neither deductible under subsection 51(1) of the Principal Act (being an expenditure not incurred for the purposes stated in that subsection) nor be available for depreciation under the Principal Act as it is not a business asset.

Subsection 51AK(2) provides that the treatment of any expenditure, or the cost assigned to an asset, under the new section is not to extend if another provision of the Principal Act defines the cost of the expenditure or asset to be less than the amount that would be determined under the new section.

Subsection 51AK(3) provides that the expression "producing assessable income" used in the new section includes gaining assessable income or carrying on a business for the purpose of gaining or producing assessable income.

By subsection 51AK(4), the common expressions used in the new section 51AK and in the new section 21A will have the same meanings.

Subsection 51AK(5) ascribes particular meanings to the following two expressions used in the section:

'agreement' is given a wide meaning and is defined in a manner common to other provisions of the Principal Act to cover various forms of agreements, whether formal or informal, express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.
'expenditure' is defined to include a loss or an outgoing.

Clause 25: Calculation of depreciation

This clause will amend section 56 of the Principal Act, which provides for the calculation of the depreciation deductions ordinarily allowable for income tax purposes in respect of a unit of property. The amendments proposed by this clause (and by clause 26) will enact new rules authorising the optional adoption of the prime cost method of depreciation in preference to the diminishing value method.

Introductory note

There are two allowable methods for depreciating plant: the prime cost method and the diminishing value method. Under the prime cost method (PCM), plant is written-off at the effective life rate determined for that plant by the Commissioner of Taxation under section 55 of the Principal Act. The rate is applied, each year, to the original cost of the plant. Under the diminishing value method (DVM), the plant is written-off at 150% of the effective life rate determined by the Commissioner, but the increased rate is applied to the written down value of the plant at the beginning of each income year rather than to its original cost (thus ensuring that no more than 100% of the cost of the unit of plant is written off). Under the DVM, deductions are higher in the earlier years than under the PCM but less in the later years. Additionally, plant may take longer to write-off fully under the DVM.

Under paragraph 56(1)(b) of the Principal Act, a taxpayer has the option, at anytime, of altering the method of depreciating plant from diminishing value to prime cost. By section 56A, that option may be exercised only in relation to:

·
all existing and future depreciable assets; or
·
all assets which first become depreciable in the year in which the option is exercised, and all future depreciable assets.

It has become the practice for some taxpayers to switch depreciation methods, from DVM to PCM, at the point at which the prime cost method would give the greater deduction. The amendments proposed by this clause, which are aimed at preventing that practice, will remove the option of changing depreciation methods and will, instead, require that an irrevocable choice of method be made at the outset by the taxpayer. That is, each year the taxpayer will be required to decide which depreciation method is to apply to all plant that is first depreciable by that taxpayer in that year. Once the decision is made, the taxpayer will be required to continue to depreciate the plant by the method chosen until the end of its depreciable life or until disposed of, scrapped or destroyed. Unless the taxpayer elects to take the prime cost method, the diminishing value method will apply. However:

·
if the plant is sold, the purchaser is not required to adopt the vendor's depreciation method but has the same choice as was available to the original owner; and
·
the election applies only to the plant that is first depreciable in the year in respect of which the election is made. For plant that first becomes depreciable in the following year, the taxpayer may choose the other depreciation method.

Clause notes

Paragraph (a) of this clause will insert new paragraph 56(1)(b) in the Principal Act. New paragraph 56(1)(b) will have the effect that, where a taxpayer has made an election in accordance with the other provisions of section 56 (which are to be inserted by this clause), the depreciation allowable in respect of the plant to which the election applies will be determined by the prime cost method.

Paragraph (b) of this clause will insert new subsections 56(1AA) and (1AB). New subsection 56(1AA) will allow a taxpayer to elect that the prime cost method of depreciation be applied in respect of all units of property that first become depreciable in the income year to which the election applies. New subsection 56(1AB) will set out the procedures for, and the effect of, making an election for purposes of new subsection 56(1AA). The election:

·
must be exercised by notice in writing to the Commissioner, which is the same requirement as for the option which it will replace;
·
must be lodged with the Commissioner of Taxation on or before the date of lodgment of the taxpayer's income tax return in respect of the year of income to which the election relates, unless the Commissioner allows an extension of time. Again, this represents no change from the procedures applicable in respect of the option being replaced; and
·
will have the effect that all units of property that first become depreciable in the income year will be depreciated using the prime cost method for that year, and for all subsequent years that the taxpayer claims depreciation in respect of that plant. This is different in two respects from the arrangements for the existing option. First, the election must be made in respect of the first year of depreciation of particular plant by a taxpayer, so that the taxpayer may only ever apply one depreciation method to that plant. Under the existing option, the change of depreciation methods is allowed at any time in the depreciable life of the plant. Second, the election is to be exercised on a year-by-year basis, whereas the existing option applies to all plant acquired in future years as well as in the year in respect of which the option was exercised.

Where a taxpayer has made an election, that election will not apply to units of property purchased in subsequent years - that is, a taxpayer will have to elect on a year-by-year basis in order for the prime cost method to apply.

By subclause 53(7) of the Bill, the amendments made by this clause are to apply to:

·
plant acquired under a contract entered into after 25 May 1988;
·
plant constructed by the taxpayer under a contract entered into after 25 May 1988 or under a series of contracts the first of which was entered into after 25 May 1988;
·
where there is no contract of construction, plant which commenced to be constructed after 25 May 1988; and
·
any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.

As a consequence, the option presently contained in the depreciation provisions may, notwithstanding its repeal, continue to be exercised in the 1987-88 income year, or subsequent years, for property that was commenced to be constructed or was contracted for before 26 May 1988 and is used or installed ready for use before 1 July 1991.

Clause 26: Repeal of section 56A

Section 56A of the Principal Act, which sets out the detailed application of the option available to taxpayers to change methods of depreciating plant, is to be repealed. The proposed repeal of the option, and the application of the election which will replace it, is discussed in detail in the notes on the preceding clause.

By subclause 53(7), the repeal of section 56A will apply to plant on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Clause 27: Repeal of section 57

This clause of the Bill proposes the repeal of section 57 of the Principal Act. The amendment is one of several designed to replace the existing option of changing depreciation methods (see notes on clauses 25 and 26).

Section 57 provides that once a taxpayer has opted for the prime cost basis of depreciation under sections 56 and 56A of the Principal Act, the taxpayer cannot revert to the diminishing value method unless leave is obtained from the Commissioner of Taxation to do so. Under the new election arrangements that are proposed by clause 25 a taxpayer, once having elected the prime cost basis for assets which first become depreciable in an income year, will not be able to revert to the diminishing value method of depreciation for those assets. Consequently, section 57 is to be repealed.

By subclause 53(7) of the Bill, the repeal of section 57 will also apply to plant on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Clause 28: Special depreciation allowance to primary producers

This clause is consequential upon the repeal of the option to change depreciation methods proposed by clauses 25, 26 and 27, and will make a technical change to section 57AA of the Principal Act. Section 57AA allows certain plant and structural improvements used in a business of primary production to be depreciated in equal instalments over 5 years. The concession has only a very limited current application.

Subsection 57AA(1) provides that plant to which the section applies shall be written-off at a rate of 20% per annum, on a prime cost basis only, thus overriding both the effective life rates determined by the Commissioner under section 55 and the ability to use the diminishing value method. In doing this, the section makes reference to sections 56A and 57, which deal with the option to switch from the diminishing value method to the prime cost method. As these sections are proposed to be repealed by clauses 26 and 27, the reference to them in subsection (1) is being omitted.

By subclause 53(7), the amendment made by this clause will apply on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Clause 29: Depreciation on property used for primary production in the Northern Territory

This clause is consequential upon the repeal of the option to change depreciation methods proposed by clauses 25, 26 and 27 and will make a technical change to section 57AB of the Principal Act. That section allows certain plant and structural improvements used in a business of primary production in the Northern Territory to be depreciated in equal instalments over 5 years. The concession has only a very limited current application.

The clause will amend subsection 57AB(2) by removing the reference to sections 56A and 57, which deal with the option to switch from the diminishing value method to the prime cost method. As these sections are proposed to be repealed by clauses 26 and 27, the reference to them in subsection (2) is also to be omitted.

The amendment made by this clause will apply on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Clause 30: Special depreciation on manufacturing plant and plant used in primary production

The amendment proposed by this clause is consequential upon the repeal of the option to change depreciation methods (see clauses 25, 26 and 27) and will make a technical change to section 57AC of the Principal Act. That section allows depreciation at double the standard rates in respect of certain manufacturing or primary production plant but has a very limited current application.

The clause will amend subsection 57AC(2) by removing the reference to sections 56A and 57, which deal with the option to switch from the diminishing value method to the prime cost method and which are being repealed (clauses 26 and 27).

Clause 31: Special depreciation on new plant first used or installed on or after 1 July 1975 and before 1 July 1976

The amendment proposed by this clause is consequential upon the repeal of the option to change depreciation methods proposed by clauses 25, 26 and 27 and will make a technical amendment of section 57AD of the Principal Act. That section, which now has limited operation, authorises depreciation at double the standard rates for new plant, excluding motor vehicles, that is first depreciable in the financial year ending on 30 June 1976.

The clause will amend subsection 57AD(3) by removing the reference to sections 56A and 57, which deal with the option to switch from the diminishing value method to the prime cost method, as these sections are proposed to be repealed by clauses 26 and 27.

Clause 32: Repeal of section 57AE

This clause proposes the repeal of section 57AE of the Principal Act. Section 57AE authorises a special 5 year depreciation allowance for on-farm structural improvements for use in the storage of grain, hay or fodder in carrying on a primary production business. The clause is one of several in the Bill designed to repeal the majority of the special concessional deduction provisions for plant and to replace them with depreciation at the effective life rates determined by the Commissioner of Taxation.

By subclause 53(7) of the Bill, the special concession provided by section 57AE will cease to apply to:

·
structural improvements acquired under a contract entered into after 25 May 1988;
·
structural improvements constructed by a taxpayer under a contract entered into after 25 May 1988 or under a series of contracts the first of which was entered into after that date;
·
where there is no contract of construction, plant commenced to be constructed by the taxpayer after 25 May 1988; and
·
any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991 (see the notes on clause 37 for a more detailed discussion of the application clause).

Structural improvements to which the section no longer applies will now be written off at the effective life rates determined by the Commissioner of Taxation, as increased by the special loading on those rates (section 57AG) which, in turn, is to be increased from 18% to 20% (see notes on clause 33).

Clause 33: Special depreciation on plant

This clause will amend section 57AG of the Principal Act to increase the special concessional loading that is allowed on effective life depreciation rates determined by the Commissioner of Taxation, and to make some minor technical amendments.

The current loading provided by section 57AG is 18%. Thus, for plant to which section 57AG applies, the effective life rate is increased by 18%. For example, a unit of plant for which the effective life rate is 20% would have its rate increased by 18% to 23.6%. Section 57AG does not, however, allow an overall deduction in excess of 100% of the cost of the unit of the plant - it is a concession that applies only to accelerate the rate of the deduction.

Paragraph 57AG(2)(b) provides that the loading does not apply to plant that is being depreciated under certain concessional provisions, including sections 57AE, 57AH, and 57AL. As those sections are proposed to be repealed by clauses 32, 34 and 37, paragraph (a) of this clause will amend paragraph 57AG(2)(b) by omitting the reference to them.

Paragraph (b) of this clause will make a technical amendment of subsection 57AG(3). Subsection 57AG(3) refers to sections 56A and 57, which deal with the option to switch from the diminishing value method to the prime cost method of depreciation, and which are to be repealed by clauses 26 and 27.

Paragraph (c) of clause 33 will substitute a new paragraph 57AG(3)(a), with the effect that the current 18% loading on depreciation rates will be increased to 20% for:

·
plant acquired by a taxpayer under a contract entered into after 25 May 1988;
·
plant constructed by a taxpayer under a contract entered into after 25 May 1988 or under a series of contracts the first of which was entered into after that date;
·
where there is no contract of construction, plant commenced to be constructed after 25 May 1988; and
·
any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.

By subclause 53(7) of the Bill, the amendments made by paragraphs (a) and (b) of clause 33 apply on the same basis as the amendments made by clause 37 (see notes on that clause).

Clause 34: Repeal of section 57AH

Clause 34 of the Bill proposes the repeal of section 57AH of the Principal Act. Under section 57AH, new plant used wholly and exclusively for the purpose of agricultural or pastoral pursuits, forest operations or fishing operations, may be depreciated in equal instalments over 5 years. The clause is one of several in the Bill that are designed to repeal the majority of the special concessional deduction provisions for plant and to replace them with depreciation at the effective life rates determined by the Commissioner of Taxation.

The repeal of section 57AH will apply on the same basis as the repeal of section 57AL proposed by clause 37 (see notes on that clause).

Plant which would previously have been depreciated under section 57AH will now be depreciated at the effective life rates determined by the Commissioner of Taxation under section 55. The existing special loading on those rates (section 57AG) is to be increased from 18% to 20% (see notes on clause 33).

Clause 35: Special depreciation on storage facilities for petroleum fuel

This clause will make a minor technical amendment of section 57AJ of the Principal Act. Section 57AJ authorises a 100% depreciation deduction for certain storage facilities (and certain ancillary plant) used for the storage of liquid or gaseous petroleum fuel. The concession is only available for facilities contracted for or which commenced to be constructed before 20 May 1983.

Subsection 57AJ(4) provides that the section will apply in lieu of certain other depreciation provisions of the Principal Act including, specifically, sections 56A and 57. These sections deal with the option to change depreciation methods and are proposed to be repealed by clauses 26 and 27. This clause will remove references to those sections from subsection 57AJ(4) on the same basis as the amendment proposed by clause 37 (see notes on that clause).

Subsection 57AJ(6) applies, for the purposes of section 57AJ, certain safeguarding provisions in section 57AH of the Principal Act. As a consequence of the proposed repeal of section 57AH (see notes on clause 34) subsection 57AJ(6) will no longer have effect, and therefore paragraph (b) of clause 35 will omit subsection 57AJ(6). However, if it is necessary to apply subsection 57AJ(6) at some future time in relation to earlier events, subclause 53(8) provides that the subsection will continue to have effect as if section 57AH had not been repealed, and subsection 57AJ(6) had not been omitted (see notes on subclause 53(8)).

Clause 36: Special depreciation on property used for basic iron or steel production

This clause will make a minor technical amendment of section 57AK. Under that section, a taxpayer is entitled to accelerated rates of depreciation for new or second hand plant used primarily or principally for basic iron or steel production or in related activities. The section has only a limited current application.

Subsection 57AK(4) provides that section 57AK will apply in lieu of the general depreciation provisions of the Principal Act including, specifically, sections 56A and 57. Consistent with previously described clauses, this clause will amend subsection 57AK(4) to omit the reference to sections 56A and 57 as these sections are themselves proposed to be repealed by this Bill (see notes on clauses 26 and 27).

Clause 37: Repeal of section 57AL

Clause 37 of the Bill proposes the repeal of section 57AL of the Principal Act. Section 57AL authorises accelerated depreciation allowances for most new and second hand plant used for the purpose of producing assessable income. The deduction is allowed over 5 years if the effective life of the plant is longer than 5 years; otherwise a 3 year write-off applies.

This clause is one of several clauses in the Bill that will terminate most of the special accelerated deduction provisions in the Principal Act and to replace them with depreciation at the effective life rates determined by the Commissioner of Taxation under section 55.

By subclause 53(7) of the Bill, section 57AL will not apply to:

·
plant acquired under a contract entered into after 25 May 1988;
·
plant constructed by a taxpayer under a contract entered into after 25 May 1988 or under a series of contracts the first of which was entered into after that date;
·
where there is no contract of construction, plant which commenced to be constructed after 25 May 1988; and
·
any plant, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.

In circumstances where construction was undertaken pursuant to more than one contract, it will only be necessary for one of those contracts to be entered into on or before 25 May 1988 for the 5/3 concession to be obtained. However, that contract must cover work that is an integral part of the overall plant planned at the time the first contract was entered into.

In determining whether a contract has been entered into after 25 May 1988, the guidelines in Taxation Ruling No. IT 2158 will apply. That ruling dealt with the approach to be taken in determining whether a contract was entered into before 1 July 1985, for purposes of the termination of the investment allowance concession. Included in the ruling are guidelines concerning sale and lease back situations and hire purchase arrangements.

The guidelines in Taxation Ruling No. IT 2142 will apply in determining whether plant has been "constructed" or "acquired" for purposes of the termination of section 57AL. That ruling dealt with construction and acquisition of property for investment allowance purposes.

All plant items which would previously have been depreciable under section 57AL will now be depreciated at the effective life rates determined by the Commissioner under section 55 of the Principal Act. Those rates will be increased by 20% as a consequence of the proposed increase, from 18% to 20%, of the special loading on effective life rates provided by section 57AG of the Principal Act (see notes on clause 33).

Clause 38: Special depreciation on trading ships

Under section 57AM of the Principal Act special 5 year accelerated depreciation is allowable for eligible Australian trading ships.

Subsection 57AM(5) provides that section 57AM will apply in lieu of other depreciation provisions of the Principal Act including, specifically, sections 56A and 57. Clause 38 will make a minor technical amendment of subsection 57AM(5) to omit the reference to sections 56A and 57 as a consequence of the repeal of those sections proposed by clauses 26 and 27.

By subclause 53(7), the amendment proposed by this clause will apply to eligible trading ships on the same basis as the amendments proposed by clause 37 (see notes on that clause).

Clause 39: Depreciation on pipelines for transporting petroleum

This clause proposes a minor technical amendment of section 58 of the Principal Act. Section 58 provides special rates for the depreciation of pipelines for transporting petroleum and for plant used in connection with the operation of those pipelines. The concession does not apply to pipelines completed after 31 December 1969.

Subsection 58(4) provides that section 58 will apply in lieu of some of the general depreciation provisions of the Principal Act including, specifically, section 57. Clause 39 will make a minor technical amendment to subsection 58(4) to omit from that subsection the reference to section 57. This amendment is a consequence of the repeal from the Principal Act of section 57 by clause 27.

By subclause 53(7), the amendment made by this clause will apply to plant on the same basis as the amendment proposed by clause 37 (see notes on that clause).

Clause 40: Cost of mains electricity connections

Section 70A of the Principal Act authorises a deduction for expenditure of a capital nature incurred on or after 1 October 1980 on the connection of mains electricity facilities to land on which a business is carried on. The deduction is allowable in full in the year in which the expenditure is incurred. Any recoupment of expenditure to which section 70A applies is included in the taxpayer's assessable income in the year of recoupment.

Clause 40 will amend section 70A to provide for a 10 year writeoff instead of immediate deductibility for capital expenditure on mains electricity connections.

Paragraph (a) will amend subsection 70A(1) with the effect that the 10 year write-off of expenditure on mains electricity connections will apply to expenditure incurred after 25 May 1988 except where the expenditure is incurred under a contract entered into on or before that date. By virtue of clause 55 of the Bill, expenditure incurred on mains electricity connections on or after 1 October 1980 but before 26 May 1988, or under a contract entered into before 26 May 1988, will continue to be deductible in full in the year incurred.

New subsection 70A(3), being substituted for the existing subsection (3) by paragraph (b) of clause 40, provides for 10 per cent of expenditure on a mains electricity connection to be allowable as a deduction in the year in which the expenditure is incurred (paragraph (a)) and in each of the succeeding 9 years of income (paragraph (b)).

Existing subsection 70A(5) provides for amounts received by way of recoupment of deductible expenditure on mains electricity connections to be included in a taxpayer's assessable income in the year of recoupment. Under the new write-off arrangements, this could have the effect of including a greater amount in a taxpayer's assessable income than has been allowed, or is allowable, as a deduction in the year of recoupment and previous years. New subsection (5), being inserted by paragraph (c) of clause 40, will ensure that the amount of recouped expenditure to be included in a taxpayer's assessable income does not exceed the total section 70A deductions allowed in respect of that expenditure in previous years or allowable in the year of recoupment (the "total deductions") less the total recouped expenditure included in the taxpayer's assessable income in previous years (the "total assessments") (paragraph (a)).

Where the amount recouped in a year does exceed the difference between the "total deductions" and the "total assessments", the excess is, by virtue of paragraph (b), deemed have been recouped in the subsequent year of income .

Example: A taxpayer who incurs expenditure of $10,000 on a mains electricity connection in the 1988-89 income year is recouped in respect of that expenditure to the extent of $5000 in the 1990-91 income year. The deductions allowable under subsection 70A(3) and the amounts to be included in the taxpayer's assessable income under subsection 70A(5) are as follows:

Year Deduction allowable Recoupment assessable   $ $
1988-89 1000 -
1989-90 1000 -
1990-91 1000 3000
1991-92 1000 1000
1992-93 1000 1000
1993-94 to 1997-98 1000 -

Paragraph (d) of clause 40 will substitute a new subsection 70A(7) to make some minor technical changes that are consequential upon the substitution of subsection 70A(10) by paragraph (g).

Paragraphs (e) and (f) of clause 40 will amend subsection 70A(9) which, broadly, ensures that a taxpayer is not also entitled to a deduction under another provision of the Principal Act for expenditure on a mains electricity connection, to reflect the new write-off arrangements for such expenditure.

By subsection 70A(10) of the Principal Act, expenditure incurred by a partnership on a mains electricity connection is deemed to have been incurred by the partners in the proportions agreed upon by them or, in the absence of such an agreement, in the proportions in which they share the partnership's profits and losses. However, where a partnership is recouped in respect of mains electricity expenditure, it is arguable that subsection 70A(5) (see earlier notes) does not operate to include the recoupment in the partnership's assessable income nor to include any part of the recoupment in the assessable income of a partner. This result is inconsistent with subsection 70A(7) under which an amount is included in the assessable income of a partner who disposes of an interest in a partnership to the extent to which that interest includes a right to be recouped in respect of mains electricity expenditure.

Paragraph (g) of clause 40 will substitute a new subsection 70A(10) to make it clear that a partner is not only deemed to have incurred a proportion of mains electricity expenditure incurred by a partnership (paragraph (a)) but also to have been recouped in the same proportion where the partnership is recouped in respect of the whole or a part of the expenditure (paragraph (b)).

Clause 41: HRH The Duke of Edinburgh's Commonwealth Study Conferences (Australia) Incorporated

The 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.

The amendment proposed by this clause will replace subparagraph 78(1)(a)(xvi) - which authorises a deduction for gifts to the Duke of Edinburgh's Study Conference Account maintained by the Commonwealth - with new subparagraph 78(1)(a)(xvi). The new subparagraph will authorise a deduction for gifts to HRH the Duke of Edinburgh's Commonwealth Study Conferences (Australia) Incorporated, a body first incorporated on 24 April 1986 to assume responsibility for organising Australian participation in the Duke of Edinburgh's Study Conferences.

Clause 42: Deduction in respect of new plant installed on or after 1 January 1976

This clause proposes a minor technical amendment of section 82AB of the Principal Act. Section 82AB authorises an investment allowance deduction for, inter alia, capital expenditure incurred on an eligible Australian trading ship within the meaning of section 57AM of the Principal Act. The concession is no longer available.

The amendment proposed omits from subsection 82AB(5B) the reference to section 57AL. That section, which provides accelerated rates of depreciation for most items of plant, is proposed to be repealed by clause 37.

By subclause 53(7) of the Bill, the amendment made by this clause is to apply on the same basis as the amendment proposed by clause 37 (see notes on that clause).

Clause 43: Interpretation

Section 82KT of the Principal Act defines certain terms necessary for the interpretation of the substantiation provisions.

Paragraph (a) amends the definition of "car" by replacing, in proposed paragraph (e) of that definition - a paragraph being inserted by Taxation Laws Amendment Bill (No.3) 1988 - references to 'car' and 'cars' with references to 'motor vehicle' and 'motor vehicles', as appropriate.

The proposed amendment is of a minor, technical nature. It will make it clear that hired motor vehicles such as utilities, panel vans and station wagons are excluded from the scope of substantiation rules applicable to car expenses.

Paragraph (b) inserts a definition of "car records" in the Principal Act.

"Car records" are those records maintained by a taxpayer for the purposes of those parts of Subdivision F of Division 3 of Part III of the Principal Act that refer to the term, i.e., for the purposes of the income tax substantiation provisions. For the year commencing 1 July 1988 or earlier years of income, the term includes computer records convertible into written English (paragraph (a)). For later years of income, it refers to records kept by an employer in a form approved by the Commissioner of Taxation (paragraph (b)).

The proposed definition mirrors the definition of "car records" to be inserted in the Fringe Benefits Tax Assessment Act 1986 by clause 15 of the Taxation Laws Amendment Bill (No.3) 1988. The purpose of inserting the proposed definitions in the relevant Acts is to simplify the process of completing taxation returns.

Clause 44: Car records to be completed before lodgment date of return etc.

By this clause a new section, section 82KTBA, is to be inserted in the Principal Act.

Amendments proposed by this Bill provide that taxpayers will no longer have to specify, in return forms, certain details in respect of claims for car expenses. Instead, it will suffice if those matters are specified in "car records" (a defined term - see the notes on that definition in clause 43).

As a safeguard against error, inadvertent or otherwise, the Bill requires that matters to be specified in car records be specified before the date of lodgment of the taxpayer's income tax return. By new subsection 82KTBA(1) a matter is not to be taken to have been specified or nominated in a taxpayer's income tax return unless it is entered in the car records before the due date (or extended due date) for lodgment of the relevant income tax return. This subsection applies for all the purposes of the Principal Act except section 223A related to penalties - see notes on subclauses 53(14) to 53(17).

Subsection 82KTBA(2) makes it clear that the operation of any other provision of the Subdivision which requires a matter to be treated as if specified in a taxpayer's car records is not to be prejudiced by the operation of subsection (1). An example is the Commissioner's power under section 82KTC (proposed to be inserted in the Principal Act by clause 52 - see notes on that clause) to treat matters as having been specified in car records where a taxpayer inadvertently failed to so specify those matters.

Clause 45: Subdivision H - Period of deductibility of certain advance expenditure

Clause 45 will insert new Subdivision H in Division 3 of Part III of the Principal Act. Subdivision H will modify the operation of section 51 (the general deductions provision) of the Principal Act in relation to the timing of deductions for certain expenditure incurred in advance.

In broad terms, where:

·
expenditure is incurred under an agreement entered into on or after 26 May 1988 in return for the doing of a thing that will not be wholly done within 13 months of the date on which the expenditure is incurred;
·
a deduction in respect of the expenditure would otherwise be allowable under section 51 of the Principal Act in the year in which it is incurred; and
·
the expenditure is not "excluded expenditure" (a defined term - see notes on subsection 82KZL(1)) or subject to the transitional arrangements provided by subclause 53(12),

the deduction is to be allowed on a straight line basis over the period during which the thing may be done, subject to a maximum write-off period of 10 years.

Any undeducted expenditure will be brought forward and allowed as a deduction in a year in which all the obligations of the other party to the agreement are discharged or all the rights under the agreement are transferred to a third party - see notes on section 82KZN. Special rules will also apply to ensure the continuity of the entitlement to a deduction where the rights under the agreement are transferred as a consequence of the formation, reconstitution or dissolution of a partnership - see notes on section 82KZO.

Section 82KZL: Interpretation

New section 82KZL contains definitions of terms used in Subdivision H as well as an interpretative provision to clarify what is meant by the doing of a thing under an agreement. Subsection 82KZL(1) defines the following terms:

"agreement" is defined to mean any formal or informal agreement, arrangement, understanding or scheme whether or not enforceable by legal proceedings, and will include any express or implied agreement, arrangement, understanding or scheme. Thus, for example, it will be possible to look beyond the express terms of a contract where it is apparent that a service fee purportedly for the first year of service has been inflated on the understanding that service fees for subsequent years will be reduced.
"eligible service period" is the period over which expenditure incurred in advance is to be deductible. The eligible service period will commence at the beginning of the first day on which the thing to be done under the agreement may commence to be done (paragraph (a)) or, if later, the day on which the expenditure is incurred (paragraph (b)). The eligible service period will end at the end of the last day on which the thing to be done may cease to be done (paragraph (c)) or, if earlier, 10 years from the beginning of the eligible service period (paragraph (d)). For example, in the case of an agreement that provides for services to be provided over a 12 month period commencing at any time during the 1989 calendar year, the eligible service period will be the period from midnight on 31 December 1988 to midnight on 31 December 1990 .
"excluded expenditure" is expenditure that will not be subject to the rules provided by section 82KZM and is defined to mean an amount of expenditure:

·.
less than $1000 (paragraph (a)). (The general anti-avoidance provisions of Part IVA of the Principal Act would be invoked in appropriate cases in respect of arrangements that seek to exploit this threshold for the purposes of avoiding the application of Subdivision H.);
·.
required to be incurred by the order of a court or by law (paragraph (b));
·.
under a contract of service - that is, for salary or wages (paragraph (c)); or
·.
to the extent that it is of a capital, private or domestic nature (paragraph (d)). (This will enable an amount of expenditure to be dissected with the effect that section 82KZM will apply to so much of the amount as is not of a capital, private or domestic nature.)

"transfer" is defined to include assign. The term is relevant to new section 82KZN which specifies the rules that are to apply where rights under an agreement are transferred.

Subsection 82KZL(2) is an interpretative provision that clarifies the operation of Subdivision H in relation to expenditure that is, or is in the nature of, interest, rent, lease payments or insurance.

Paragraph (a) provides that a payment of interest that is made in return for the making available, or continued making available, of the relevant loan principal is to be taken, for the purposes of Subdivision H, to be expenditure incurred under an agreement in return for the doing of a thing under the agreement for the period to which the interest payment relates. Thus, the eligible service period in relation to a payment of interest will be determined by reference to the period to which the interest relates and not to the period of the loan. Paragraph (a) also applies in relation to amounts that are similar in nature to interest.

Similarly, paragraph (b) will have the effect that the eligible service period in relation to a rent, lease or similar payment will be determined by reference to the period to which the payment relates and not to the period of the lease. Where, however, a lease payment is high in relation to subsequent payments under the lease, the period to which the lease payment relates would, by reason of its effect of reducing those subsequent payments, generally be taken to be the period of the lease.

By paragraph (c), the eligible service period in relation to an insurance premium will be determined by reference to the period during which the insurance cover is provided, notwithstanding that the insurer's obligations in relation to claims may be met after the end of that period. Paragraph (c) also applies in relation to amounts that are similar in nature to insurance premiums, for example, amounts paid under a warranty agreement.

Section 82KZM: Period of deductibility of certain advance expenditure

Section 82KZM is the operative provision of Subdivision H. It will operate to alter the timing of deductions for expenditure where each of the conditions specified in paragraphs (a), (b) and (c) are met. Those conditions are:

·
that the expenditure is incurred under an agreement (a defined term - see notes on section 82KZL) entered into after 25 May 1988 (paragraph (a)). (This condition is, however, subject to the transitional rules contained in subclause 53(12));
·
that the thing to be done in return for the expenditure is not to be wholly done within 13 months after the date on which the expenditure is incurred (subparagraph (b)(i));
·
that the expenditure is not excluded expenditure (a defined term - see notes on section 82KZL) (subparagraph (b)(ii)); and
·
that the expenditure would otherwise be allowable as a deduction under section 51 of the Principal Act in the year in which it is incurred (paragraph (c)).

If each of these conditions are met, the deduction is not allowable under section 51 in the year in which the expenditure is incurred but is allowable pro-rata in each of the years in which occurs the whole or a part of the eligible service period (a defined term - see notes on section 82KZL). The proportion of the deduction to be allowed in each year is calculated by reference to the number of days in the eligible service period that occur in the year of income relative to the total number of days in the eligible service period.

Example: A taxpayer incurs expenditure of $10,960 on 1 May 1990 in respect of services that will be provided from 1 June 1990 to 31 May 1993.

  1989-90 1990-91 1991-92 1992-93 Total
Number of days in service period 30 365 366 335 1096
Proportion allowable 30/1096 365/1096 366/1096 335/1096
Deduction allowable ($) 300 3650 3660 3350 10960

Section 82KZN: Transfer, etc. of rights under agreement

Section 82KZN will apply where a taxpayer who has incurred expenditure in advance under an agreement (paragraph (a)) either transfers all the remaining rights under the agreement (subparagraph (b)(i)), or no longer has any rights under the agreement by virtue of its discharge (subparagraph (b)(ii)). In such cases, paragraph (c) will have the effect of bringing forward to the year in which the transfer, assignment or discharge occurs those deductions that would otherwise have been allowable in later years by the operation of section 82KZM. Paragraph (d) will have the effect that section 82KZM will have independent application in relation to expenditure incurred by a person in return for the transfer of the rights. Accordingly, it will be necessary to determine whether that expenditure would be deductible under section 51 of the Principal Act - this question, and the question of assessability of the consideration received by the transferor, will be determined according to ordinary principles.

The general anti-avoidance provisions of Part IVA of the Principal Act are available against arrangements to transfer rights for the purpose of avoiding the application of Subdivision H.

Section 82KZO: Partnership changes where entire interest in agreement rights is not transferred

Section 82KZO will enable deductions in respect of expenditure incurred in advance to continue to be allowable following the formation, dissolution or reconstitution of a partnership. In broad terms, the person or partnership holding the rights after the change will be entitled to the same deductions as would have been available to the person or partnership that incurred the expenditure.

The provisions of paragraphs (d), (e) and (f) will operate where each of the conditions specified in paragraphs (a), (b) and (c) apply. Those are:

·
that a person or partnership incurred expenditure in advance under an agreement entered into after 25 May 1988 (paragraph (a));
·
that a partnership change (broadly, the formation, dissolution, reconstitution or variation of a partnership (subparagraphs (b)(i) and (ii))) occurs with the effect that one or more of the persons who had an interest in the rights before the change has or have an interest in the rights after the change (subparagraphs (b)(iii) and (iv)); and
·
a deduction in respect of the expenditure is allowable in the year of the change or a subsequent year because of the application of Subdivision H, including any previous application of section 82KZO (paragraph (c)).

Paragraph (d) will operate in relation to a deduction that is allowable in the year in which the partnership change occurs to apportion the deduction according to the portions of the eligible service period occurring before and after the change.

By paragraph (e), the person or partnership holding the rights in a year of income subsequent to the change will be entitled to the same deductions as would have been allowable to the person or partnership that incurred the expenditure.

Paragraph (f) deems the person or partnership becoming entitled to the future deductions by the operation of section 82KZO to have incurred the expenditure under the agreement for the purposes of any later application of section 82KZO and for the purposes of section 82KZN.

Example: A taxpayer, X, incurred expenditure of $12,000 on 1 July 1988 in respect of services to be provided from 1 July 1988 to 30 June 1991. On 30 September 1989, X formed a partnership (XY) with Y and transferred all the rights under the agreement to the partnership. On 31 December 1989, Z was admitted to form the partnership XYZ. In the absence of any changes, X would have been entitled to a deduction of $4,000 in each of the years 1988-89, 1989-90 and 1990-91. The entitlement to deductions as a result of the changes will be as follows:

  1988-89 1989-90 1990-91
X 4000 1000 -
XY - 1000 -
XYZ - 2000 4000
Total 4000 4000 4000

Clause 46: Interpretation

Clause 46 proposes to amend section 102M of the Principal Act, to extend the meaning of the term "eligible investment business". For the purposes of Division 6C of Part III, a public unit trust that solely conducts eligible investment business is not treated as a public trading trust, and is not, therefore, subject to the rules by which the trustee of a public trading trust is taxed as a company. The effect of this amendment is therefore that a public unit trust may conduct a wider range of business activities than is currently permissible, without being taxed as a public trading trust.

The amendment will omit existing subparagraph (b)(v) of the definition of "eligible investment business" in section 102M and substitute new subparagraphs (b)(v) to (b)(xiii) inclusive. By the insertion of these new subparagraphs, a public trading trust will continue to conduct eligible investment business where it invests or trades in the following additional types of financial instruments:

·
futures contracts
·
forward contracts
·
interest rate swap contracts
·
currency swap contracts
·
forward exchange rate contracts
·
forward interest rate contracts
·
life assurance policies
·
a right or option in respect of such a loan, security, share, unit, contract or policy, including loans, securities, shares or units referred to in existing subparagraphs (b)(i) to (b)(iv); and
·
any similar financial instruments.

The reference to "any similar financial instruments" in subparagraph (b)(xiii) is intended to obviate the need for further amendments to the definition of the term "eligible investment business" if further acceptable variants of existing financial instruments are developed. A public unit trust will therefore be able to trade or invest in new financial instruments and not be treated as a public trading trust provided that the new financial instrument invested in or traded in is similar to any of the types of financial instruments referred to in the proposed expanded definition of "eligible investment business."

By subclause 53(18), the amendment made by this clause will have effect in relation to business conducted by a public unit trust in the year of income that commenced on 1 July 1987 or in a subsequent year of income.

Clause 47: Allowable capital expenditure

This clause will amend Division 10 of Part III of the Principal Act, which authorises special deductions for capital expenditure incurred on prescribed mining operations. The amendment proposed by this clause will have the effect of removing from Division 10 any entitlement to a deduction for expenditure incurred on plant for use in prescribed mining operations. The clause is one of several in the Bill to repeal from the Principal Act most of the special concessional deductions that are allowable for capital expenditure on income-producing plant, and to replace them with depreciation at the effective life rates determined by the Commissioner of Taxation.

Under Division 10, expenditure incurred on income producing plant used in prescribed mining operations is deductible on a straight line basis over 10 years or the life of the producing mine to which the expenditure relates, whichever is the lesser. The deduction becomes available in the year in which the expenditure is incurred and, where there is insufficient income against which the deduction can be claimed, can be carried forward indefinitely.

Section 122A of the Principal Act defines the capital expenditure that is eligible for deduction under Division 10. By this clause, section 122A will be amended by adding new subsections 122A(1B) and (1C).

By new subsection 122A(1B), expenditure on plant or articles for the purposes of section 54 of the Principal Act - that is, plant or articles as defined in that section which are owned by a taxpayer and used or installed ready for use for producing assessable income - will cease to be allowable capital expenditure under Division 10 unless:

·
the plant was acquired by the taxpayer under a contract entered into on or before 25 May 1988;
·
if the plant is constructed by the taxpayer, either:

·.
the construction commenced on or before 25 May 1988; or
·.
the construction commenced after that date under a contract entered into on or before 25 May 1988, or under 2 or more contracts any of which was entered into on or before that date;

and irrespective of when the plant was contracted for or commenced to be constructed, it was used or installed ready for use for the purpose of producing assessable income before 1 July 1991.

Plant to which Division 10 will cease to apply by virtue of the amendment proposed by this clause will qualify for deduction under the general depreciation provisions of the Principal Act. As a consequence, there will be three significant differences to the way in which mining plant will be written off under those provisions than under Division 10:

·
first, the rate of the deduction will be based on the effective life rate determined by the Commissioner of Taxation under section 55, as increased by the special loading provided for those rates by section 57AG;
·
second, the deduction will not commence to be allowable until the year in which the plant is used or installed ready for use for the purpose of producing assessable income; and
·
third, carry-forward losses will be limited to 7 years.

There will be cases where taxpayers have contracted for (or commenced construction of) plant on or before 25 May 1988 and claimed a deduction for that expenditure under Division 10 but the plant is not used or installed ready for use for the purpose of producing assessable income until after 30 June 1991. In that case, the plant would not be eligible for a Division 10 deduction, but the deduction would already have been allowed. In such circumstances, new subsection 122A(1C) will permit the Commissioner to amend previous assessments to deny a deduction under Division 10. The new subsection will apply notwithstanding the general time limitations regarding the amendment of assessments, as provided in section 170 of the Principal Act.

It should be noted that capital expenditure on plant used in mining exploration or prospecting (which may be written-off in the year in which the expenditure is incurred) will continue to be deductible under Division 10.

Clause 48: Allowable capital expenditure

This clause will amend Division 10AA of Part III of the Principal Act, which authorises special deductions for capital expenditure incurred on prescribed petroleum mining operations in Australia. The amendment proposed by this clause will have the effect of removing from Division 10AA any entitlement to a deduction for expenditure incurred on plant for use in such operations. The clause is consistent with others under which special concessional deductions for capital expenditure on income-producing plant are being replaced with depreciation at the effective life rates determined by the Commissioner of Taxation.

The provisions of Division 10AA, to the extent that they relate to entitlement to a deduction for income producing plant used in prescribed petroleum operations, have a similar effect to the equivalent provisions in the general mining provisions of the Principal Act (Division 10). The amendments proposed by this clause are identical to the amendments proposed to the equivalent provision in Division 10 (see notes on clause 47). Consequently, the notes on that clause are equally applicable to the amendments proposed by this clause.

Clause 49: Qualifying expenditure

This clause will make a technical amendment of section 124ZG of the Principal Act. Section 124ZG identifies capital expenditure incurred on the construction of an income-producing building which may be written-off under Division 10D of Part III of the Principal Act.

By subsection 124ZG(3), expenditure incurred on property that is both deductible under Division 10D and depreciable under sections 54 or 57AE, such as lifts and air-conditioning, is not to be treated as qualifying expenditure for the purposes of Division 10D. Clause 49 will make a minor technical amendment to subsection 124ZG(3) to omit the reference to section 57AE. This amendment is a consequence of the repeal of section 57AE by clause 32 (see notes on that clause).

By subclause 53(7) of the Bill the amendment made by clause 49 applies on the same basis as the amendment proposed by clause 37.

Clause 50: Insertion of new Division

Division 16G - Debt Creation Involving Non-residents

Clause 50 will insert new Division 16G in Part III of the Principal Act to deny interest deductions on debt creation involving non-residents.

Division 16G will, in specified circumstances, reduce a deduction which would otherwise be allowable under the Principal Act for interest incurred. The interest affected is that incurred after 30 June 1987 on amounts owing in connection with the acquisition of assets from "foreign controllers" of Australian companies or from foreign controlled Australian companies. Put broadly, restructuring of foreign controlled investments in companies will not be permitted to be financed by interest-bearing debt to the extent that there is no change in the ultimate beneficial ownership of any assets transferred under the restructure.

Generally, a 50% capital entitlement test will determine whether a company has the requisite degree of foreign control to attract the operation of this Division. As a transitional measure, the required degree of foreign control between 1 July 1987 and 20 June 1988 will be 100%.

On 20 June 1988 a draft of the main operative provisions of this proposed Division was released for public comment. Submissions on the draft were received from professional bodies and industry. Suggestions contained in these submissions have been adopted in the Bill, particularly those in relation to the need for specific exemptions for certain assets to ensure that the operation of the Division does not unnecessarily intrude into the normal trading activities of foreign controlled companies.

Subdivision A - Interpretation

Section 159GZY: Interpretation

Proposed section 159GZY contains a number of definitions necessary for the operation of the proposed Division 16G. Each defined term is to have the given meaning unless the contrary intention appears.

"asset" is defined very broadly to mean any form of property and specifically includes any form of incorporeal property and any form of property created or constructed. Incorporeal property includes options, debts, choses in action, any other rights and goodwill.
It can be seen that assets both of a tangible and intangible nature are included within the definition. Examples are land, buildings, shares, share rights and options, securities, industrial property, plant and equipment, an interest in a trust estate or a unit in a unit trust.
"associate" has the same meaning as for thin capitalisation purposes in Division 16F, except that the references in section 159GZC to a 15% threshold are to be read as references to a 50% threshold. Other aspects of the definition have substantially the same meaning as in other parts of the Principal Act, such as in sections 26AAB and 160E.
Subsection 159GZC(1) specifies who is an associate of a natural person, a company, a trustee of a trust estate or a partnership. In broad terms, it refers to those persons who by reason of family or business connections might appropriately be regarded as being associated with a particular person.
Subsection (2) is based on subsection 160K(2). It provides that any references in subsection (1) to the spouse of a person are to include, in relation to the person, another person who, although not legally married to the person, resides with the person on a bona fide domestic basis as husband or wife. Subparagraph (a)(ii), however, excludes from any references to the spouse of a person, a person who, whilst legally married, permanently lives separately and apart from the person.

The definition of associate is relevant to sections 159GZZ and 159GZZA and subsection 159GZZF(5). In determining whether a party is a "foreign controller" for the purposes of section 159GZZA, the definition looks to the holdings of non-resident associates of the party as well as to those of the party itself to test whether there is a degree of foreign control sufficient to attract the corporate restructure (debt creation) rules.

An associate can be a foreign controller in his or her own right as well as contributing to the classification of one or more parties as a foreign controller(s). The term associate includes all persons who are associated whether residents or non-residents.

"interest" is defined in the same way as for withholding tax purposes in section 128A and includes an amount in the nature of interest. Profits on the disposal of specified Commonwealth securities that do not bear interest, which are brought to tax by section 26C of the Principal Act, are expressly excluded from the definition of interest.
"scheme" has the same wide meaning as for thin capitalisation purposes in Division 16F. The term "scheme", as it applies to Division 16G, does not require a tax avoidance motive.
Paragraph (a) of the definition covers any agreement, arrangement, understanding, promise or undertaking whether it is express or implied and whether or not legally enforceable. By paragraph (b), any scheme, plan, proposal, action, course of action or course of conduct is also to be treated as a "scheme". In the sense in which the term is used in paragraph (b), "scheme" will include arrangements of a unilateral kind as well as those where there are two or more parties.

Section 159GZZ: Capital entitlement factor

This section will define the term "capital entitlement factor". The factor is the percentage measure of the interest of a person in a company that is the buyer (taxpayer) or seller (eligible seller) of an asset. The terms "taxpayer" and "eligible seller" are used in section 159GZZE.

If a non-resident has a capital entitlement factor of at least 50% in the taxpayer or eligible seller that person will be a foreign controller. (As a transitional measure clause 53(19) of this Bill provides that the capital entitlement factor between 1 July 1987 and 19 June 1988 is 100%).

Where there is a foreign controller of both the taxpayer and the eligible seller, section 159GZZE may apply to reduce the taxpayer's deduction for interest on any amount owed in connection with the acquisition of the asset. The amount by which the deduction is reduced is calculated by reference to the capital entitlement factor.

Subsection (1) provides that the capital entitlement factor of a person in relation to a company will be determined on the basis of a notional distribution of capital by the company. The capital entitlement factor will be the percentage of the notionally distributed capital that the person would be beneficially entitled to receive either directly or indirectly.

The person's capital entitlement factor will also include amounts of notional distributed capital to that person's associates who are not residents of Australia.

Example: A non-resident is entitled to a 20% notional distribution of the capital of a company. However, an associate of the non-resident is entitled to 40% of the notional distribution of capital. In these circumstances, the capital entitlement factor of the non-resident will be 60% for the purposes of this section.

The term "capital" is not restricted to "paid-up capital" but includes the whole of the capital or shareholders funds of the company at the time of the notional distribution.

Subsection (2) enables indirect capital entitlements to be traced where there are other entities interposed between the company and the foreign controller.

An interposed entity entitled to a notional distribution from the company will also be assumed to have made a distribution of the whole, or proportionate part, of that distribution to the next interposed entity up the chain until a notional distribution is ultimately made to the foreign controller.

Example 1: If 100% of the company's notional distribution of capital is to an interposed entity but the interposed entity would only notionally distribute 50% of that amount to the foreign controller, then the foreign controller's capital entitlement factor would be 50%.

Example 2: A non-resident is beneficially entitled to notional distributions of capital of a company as follows: a direct entitlement; one through its associated company A; and another through a trust. The non-resident is entitled to a direct 20% notional distribution from the company. The second source of the non-resident's notional distribution is through its associate A. A is entitled to a 40% notional distribution from the company. However, A would only distribute, in turn, 60% to the non-resident on a notional distribution of A's capital. Through A, the non-resident has a notional distribution of 24%

(i.e., 40% * 60%).

The third source of notional distribution is through a trust. The trust deed directs that the non-resident and another beneficiary will be entitled to an equal distribution of the capital on vesting day. The trust is entitled to a notional distribution of 40% of the company's capital. Through the trust the non-resident has a notional distribution of 20%

(i.e., 50% * 40%).

The non-resident's total notional distribution of capital will be 64% (i.e., 20% directly, 24% through its associate A, and 20% through the trust).

Section 159GZZA: Foreign Controller

Under this section, a person will be a foreign controller of a company if that person is both a non-resident and has a capital entitlement factor in relation to the company amounting to at least 50%. Under section 159GZZ a person's capital entitlement factor will include notional distributions of capital to that person's non-resident associates. It should be noted that clause 53(19) of this Bill provides that, in the application of this Division up until 20 June 1988, the reference in section 159GZZA to 50% is to be read as a reference to 100%. In effect, this means that in the period 1 July 1987 to 19 June 1988 the Division will only apply where the foreign controller has a capital entitlement factor of 100%.

Section 159GZZB: Acquisition of asset not previously in existence

Section 159GZZB applies to an acquisition of an asset that did not exist (either by itself or as part of another asset) before the acquisition. The creation of an asset constitutes an acquisition of the asset for the purposes of this Division.

For example, where a person grants a lease, or gives an option to buy an asset, the lease or option is itself an asset created out of a transaction relating to another asset.

By paragraph (a) the created asset is taken to have existed immediately prior to the acquisition and to have been acquired from the person or persons who created it. In the case of a lease, the conduct of the lessor in granting the lease creates that asset and the lessor is taken to be the person from whom the lease is acquired.

Where an asset is acquired from more than one person, paragraph (b) enables the proportional interest of each eligible seller to be ascertained. Under subparagraph (b)(i) the proportionate interests are normally determined by reference to entitlements to the consideration paid.

Example 1: A newly created asset is acquired from four persons for a consideration of $100,000. If each person received $25,000, then for the purposes of this Division, each person will have had a 25 per cent interest in the asset created. In this case, the Commissioner's discretion that the proportion so determined is inappropriate has not been exercised.

Subparagraph (b)(ii) enables the Commissioner to substitute an alternative proportion where he is satisfied that the proportion determined under subparagraph (b)(i) is not reasonable.

Example 2: A newly created asset is acquired for $100,000. Two persons who each held 40% in the property from which the asset was created receive $50,000 each. A third person, who does not receive any consideration, held a 20 per cent interest in the property from which the asset arose. In this situation, the ownership of the new asset would be apportioned as to 40 per cent to each of the two persons who received $50,000 and 20 per cent to the third person. The discretion would be exercised to prevent adjustment of the distribution of the consideration to obtain an advantage under these provisions.

Under subparagraph (b)(iii) where no consideration is paid, the Commissioner may determine the respective interests of the persons taking into account such matters as the interests they held in the property from which the asset was created.

Example 3: Assume the facts as in example 1, except that no consideration is paid and each person had a 25% interest in the original asset prior to the acquisition of the newly created asset.

In this situation the factors to be examined will be the ownership of the property from which the asset was created, the nature of the asset, its value, and any other information relevant to ownership. In this case, the ownership would be apportioned to the sellers as to 25 per cent each.

It should be noted that created assets that are debts are expressly excluded from the operation of the Division.

Section 159GZZC: Acquisition of asset through interposed persons

The section provides that where, under a scheme, one or more persons are interposed between an eligible seller and the final buyer of an asset, the Commissioner has a discretion to treat the transactions as being a direct acquisition by the final buyer from the original seller.

The purpose of this section is to prevent the circumvention of the Division by interposing persons between an eligible seller and the final buyer of an asset in circumstances where a direct sale would otherwise attract the operation of the Division.

The interposed persons need not be companies - they could be individuals, trusts, partnerships or any other entities. There is no requirement that the interposed persons be related to either the original seller or the final buyer or that an avoidance purpose be satisfied.

Example: A foreign controller owns all the shares in two Australian companies, A and B. The foreign controller sells all the shares in A to a unit trust which in turn sells the shares to B. Under section 159GZZC the Commissioner may, for the purposes of the Division, treat the shares in A as having been acquired directly by B from the foreign controller.

Where all interposed persons are companies with a capital entitlement factor which is not less than that of either the original seller and the final buyer, there would be no opportunity for the avoidance of tax and the Commissioner would not be expected to exercise the discretion.

Where another asset is acquired by the final buyer in substitution for an asset acquired by an intermediary from the eligible seller to avoid the operation of this provision, reliance would be placed on the general anti-avoidance provisions of Part IVA of the Principal Act.

Subdivision B - Application of Division

Section 159GZZD: Application of Division

By this section, the corporate restructure (debt creation) rules will generally affect interest incurred on or after 1 July 1987 on an amount owing in connection with an asset acquired on or after 1 July 1987. The provision will not apply to an acquisition under a contract entered into before 1 July 1987.

Subdivision C - Reduction of Interest Deductions

Section 159GZZE: Reduction or extinction of interest deduction in case of certain created debt.

Section 159GZZE is the main operative section. It provides the mechanism for determining the amount of non-deductible interest.

The steps in this process are to identify the taxpayer affected, to identify the interest, and to calculate the amount of non-allowable interest.

Subsection (1) identifies the interest and the taxpayers affected by the Division. Subsections (2) and (3) provide for situations where there is more than one eligible seller or more than one foreign controller. Subsection (4) calculates the amount for which a deduction is not allowable.

Paragraph (1)(a) provides that this Division shall apply to a taxpayer that is a company, but not a company acting as a trustee, provided that the company is entitled to a deduction for an amount of interest (otherwise than under this Division or Division 16F (thin capitalisation)). After this Division has operated to deny a deduction for interest, Division 16F may then operate to deny a deduction for the balance of any interest that is foreign debt interest in terms of that Division. Debts on which interest is not deductible because of the operation of this new Division cannot count as foreign debt under thin capitalisation rules.

Paragraph (1)(b) sets out the precondition that the interest for a claimed deduction must be in respect of an amount owing in connection with the acquisition of an asset. The very broad term "in connection with" would include the case where the interest relates to funds which are borrowed and used for one purpose but are subsequently applied to acquire the asset concerned.

This paragraph also defines, by reference, who is the "taxpayer" and who is the "eligible seller" in a particular acquisition by the taxpayer.

The section only applies where there is a foreign controller of the buyer and the seller of an asset or the foreign controller is either the buyer or seller.

Paragraph (1)(c) describes the three occasions that are preconditions to the application of this section:

·
immediately after the acquisition the seller was a non-resident with the required level of control (i.e., a foreign controller) of the taxpayer claiming the deduction for interest;
·
the taxpayer was a foreign controller of the seller immediately before the acquisition; and
·
a person was a foreign controller of both the taxpayer immediately after the acquisition and of the seller immediately before the acquisition.

Subparagraph (c)(i) provides for the situations where either the eligible seller was a foreign controller of the taxpayer immediately after the acquisition or where, under a scheme of which the acquisition was a part, the eligible seller later became a foreign controller of the taxpayer. Similarly, subparagraph (c)(ii) covers situations where either the taxpayer was a foreign controller of the eligible seller immediately before the acquisition or where, under a scheme of which the acquisition was a part, the taxpayer had ceased to be a foreign controller of the eligible seller at some earlier time.

Subparagraph (c)(iii) only applies where neither of the two preceding subparagraphs operate. It applies where a third party was both a foreign controller of the eligible seller immediately before the acquisition and a foreign controller of the taxpayer immediately after the acquisition or where, under a scheme, they earlier ceased or later became a foreign controller of those parties.

The operation of subsection (1) is based on an assumption that there is only one eligible seller of an asset. Subsection (2) provides for situations where there are two or more eligible sellers in relation to an acquisition of an asset by a taxpayer. In these circumstances, subsection (1) is to be applied successively to each combination of the taxpayer and each of those eligible sellers.

Subsection (3) provides for situations where there are two or more common foreign controllers in relation to an application of subparagraph (1)(c)(iii). Where a person was a common foreign controller of both the eligible seller and the taxpayer, the amount calculated for the purposes of the application of subsection (1) is to be the aggregate of the amounts that would be calculated for each of those common foreign controllers. Subsection (6) ensures that there is no double counting of foreign controllers' capital entitlements.

Subsection (4) contains definitions and the formula used to reduce interest deductions. The formula is designed to calculate how much of the interest relates to an asset, or part thereof, which is effectively owned by the foreign controller both before and after the acquisition. The formula is:

(Deduction) * (Asset ownership factor) * (Capital entitlement factor)

"Deduction" is defined as being the amount that but for this Division and the thin capitalisation rules contained in Division 16F would be allowable as a deduction.
"Asset ownership factor" is defined as being the eligible seller's proportional interest in the asset immediately before the acquisition. For example, if an asset is acquired from two sellers who jointly owned the asset and only one of the sellers was an eligible seller (i.e., with a foreign controller) then the eligible seller's interest in the asset prior to the sale would be 50%. The asset ownership factor is 50%.
"Capital entitlement factor" is, in effect, the total of the foreign controller's direct and indirect beneficial interests in the capital of a company calculated on one of a number of alternate bases depending on which subparagraph of paragraph 1(c) applies.

Subparagraph (4)(a)(i) provides, where subparagraph 1(c)(i) applies, that the capital entitlement factor of the eligible seller in the taxpayer will usually be the amount calculated as the eligible seller's capital entitlement immediately after the acquisition of an asset by the taxpayer. Subparagraph (4)(a)(ii) applies if the eligible seller later becomes a foreign controller of the taxpayer under a scheme of which the acquisition is a part, and consequently sub-subparagraph (1)(c)(i)(B) applies. The capital entitlement factor is calculated immediately after the eligible seller became a foreign controller of the taxpayer.

Where subparagraph (1)(c)(ii) applies the capital entitlement factor of the taxpayer in respect of the eligible seller will under subparagraph (4)(b)(i) be the amount calculated as the taxpayer's capital entitlement immediately before the acquisition. Where the taxpayer later becomes a foreign controller of the eligible seller under a scheme of which the acquisition was a part, and consequently sub-subparagraph (1)(c)(ii)(B) applies, subparagraph (4)(b)(ii) provides that the capital entitlement factor is to be calculated immediately before the taxpayer ceased to be a foreign controller of the eligible seller.

Where subparagraph (1)(c)(iii) applies and there is a common foreign controller of the taxpayer and the eligible seller, the capital entitlement factor ascertained in accordance with paragraph (4)(c) is the lesser of the capital entitlement factor of the taxpayer and the capital entitlement factor of the eligible seller, calculated as above, but taking into account only the interest held by the common foreign controller and its non-resident associates.

Subsection (5) provides for an apportionment where interest is only partly in respect of the acquisition, e.g., if the taxpayer borrows $2 million and uses that sum to buy the following: an asset of $500,000 from an eligible seller; trading stock of $1 million from an unrelated seller; and $500,000 to pay off an existing debt; only the $500,000 in connection with the acquisition from the eligible seller is subject to denial of interest deduction.

Subsection (6) ensures that there is no double counting of beneficial entitlements to capital through multiple applications of the section.

Two of the potential cases of double counting that this provision is designed to overcome are as follows. First, in multiple applications of paragraph (1)(c) to two or more common foreign controllers, the capital entitlement factors of the common foreign controllers, and their associates are aggregated. Where the common foreign controllers are also associates of one another, there is a potential application of the provision to each common foreign controller and his or her associated common foreign controller. Subsection (6) ensures that there is no double counting in these circumstances.

Secondly, in relation to any multiple applications of subsection (1), there is a potential for double counting where there is a chain of foreign controllers or common foreign controllers. Subsection (6) provides that a direct or indirect entitlement to a capital distribution is not counted to the extent that that entitlement has previously been counted in the application of the provision to a particular acquisition.

Example: If resident company C is the taxpayer and B is a direct 50% foreign parent of C, with A the 100% foreign parent of B, and 50% parent of C, A and B will both be foreign controllers of C. Subsection (6) will operate to ensure that in multiple applications of the section to B and then to A, the 50% capital entitlement of A in C that is derived through B is not double counted in A's hands.

Section 159GZZF: Section 159GZZE not to apply in certain cases

The purpose of this section is to exclude from the application of this Division those transactions not normally regarded as corporate restructures.

Subsection (1) specifies that section 159GZZE does not apply where the asset acquired is cash. This exemption is conditional on the acquisition not being related to the acquisition of a business or part of a business.

The exclusion provided by this subsection is designed to ensure that transactions such as external borrowings by a company for the purpose of on-lending to a related company are not subject to this Division.

Example: Company A borrows $300,000 for the purpose of on-lending the money to a related company, B. After the on-lending has occurred, B has a $300,000 debt to A for which it has acquired an asset of $300,000 cash. Under subsection (1) the acquisition of the cash asset by B will be exempted from the operation of this Division.

Similarly, cash received by the seller of an asset, such as machinery, will not be treated for the purposes of this Division as an acquired asset. However, the exemption does not apply to cash transferred as part of the sale of a business. Where a company acquires the business of a related company whose assets include cash, the cash assets will not be exempted by this provision. In this case, cash is a business asset that is being transferred. The qualification also applies to the acquisition of part of an asset.

Example: Company A borrows $100,000 to acquire part of the business of a related company, B. The part of the business being transferred includes cash of $40,000 and other assets. In this example, the $40,000 cash being transferred would not be exempted from the application of section 159GZZE. The cash asset would be another asset of that part of the business being transferred.

Under subsection (2) assets that were trading stock of the eligible seller immediately before the acquisition and were acquired by the buyer and disposed of by the seller in the ordinary course of business of both are excluded from the operation of section 159GZZE.

Example: Company A sells electronic components. B is a related company and assembles electrical instruments using several components manufactured by A. This process forms part of the normal business activities of both A and B. Assume B obtains a loan of $250,000 to purchase components from A to supply a large order. Subsection (2) operates to exempt the acquisition from section 159GZZE. Consequently, the interest component will be deductible under section 51(1) of the Principal Act.

Excluded from the operation of subsection (2) is the forced sale of trading stock or the disposal of the whole or part of a business operation including trading stock.

Example: Companies A and B are related. It is part of the normal business operations that B purchases trading stock from A. As part of a group reorganisation, B acquires the manufacturing part of A's operations. At acquisition, trading stock represents approximately 40% of the assets of the business operations being transferred. If B borrows to finance the acquisition, the trading stock assets will not be exempted from the operation of section 159GZZE.

Subsection (3) will exclude from the operation of the Division any shares that are issued to an eligible seller by a taxpayer. In the absence of such an exclusion, the Division would deny interest deductions, for example, where two companies have a common foreign controller and one company borrows to subscribe for shares in the other. The exclusion only applies to a new issue of shares and would not operate where previously issued shares are acquired.

Apart from this Division, a taxpayer will generally be entitled to a deduction for interest on funds used to finance the purchase of an asset if the asset is used by the taxpayer to produce assessable income. The exemption provided by subsection (4) will ensure that a taxpayer who would otherwise be affected by this Division is able to finance the acquisition of certain assets from a non-resident eligible seller. Where an asset has not previously been used by anyone for the production of assessable income, or in carrying on a business for the purpose of gaining assessable income, the taxpayer will be permitted to finance the acquisition with interest-bearing debt.

Paragraph (4)(a) sets a number of conditions to be satisfied for the application of the exemption. The paragraph requires that before acquisition the asset has not been used or held in Australia for income producing purposes. This covers both the previous use of such assets for obtaining income or the holding of assets for this purpose. An example of the latter situation is where a company has plant installed as back up for the main plant. Even if this plant was never used in Australia for income producing purposes it would not be eligible for the exemption.

Paragraph (4)(b) stipulates that the eligible seller of the item of plant must be a non-resident immediately before the acquisition by the taxpayer.

Subsection (5) will exclude from the operation of section 159GZZE those acquisitions of assets which the Commissioner is satisfied do not result in:

(a)
an increase in the debt owed by the group constituted by the affected taxpayer and the eligible seller(s); or
(b)
an increase in the ability of the eligible seller(s) or their associates to make payments which are not dividends that are assessable income or liable to dividend withholding tax to a foreign controller of the eligible seller(s) (or an associate of the foreign controller).

The specified group for purposes of this section is constituted by the taxpayer and the eligible seller(s).

Corporate group restructures which result in an increase in the overall debt of the group or an increase in the ability of an Australian company to make untaxed payments to foreign controllers provide opportunities for the avoidance of tax. The purpose of this subsection is to ensure that section 159GZZE will not operate to deny an interest deduction where the Commissioner is satisfied that these avoidance opportunities do not arise from a restructure. If neither of the tests in paragraphs (5)(a) and (5)(b) apply, then section 159GZZE shall have no application.

Paragraph (5)(a) will be met where the Commissioner is satisfied that the total debt of the group members, viz, the affected taxpayers and eligible seller(s), is not greater after the relevant transaction involving the acquisition of an asset than before the transaction.

Example 1: A foreign controller owns all the shares in two Australian companies, A and B. A then acquires all the shares in B with borrowed funds. There has been an increase in the overall indebtedness of the group constituted by the affected taxpayer, A, and the eligible seller (foreign controller). The Commissioner would not be satisfied that the acquisition of the asset does not result in an increase in the overall indebtedness of the group and section 159GZZE would apply.

Example 2: A foreign controller owns all the shares in two Australian companies, A and B. The assets of A are mortgaged to the extent of $1 million. A sells all the assets of its business to B for their book value of $4 million. B finances only $1 million of the business acquisition by loan finance. On transfer of the assets from A to B the mortgage of A's assets is extinguished. In effect, the $1 million mortgage debt of A has been replaced by the $1 million loan of B. The overall indebtedness of the group constituted by the affected taxpayer, B, and the eligible seller, A, is unchanged. The Commissioner would be satisfied that the acquisition has not resulted in an increase in the overall indebtedness of the group constituted by the affected taxpayer, B, and the eligible seller, A.

Paragraph (5)(b) will be met where the Commissioner is satisfied that the acquisition of an asset does not give the eligible seller(s) (or an associate) an increased ability to pay amounts to a foreign controller of the eligible seller (or to an associate of the foreign controller) which are not assessable dividend income or liable to dividend withholding tax. Examples of such payments include the repayment of a loan and dividends which are not paid out of profits. Generally, if the eligible seller uses the proceeds of the sale of an asset to repay loans (other than from a foreign controller or an associate of a foreign controller), the ability of the eligible seller to pay amounts to a foreign controller which are not subject to tax will not be increased. However, where the proceeds of the sale of an asset are not used by an eligible seller to repay loans from persons other than a foreign controller (or a foreign controller's associate), the ability of the eligible seller to make untaxed payments to a foreign controller will generally be increased.

Example 1: A foreign controller owns all the shares in two Australian companies, A and B. A which has large capital reserves sells a division of its business to B. A uses the proceeds of the sale to repay a loan from an arm's length financier. The acquisition of the asset by B has not resulted in an increase in the ability of the eligible seller to make payments to a foreign controller (or any of its associates) which are not subject to tax. This transaction will fall outside the operation of the Division.

Example 2: The facts are the same as for example 1 except that A banks the proceeds of the sale of the division of its business. The generation of this significant cash asset has increased the ability of A to pay a dividend other than out of profits to the foreign controller and that dividend would not be assessable dividend income or subject to withholding tax. The Commissioner would not be satisfied that the acquisition of an asset has not increased the ability of the eligible seller, A, to make payments to a foreign controller which are not subject to tax.

Subsection (6) provides that for the purposes of section 159GZZF "affected taxpayer" means a taxpayer whose interest deduction would be reduced under section 159GZZE if not for the operation of section 159GZZF.

The subsection also specifies that in section 159GZZF the words "eligible seller", when used in relation to the acquisition of an asset, have the same meaning as in section 159GZZE.

Clause 51: 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 XIII of the Social Security Act 1947, a Formal Training Allowance or an allowance paid under certain Commonwealth educational schemes (beneficiary rebates - subsection 160AAA(2)).

Pensioner rebate

Under subsection 160AAA(1) of the Principal Act a taxpayer in receipt of an Australian social security or repatriation pension that is included in his or her assessable income may be entitled to a rebate of tax. The maximum rebate of $250 is designed to ensure that persons wholly or mainly dependent on such pensions do not have to pay tax. The rebate shades-out at the rate of 12.5 cents for each dollar by which the person's taxable income exceeds $6,142. The operation of subsection 160AAA(1) was modified in the 1987-88 income year for recipients of repatriation pensions. In their case, the level of the rebate was set at $308 and was shaded out for taxable incomes in excess of $6,384.

Paragraph 51(a) of the Bill proposes that paragraphs 160AAA(1)(g) and (h) of the Principal Act be amended to increase the level of the maximum rebate to $430 and to increase the taxable income level at which the rebate begins to shade-out from $6142 to $6892.

As a consequence, where an eligible taxpayer's taxable income is $6892 or less in 1988-89 no income tax will be payable. The rebate will shade out where the taxable income exceeds $6892 and will shade-out fully at a taxable income of $10332.

Beneficiary rebates

Under subsection 160AAA(2), a married (including de facto married) taxpayer in receipt of an unemployment, sickness or special benefit, a Formal Training Allowance or specified Commonwealth educational assistance may be entitled to a rebate of tax of $430. For other taxpayers in receipt of such benefits or assistance the rebate is $180. 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 - $10350 in the case of a married taxpayer and $5850 in any other cases.

Paragraph 51(b) of the Bill will amend paragraph 160AAA(2)(d) of the Principal Act to increase the maximum amount of rebate to $600 for a married taxpayer and increase the taxable income level from $10350 to $11059 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 $11059 and will shade-out fully at a taxable income of $15859.

Paragraph 51(c) proposes to amend paragraph 160AAA(2)(e) of the Principal Act to increase the maximum amount of rebate to $260 for an unmarried taxpayer and increase from $5850 to $6184 the taxable income level 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 $6184 and will shade out fully at a taxable income of $8264.

The amendments of section 160AAA proposed by this clause will apply, by the operation of subclause 53(21), in assessments of the 1988-89 and subsequent income years.

Clause 52: Amendments relating to car records.

This clause authorises several drafting amendments of the Principal Act that are set out in the Schedule to the Bill, most being consequent upon changes being made under which taxpayers may specify certain matters - in relation to income tax deduction claims for car expenses - in records to be retained by them rather than in income tax returns lodged with the Commissioner. A further general explanatory note on the Schedule amendments appears at the end of the notes on the clauses of the Bill.

Clause 53: Application of amendments

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

By subclause (2), the amendments made by clause 16 - to permit a taxpayer to value natural increase of live stock at actual cost - will apply to natural increase occurring after 30 June 1988.

Subclause (3) will ensure that regulations made before the amending Act receives the Royal Assent, for the purposes of the live stock valuation provisions of the Principal Act, continue in force for the purposes of those provisions as amended by clause 16 (see notes on that clause).

Subclauses (4) and (5) specify that the amendments proposed to be made to sections 46 and 46A of the Principal Act by clauses 17 and 18 of the Bill, that is, to deny the intercorporate dividend rebate on dividends paid by tax-exempt entities, are to apply in relation to dividends paid after 25 May 1988 except where the dividends are paid on shares issued by the tax-exempt entity on or before 25 May 1988. In these latter circumstances, the amendments are to apply in relation to dividends paid after the date of commencement of the amending Act, as provided for by clause 2 of the Bill.

Subclause (6) specifies that the denial of the intercorporate dividend rebate in respect of the unfranked part of dividends received by private companies, as provided for by new section 46F which is proposed to be inserted by clause 19, is to be effective in relation to dividends paid on or after 26 May 1988 other than dividends declared on or before that date. It also excludes from the operation of the new section amounts paid or credited before 26 May 1988 which are deemed by section 108 of the Principal Act to have been paid on the last day of the relevant year of income of the shareholder, where that day occurs on or after 26 May 1988.

By subclause (7) the amendments proposed by subclause 23(1), clauses 25 to 32, paragraphs 33(a) and (b), clause 34, paragraph 35(a), clauses 36 to 39, 42 and 49 will apply to:

·
a unit of property acquired under a contract entered into after 25 May 1988;
·
a unit of property constructed by a taxpayer under a contract entered into after 25 May 1988 or under a series of contracts the first of which was entered into after that date;
·
where there is no contract of construction, a unit of property which commenced to be constructed after 25 May 1988; and
·
any unit of property, irrespective of when contracted for or commenced to be constructed, that is not used or installed ready for use before 1 July 1991.

The effect of subclause (8) is that, if it is necessary to apply the safeguarding provisions in subsection 57AJ(6), that subsection will continue to apply as if both subsection 57AJ(6) had not been omitted by paragraph (b) of clause 35 and section 57AH had not been repealed by clause 34 (see notes on those clauses).

By the operation of subclause (9) of the Bill, gifts made to H.R.H. The Duke of Edinburgh's Commonwealth Study Conferences (Australia) on or after 24 April 1986 will qualify for a deduction.

Because the new body and the existing Account maintained by the Commonwealth have operated concurrently since the new body was incorporated, subclause (10) allows gifts made to the Duke of Edinburgh's Study Conference Account maintained by the Commonwealth to continue to qualify for deduction until 1 January 1989.

The effect of subclause (11) is that the amendment to the definition of "car" proposed by subclause 43(a) will apply from the year of income that commences on or after 1 July 1988. The proposed commencement date is consistent with the commencement date of amendments to the definition of "car" proposed by Taxation Laws Amendment Bill (No. 3) 1988. The amendments proposed in that Bill have a prospective date of commencement to ensure that taxpayers who have been substantiating hire car expenses as car expenses are not disadvantaged by the proposed change.

Subclause (12) relates to new section 82KZM, being inserted in the Principal Act by clause 45, which provides new rules for the timing of deductions for certain expenditure incurred in advance. The new rules apply in respect of expenditure incurred under an agreement entered into after 25 May 1988.

A common feature of some investment proposals involving partnerships is, broadly, that a person enters into an agreement on behalf of limited partnerships that are to be formed on the achievement of a minimum subscription. Pursuant to that agreement, the limited partnerships, when formed, enter into agreements under which expenditure is incurred.

By paragraph (a) of subclause (12), such expenditure (whenever incurred) will not be subject to the new rules provided the original agreement was entered into before the formation of the partnership (subparagraph (i)) and on or before 25 May 1988 (subparagraph (ii)).

By paragraph (b) of subclause (12), the new rules will not apply to expenditure incurred on or before 30 June 1988 if the expenditure was incurred in subscribing for a prescribed interest within the meaning of the Companies Act 1981 (or a corresponding State or Territory law) and a prospectus in relation to that prescribed interest was registered before 26 May 1988.

The application rule expressed in subclause (13) is that the amendments concerning car records proposed by clauses 43, 44 and 52 apply from the date of commencement of the income tax substantiation rules, i.e., 1 July 1986.

Subclause (14) limits the scope of a penalty section of the Principal Act, section 223A, in relation to the specification in income tax return forms of a business-use percentage for a car. The subclause deems section 223A never to have applied to such a percentage but is subject to the operation of subclauses 15 to 17 inclusive.

Subclause (15) ensures that section 223A operates only in appropriate circumstances. Before its amendment by this Bill, section 223A imposed penalty tax if a taxpayer specified, under the actual business expenses method, an excessive percentage for deductible car expenses in his or her return for a year of income.

The subclause provides that the section 223A penalty can only apply in relation to the specification of matters in car records retained by a taxpayer where:

·
the specification occurs after the commencement of this clause (i.e., after the date of Royal Assent) even if subclause (16) deems that specification to have been made before then (paragraph (a));
·
the business-use percentage is deemed by subclause (17) to have been specified in the car records (paragraph (b)); or
·
section 82KTC of the Principal Act, as proposed to be amended by this Bill, deems the business-use percentage to have been specificed in the car records (paragraph (c)).

Subclause (16) allows taxpayers one month after the commencement of this clause (i.e., one month after the date of Royal Assent) to specify or nominate a particular in car records of a particular year of income that ended before that date and to be treated as if they had specified or nominated it before the return for that year was due for lodgment. This gives taxpayers time to take advantage of the opportunity to specify relevant matters in car records relating to a past year or years of income.

Subclause (17) preserves the exposure of taxpayers to penalty under section 223A of the Principal Act in relation to business-use-of-car percentages specified in returns lodged before the commencement of this clause, i.e., one month after the date of Royal Assent. Subclause (17) applies only for the purposes of section 223A.

Subclause (18) determines the effective commencement date of the amendment proposed by clause 46 in relation to public unit trusts. Reference should be made to the notes on that clause.

By subclause (19), Division 16G (which deals with debt creation involving non-residents) will only apply to an acquisition of an asset that occurred on or after 1 July 1987 (the date of application of the Division by virtue of section 159GZZD) and before 20 June 1988 if under section 159GZZA the capital entitlement factor of a non-resident in respect of the company is 100%. From 20 June 1988, the Division will apply to an acquisition of an asset where there is a 50% or greater capital entitlement factor.

Subclause (20) will ensure that the amendment of the definition of "associate" in section 159GZC of the Principal Act effected by section 23 of Taxation Laws Amendment Act (No.2) 1988 has effect for purposes of Division 16G. Thus the amendment will apply for the purposes of Division 16G from 1 July 1987 although in relation to Division 16F (thin capitalisation by non-residents) it only applies to assessments in respect of income of the year commencing on 1 July 1988 and subsequent years of income.

By subclause (21), the amendments made by clause 14 (exemption of the special temporary allowance) and clause 51 (increase in the levels of the pensioner and beneficiary rebates) apply for the 1988-89 and subsequent income years.

Clause 54: Special transitional provisions - non-cash business benefits provided on or before date of introduction of this Bill

This clause, which will not amend the Principal Act, contains transitional provisions concerning the special rules set out in the announcement of the proposal to tax non-cash benefits but which are not relevant to the proposal as implemented by the new sections 21A and 51AK.

Subclause 54(1) provides that the transitional provisions will apply to non-cash business benefits provided on or before the date of introduction of this Bill.

By subclause 54(2) the value of a business related benefit is to be taxed in the hands of its recipient where the recipient is:

·
a director or shareholder of the company that is the taxpayer;
·
a beneficiary of a trust estate where the trustee is the taxpayer, or
·
a partner in a partnership where the partnership is the taxpayer.

Subclause 54(3) operates to tax the value of a non-cash benefit which is income not in the year in which it is received but in the year in which it is utilised.

By subclause 54(4), where a non-cash business benefit is income derived by a taxpayer and where if the taxpayer had incurred the expenditure in providing for such a benefit the cost would have been fully or partly deductible, the taxable amount for purposes of the new section 21A would be the arm's length value of the benefit less the amount that would have been deductible.

Subclause 54(5) operates, subject to subclause 54(6), to allow depreciation on the cost of a non-cash benefit which is income derived by a taxpayer and is a depreciable unit of property for purposes of the Principal Act.

Subclause 54(6) provides that the cost of a unit of depreciable property, as determined under this section, will not apply to another provision of the Principal Act that deems the cost of such a unit to be less than the cost determined under this section.

By subclause 54(7), the common expressions used in this section and in the new section 21A will have the same meaning.

Subclause 54(8) ascribes meanings to the following two expressions:

'amended Act' is defined to mean the Principal Act as amended by this Act.
'once-only deduction' in relation to expenditure is defined to mean a deduction that is allowable only in a particular year.

Clause 55: Transitional - section 70A

Clause 55 will ensure that existing section 70A of the Principal Act will continue to operate to allow immediate deductibility for expenditure on mains electricity connections where the expenditure was incurred on or before 25 May 1988 (paragraph (a)) or under a contract entered into on or before that date (paragraph (b)).

Clause 56: Provisional tax for 1988-89 year

The purpose of subclause (1) of clause 56, which will not amend the Principal Act, is to specify the basis for calculating the 1988-89 provisional tax payable by provisional taxpayers who do not "self-assess" by seeking a variation of provisional tax on the basis of an estimate of income for the relevant year. Broadly, the subclause requires that the provisional tax is to be calculated by applying 1988-89 rates of tax (without regard to the arrangements for pro-rating of the tax-free threshold) and Medicare levy to 1987-88 taxable incomes increased by 12 per cent. With the exception of the rebates of tax available to Christmas Island residents on Island and ex-Australian source income, the rebates on franked dividends and averaging rebates, which are discussed below, rebates are to be taken into account as allowed in the taxpayer's 1987-88 income tax assessment.

Where an amount of a net capital gain has been included in a taxpayer's 1987-88 assessable income by virtue of Part IIIA of the Principal Act, the provisional tax for 1988-89 will be calculated by reference to the amount that would have been the taxable income for 1987-88 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 1988-89 rates of tax and Medicare levy to the taxpayer's estimated taxable income for that income year and deducting estimated 1988-89 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) or section 86 (lease premiums) of the Principal Act, provisional tax, before deduction of rebates, is to be calculated by applying to 1987-88 taxable income increased by 12 per cent, the 1988-89 rate of tax applicable to their 1987-88 notional income.

Taxpayers who were under 18 years of age at 30 June 1988 were liable for tax for 1987-88 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 the purposes of the 1988-89 provisional tax calculation, the portion of a minor's taxable income, as increased by 12 per cent, that is to be taken as eligible taxable income is to be in the same proportion as that which the 1987-88 eligible taxable income of the taxpayer bore to his or her taxable income for that year.

Where the 1987-88 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 the purposes of the 1988-89 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 1987-88 assessable income.

In respect of a taxpayer who is an eligible person for the purposes of Division 16A of Part III of the Principal Act - that is, an artist, composer, inventor, performer, production associate, sportsperson or writer - the taxpayer's provisional tax liability is to be calculated on the basis that his or her eligible taxable income for the purposes of section 158H of the Principal Act is increased by 12%.

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 1987-88 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 12 per cent. 1988-89 rates of tax will be applied in the calculation on the basis of the average income used for 1987-88 assessment purposes. Average income will not be recalculated to reflect the notional 12 per cent increase in taxable income for provisional tax purposes. A primary producer may qualify for a partial averaging benefit only in 1987-88 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 1988-89 provisional tax is the same as the 1987-88 proportion. That is, it is not to be reduced to reflect the notional 12 per cent increase in income other than from primary production.

For taxpayers entitled to a rebate of tax in respect of franked dividends received during 1987-88, the subclause will require that, for the 1988-89 provisional tax calculation, those rebates will be increased by 12 per cent.

Where an amount of income tax or Medicare levy was payable in 1987-88, an amount additional to the provisional tax (if any) otherwise payable representing Medicare levy for 1988-89 is to be incorporated in the 1988-89 provisional tax calculation. In these situations the Medicare levy component of provisional tax will be calculated by applying the 1988-89 year Medicare levy rate of 1.25 per cent to 1987-88 taxable income as increased by 12 per cent. The increased low income thresholds to apply for levy purposes in 1988-89 will be taken into account. In addition, wherever a part or full exemption from levy was obtained by an individual in his or her 1987-88 assessment, the same exemption will be provided in the calculation of levy for 1988-89 provisional tax purposes.

For Christmas Island residents, a rebate of tax under section 160ACD of the Principal Act was available in the years 1985-86 to 1987-88 for the purposes of phasing in income tax on Island and ex-Australian sourced income. No rebate will be available in respect of 1988-89 assessments and the 1988-89 provisional tax will be calculated on this basis.

For a taxpayer whose 1987-88 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, 1988-89 provisional tax will be calculated as if no such deduction had been allowed, with the taxable income so adjusted increased by 12 per cent.

Subclause (2) of clause 56 is a drafting measure which ensures that the basis of calculation of 1988-89 provisional tax provided for in this clause applies to provisional tax that is payable under both the single payment system and the instalment system that first operated in the 1987-88 year.

Clause 57: Amendment of assessments

This clause gives the Commissioner of Taxation authority to reopen an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to the amendments proposed by the Bill.

PART IV - AMENDMENT OF THE TAXATION ADMINISTRATION ACT 1953

Clause 58: Principal Act

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

Clause 59: Repeal of Modification of Limitation Laws applying to the recovery of tax debts

This clause will repeal Section 14ZKA of the Principal Act. That section modified the various State and Territory Limitation Acts in order that the recovery of tax debts could commence at any time. The Full Supreme Court of Queensland held in Moorebank's case that in recovering tax debts the Commissioner of Taxation was subject to Section 64 of the Judiciary Act 1903. That section provides that the rights of parties in a court action, in which the Commonwealth is a party, shall as nearly as possible be the same as in a legal action between one person and another.

The Commissioner of Taxation appealed to the High Court of Australia against the Queensland Supreme Court decision and on 9 June 1988 the High Court handed down its decision (88 ATC 4443). The High Court held that Section 64 of the Judiciary Act did not apply the provisions of a State law (such as a limitations law) to circumstances where the direct application of the State law would be invalidated by Section 109 of the Commonwealth Constitution, by reason of inconsistency with applicable Commonwealth provisions.

The effect of the High Court decision is that section 14ZKA, which was originally inserted into the Principal Act to protect the revenue, is now redundant. The section is therefore being repealed by this clause with effect from the date of commencement of this Act (i.e., on Royal Assent).

SCHEDULE

AMENDMENTS OF THE INCOME TAX ASSESSMENT ACT 1936 RELATING TO CAR RECORDS

Changes being made to the income tax provisions regarding the specification of certain matters in taxpayers' car records, rather than in income tax returns, are proposed in the Schedule of this Bill. The changes consist almost entirely of the omission of certain shorthand expressions from sections of the Principal Act and their replacement by other drafting expressions to ensure that the Principal Act operates as intended in relation to the changed arrangements for specifying those matters.

One amendment that falls outside this pattern of changes is the repeal of existing section 82KTC and its replacement with a new section 82KTC.

The existing section 82KTC allows taxpayers who inadvertently fail to specify certain matters relating to claims for car expenses in return forms to specify those matters in a later document lodged with and accepted by the Commissioner of Taxation.

Proposed new section 82KTC contains procedures along similar lines to the section it replaces and, additionally, allows the Commissioner to treat a relevant 'period, nomination, particular or percentage' specified by the taxpayer in a document lodged with the Commissioner as if it had been specified in the taxpayer's car records.

The matters particularly addressed are:

·
an 'applicable log book period' of a kind referred to in subsection 82KT(1) of the Principal Act (paragraph (a));
·
a nomination (or particulars thereof), under subsection 82KTJ(1) of the Principal Act, of one car as a replacement for another (paragraph (b)); or
·
a business-use-of-car percentage of the type mentioned in section 82KUB or 82KUC of the Principal Act.

These concessional rules will benefit taxpayers who, by oversight, fail to comply with certain provisions of the law.

INCOME TAX AMENDMENT BILL 1988

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 1988-89 financial year and, until the Parliament otherwise provides, the 1989-90 financial year by -

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

The general rates of tax for resident taxpayers for 1988-89 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 Tax on Total Taxable Income $ $ %
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 1988-89 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 for 1988-89 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.

The rate of tax for companies, certain unit trusts and registered organisations, payable in respect of 1987-88 income, are:

·
49 per cent for companies, corporate unit trusts and public trading trusts; and
·
20 per cent for registered organizations.

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 1988.

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 commence on the day on which it receives the Royal Assent. But for this clause, the amending 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.

Clause 3: Levy of tax

Clause 3 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 1988-89 financial year (paragraph (a)) and, until the Parliament otherwise provides, for the 1989-90 financial year (paragraph (b)).

MEDICARE LEVY AMENDMENT BILL 1988

This Bill will amend the Medicare Levy Act 1986 to impose Medicare levy for the financial year commencing on 1 July 1988 and, until the Parliament otherwise provides, the financial year commencing on 1 July 1989. 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 1988.

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 commence on the day on which it receives the Royal Assent. But for this 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.

Clause 3: Amendment of Principal Act

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

Levy in Cases of Small Incomes (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 $8,980 and to substitute references to $9,560. As a consequence of the amendment of subsection 7(1), a taxpayer whose taxable income is $9,560 or less will not be required to pay Medicare levy. By clause 4 of the Bill the amendment applies for financial years commencing on or after 1 July 1988.

A further amendment of subsection 7(2) proposes to omit a reference to $9,578 and to insert a reference to $10,197. The levy for a taxpayer whose taxable income exceeds $9,560 but does not exceed $10,197, will be limited to 20 per cent of the excess of the taxable income over $9,560. By clause 4 of the Bill this amendment also applies for financial years commencing on or after 1 July 1988.

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).

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 $15,090 to $16,110. 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 amendment proposed by the Schedule to a component 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 formula limits the levy payable by a 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 an amendment to subsection 8(6) of the Principal Act to account for the increase in the basic level of the "family income threshold" to $16,110.

Financial Years for which Levy is Payable (section 11)

By the amendment proposed to section 11 of the Principal Act the Medicare levy, imposed by section 5 of the Principal Act, is payable for the 1988-89 financial year (paragraph (a)) and, until the Parliament otherwise provides, for the 1989-90 financial year (paragraph (b)).

Clause 4: Application of amendments

By this clause the amendments to sections 7 and 8 of the Principal Act will apply for financial years commencing on or after 1 July 1988.


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