Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)Introductory note
The purpose of this memorandum is to explain the provisions of the above Bill. The provisions are designed to counter tax avoidance under those schemes referred to in ministerial statements of 24 September and 3 October 1978 and 1 March 1979. They are schemes commonly known as "section 67" and "section 67A" schemes, "recoupment" schemes that involve interest, rent and trading stock, schemes associated with the special trading stock transfer provisions of the income tax law, schemes of share trading of the kind to which section 52A of the Income Tax Assessment Act (the Principal Act) applies and modified "Curran" schemes.
Bonus shares (Clause 3)
This measure relates to amendments made last year to overcome the High Court decision in Curran v. Federal Commissioner of Taxation. Last year's amendments (section 6BA of the Principal Act) were designed to ensure that, where a bonus share issue was made, the bonus shares were not, in calculating the taxable profit or deductible loss of a share trader, to be attributed an independent cost, but the cost of the original shares in respect of which the bonus issue was made was to be spread over those shares and the bonus shares. The amendments proposed by this Bill have the purpose of ensuring, in the light of contentions that the earlier amendments may not have their intended field of operation, that the income tax law is effective against "Curran" schemes and variations of that scheme.
The amendments will apply generally in relation to bonus shares allotted after 3 October 1978 but, should the law as enacted last year be held to be deficient, any tax loss created under a "Curran" scheme from bonus shares allotted after 7 April 1978 (the date on which the earlier amendments were introduced into the Parliament) will not be available to be carried forward and set-off against income of any year of income after 1978-79.
Commodity trading schemes (Clauses 4 and 5)
The amendments are designed to broaden the scope of anti-tax avoidance amendments made last year to counter schemes creating artificial share trading losses under provisions of the Principal Act dealing with transfers of trading stock otherwise than in the ordinary course of business. Last year's amendments (to section 36 of the Principal Act) were limited to trading stock consisting of shares, debentures and other choses in action. Recent schemes of the same general character utilise other forms of trading stock such as antiques, fine art and precious metals. As a result of the proposed amendments, the effect of the provisions dealing with transfers of trading stock in relation to all forms of trading stock will be varied, to ensure that any artificial loss will be eliminated and only the commercial result taken into account for income tax purposes.
The amendment to be made by clause 4 will apply to transfers of property taking place after 24 September 1978. Those to be made by clause 5, which are designed to ensure that the amendments foreshadowed on 24 September 1978 are not circumvented by elections under section 36A of the Principal Act, will apply from the date of introduction of the Bill.
Share trading losses (Clause 6)
Schemes have been devised with the object of circumventing new provisions inserted last year in the Principal Act (section 52A of that Act), which were designed to limit the amount of deductible expenditure incurred under share trading avoidance arrangements to an amount that is commercially realistic in the light of various collateral arrangements. Under more recent schemes, a tax deduction is sought for the value of property acquired without the incurring of expenditure, e.g., by vesting of shares under the terms of a trust.
The proposed amendments will extend the operation of the existing law so as to ensure that these variations of share trading schemes will be covered, and will also make changes to remove doubts expressed about the application of the law where expenditure is incurred by way of calls or premiums on shares. The amendments proposed by clause 6 will apply in respect of property acquired after 24 September 1978.
Tax avoidance under certain expenditure recoupment arrangements (Clauses 7 to 10)
These amendments aim to counter avoidance of tax through certain expenditure "recoupment" schemes that have been developed to exploit the availability of deductions under the Principal Act for expenditure incurred by a taxpayer in borrowing money, in discharging a mortgage, in the acquisition of trading stock or in respect of a liability to pay interest or rent.
Under these schemes, expenditure is incurred as part of a tax avoidance agreement which provides for the receipt by the taxpayer or an associate of a compensatory benefit, the value of which, when added to the expected tax benefit, effectively recoups the taxpayer for the expenditure, with the effect that no real deductible loss or outgoing is suffered.
The proposed amendments will operate to deny a deduction for expenditure incurred in borrowing money, in discharging a mortgage, in the acquisition of trading stock or by way of interest or rent where that expenditure is incurred after 24 September 1978 under a tax avoidance agreement of this type that is entered into after that date.
Detailed explanations of each clause of the Bill follow.