Supplementary Explanatory Memorandum
Amendments to be moved on behalf of the Government (Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Philanthropy
The amendments made to the philanthropy measures contained in Schedule 5 to this Bill will clarify and streamline the operation of the measures and will remove an unintended consequence.
Date of effect: The amendments will apply from 1 July 1999.
Proposal announced: The original proposal was announced on 26 March 1999 by the Prime Minister, the Treasurer, the Minister for Family and Community Services, the Minister for Communications, Information Technology and the Arts, and the Minister for the Arts and the Centenary of Federation. These amendments have not been announced.
Financial impact: These amendments do not alter the original estimates contained in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 8) 1999.
Compliance cost impact: There will be no change to the compliance costs as outlined in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 8) 1999.
Summary of Regulation Impact Statement
A Regulation Impact Statement is not required for this amendment.
Franking of dividends
Amendment 2 will amend Schedule 3 to this Bill to ensure that no taxpayer is disadvantaged by the retrospective amendment to be made by item 2 in Schedule 3 to the existing concession under the 45 day rule which applies where shares or interests in shares are transferred to a bare trustee.
Date of effect: This change will apply from the commencement of the 45day rule.
Proposal announced: Not announced.
Financial impact: Nil.
Compliance cost impact: Negligible.
Summary of Regulation Impact Statement
The Office of Regulation Review has advised that a Regulation Impact Statement is not required for this change.
Chapter 1 - Philanthropy
Overview
1.1 Schedule 5 to the Taxation Laws Amendment Bill (No. 8) 1999 amends the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to implement the Governments response to the report on philanthropy in Australia by the Business and Community Partnerships Working Group on Taxation Reform.
1.2 The amendments will:
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- ensure that donors making gifts of property under the Cultural Gifts Program receive a deduction equal to the amount that they would have received before the new capital gains tax (CGT) exemption under new subsection 118-60(2) (ITAA 1997) became available;
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- allow taxpayers to choose to use the valuation by the Commissioner of Taxation (the Commissioner), obtained under new section 30-212 (ITAA 1997), for the purposes of valuing the disposal of a CGT asset where the disposal occurs no more than 90 days before or after the date of the Commissioners valuation;
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- allow taxpayers to choose to use the Commissioners valuation obtained under new section 30-212 for the purposes of valuing the disposal of trading stock outside the ordinary course of business. Taxpayers may only choose this alternative valuation where the disposal occurs no more than 90 days before or after the date of the Commissioners valuation;
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- clarify that the cost of obtaining a valuation from the Commissioner is tax deductible where the valuation is required under the gift provisions of the ITAA 1997; and
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- ensure that the consequential amendments to the political donations provisions in the ITAA 1997 will not commence until immediately after the provisions of Taxation Laws Amendment (Political Donations) Bill 1999 commence.
Summary of the amendments
1.3 The purpose of the amendments is to clarify and streamline the operation of the philanthropy measures and to remove an unintended consequence.
1.4 The amendments will apply from 1 July 1999.
Background to the legislation
1.5 Schedule 5 to this Bill amends the ITAA 1997 and ITAA 1936 to encourage greater corporate and personal philanthropy in Australia by:
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- allowing an income tax deduction for a gift of property, worth more than $5,000, to certain funds, authorities and institutions and to political parties regardless of when or how the property was acquired;
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- providing a CGT exemption for testamentary gifts of property to certain funds, authorities and institutions and to political parties, unless the property is reacquired for less than market value by the estate, a beneficiary of the estate or an associate;
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- providing a CGT exemption for gifts of property made under the Cultural Gifts Program, unless the property is reacquired for less than market value by the donor or an associate;
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- allowing concessional taxation treatment for specified private funds which will not be required to seek donations from the public but will be subject to the other requirements applying to public funds; and
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- allowing the apportionment of deductions for donations made under the Cultural Gifts Program over a period of up to 5income years.
1.6 Subdivision 30-C of the ITAA 1997 contains valuation rules for gifts of property made under the Cultural Gifts Program. Generally, 2 or more written valuations must be obtained by the taxpayer (section 30-200). The general rule in section 30-215 provides that the average of the market values specified in the valuations is the amount that can be deducted.
1.7 Under section 30-205, written valuations are not required when an amount is not included in the taxpayers assessable income in respect of the gift, but an amount would have been included if the property had been sold rather than donated. Where section 30-205 applies, the amount allowable as a deduction is either the amount paid for the property or so much of the cost of production/creation that would have been deductible if the property had been sold (subsection 30-215(3), items 1 and 2).
1.8 As a result of the CGT exemption under new subsection 118-60(2) , section 30-205 applies; that is, no amount is included in assessable income in respect of the gift of property made under the Cultural Gifts Program but an amount would have been included if the property had been sold rather than donated. Therefore, written valuations are not required and the amount of the deduction is determined by reference to the original cost of the property.
1.9 Taxpayers who donate property valued by the Commissioner at more than $5,000 may have disposed of a CGT asset under section 104-10 of the ITAA 1997 (CGT event A1). Subsection 104-10(4) states that a capital gain is made if the capital proceeds from the disposal are more than the cost base of the asset. Under section 116-30, a taxpayer is deemed to have received the market value of the CGT asset when no capital proceeds have been received. The market value is determined as at the time of the CGT event.
1.10 Where a taxpayer disposes of trading stock outside the ordinary course of business (e.g. the taxpayer donates an item of trading stock in accordance with Division 30 of the ITAA 1997), section 70-90 includes the market value of the item on the day of disposal in assessable income.
Explanation of the amendments
1.11 Section 30-205 of the ITAA 1997 is amended to ensure that written valuations are required where an amount would have been included in assessable income had the CGT exemption under new subsection 118-60(2) not applied. [Item 10A, subsection 30-205(2)]
1.12 Where written valuations are required, section 30-215 provides that the amount deductible in relation to the gift is generally the average of market valuations.
1.13 This amendment ensures that taxpayers receive the same amount of deduction that they would have been entitled to if the CGT exemption had not been available.
Valuations by the Commissioner
Amendment 6 - capital gains tax
1.14 New section 116-100 is inserted in Division 116 of the ITAA 1997 to modify the general rules about capital proceeds on the disposal of a CGT asset, in situations where a gift of property has been made and a valuation under new section 30-212 has been obtained.
1.15 New subsection 116-100(1) gives a taxpayer the option to use the amount specified in the valuation in determining the capital proceeds. Under new subsection 116-100(2) , the taxpayer may only make this choice if the valuation is made no more than 90 days before or after the CGT event. [Item 19B]
1.16 Section 116-25 lists modifications to the general rules for determining what are the capital proceeds from a CGT event. The table in section 116-25 is amended to include a reference to new section 116-100 in the list of special rules relating to CGT event A1. [Item 19A]
1.17 Section 70-90 is amended where trading stock has been disposed of by way of making a donation of property and a valuation under new section 30-212 has been obtained.
1.18 New subsection 70-90(1A) is inserted to give taxpayers a choice to use the Commissioners valuation as the value that is included in assessable income instead of the value determined under subsection 70-90(1). The taxpayer may only make this choice if the valuation is made no more than 90 days before or after the disposal. [Item 18A]
1.19 A consequential amendment is made to section 70-95 to reflect the change made to section 70-90. [Item 18B]
1.20 Subsection 25-5(1) of the ITAA 1997 allows deductions for certain tax-related expenses. Subsection 25-5(1) is amended to allow a deduction for the fee charged by the Commissioner for a valuation of property under new section 30-212. [Item 1A, new paragraph 25-5(1)(d)] It is recognised that a deduction for this expense may already be allowable under section 8-1, but this amendment is provided for the avoidance of doubt.
1.21 The valuation under new section 30-212 may be obtained either before or after the gift is made.
1.22 The commencement date of the consequential amendments (item 14) to the political donations provisions in the ITAA 1997 is amended so that they will not commence until immediately after the provisions of Taxation Laws Amendment (Political Donations) Bill 1999 commence.
Chapter 2 - Franking of dividends
Overview
2.1 Amendment 2 will amend Schedule 3 to this Bill to ensure that no taxpayer is disadvantaged by the retrospective amendment to be made by item 2 in Schedule 3 to the existing concession under the 45 day rule which applies where shares or interests in shares are transferred to a bare trustee.
Background
2.2 The 45 day rule requires a shareholder to hold shares for at least 45 days at risk to be eligible for franking benefits or the inter-corporate dividend rebate for dividends paid on shares. A concession applies under the 45 day rule where a person transfers shares or an interest in shares to a bare trust so that the person is not precluded by the transfer from satisfying the 45 day rule. The concession is provided in subsections 160APHH(6) and (7) of the Income Tax Assessment Act 1936 (ITAA 1936).
2.3 Item 2 in Schedule 3 will substitute an alternative concession to apply in these circumstances. The substituted concession will reduce compliance costs for custodians and nominees. The proposed amendment is retrospective and will apply from the commencement of the 45 day rule. This change, including the date of effect, was requested by representatives of the custodians and nominees industry. However, some taxpayers may have derived an advantage from the concession in its present form, which they would prefer to retain.
Date of effect
2.4 This change will apply from the commencement of the 45 day rule.