Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)
The purpose of this memorandum is to explain the provisions of the Income Tax Assessment Amendment Bill 1978 which is a Bill to amend the Income Tax Assessment Act in a number of important respects.
The main features of the Bill are -
The law is to be amended to overcome the decision of the High Court in Curran's case by providing that tax-free bonus shares allotted after 16 August 1977 (date of 1977-78 Budget Speech) shall be treated as having no independent cost to the taxpayer. The amended law will mean that for the purposes of the trading stock provisions, and in calculating any taxable profit or deductible loss on the sale of shares, the cost of the original shares in relation to which the bonus issue was made is to be spread over those original shares and the bonus shares.
The gift deduction provisions are to be strengthened against tax avoidance arrangements. Very broadly, the deduction will no longer be available in respect of gifts made after the specified date (date of introduction) where the gift is made under arrangements whereby its value to the relevant fund, authority or institution will be less than the value of the property at the time the gift is made, the donor or an associate obtains some benefit or advantage in connexion with the gift or the donee fund, authority or institution undertakes to acquire property from the donor or an associate of the donor.
The amendments, which are to be effective from the specified date, will complement last year's anti-avoidance measures against schemes which used elections under section 36A of the Principal Act to create artificial share trading losses. By clause 6, certain trading stock (shares, debentures and other choses in action) are to be treated as having been bought and sold at a commercially realistic value having regard to any collateral arrangements or understandings that have the effect that the true value of the stock is significantly less than its ostensible market value. If schemes of the kind that have been encountered were to he implemented in future the commercial profit would thus be taxed, instead of (as is claimed) a manufactured tax loss being deductible.
A variation of this type of scheme seeks to rely upon the manufacture of artificial share trading losses by using the general deduction provisions of the income tax law or the provisions governing losses incurred on property acquired for profit-making. By clause 9 the amounts deductible under those provisions in respect of the cost of shares, etc., will be limited to levels that are commercially realistic in the light of such collateral arrangements as may effectively compensate for the loss suffered on sale of the shares.
Existing provisions of the Principal Act which limit the amount of rebate available on inter-company dividends that are received in the course of a dividend stripping operation are being clarified by clause 7. The amendment will ensure that, in the application of that limitation, there will, in special situations, be offset against the inter-company dividends otherwise subject to rebate, not only the relatively negligible cost of the shares on which the stripping dividend is directly paid, but also the cost to that same shareholder of other shares (including rights or options to acquire shares) in the company that were acquired to initiate that dividend stripping operation.
Clause 8, which is to be effective from the specified date, will counter yet another kind of dividend rebate avoidance scheme under which shares in a company are purchased for dividend stripping purposes, the stripping dividend is paid to another company on special class shares but the cost of the shares purchased from the first company (and the resultant tax loss) is borne by a company or other entity associated with the stripping company. An inter-company dividend rebate is not in future to be available to the stripping company in respect of such dividends.
A private company that does not make a sufficient distribution of its income to its shareholders is liable to pay a 50 per cent undistributed income tax on the shortfall in its dividend payments. With effect from the date specified, companies will not be able to satisfy this "sufficient distribution" requirement by employing methods which, in broad substance, have the effect that a dividend is not distributed. A dividend will not be credited towards the making of a sufficient distribution if it is paid under an arrangement whereby a compensating benefit approximating the amount of the dividend is to be paid.
The benefit of the averaging provisions applicable to primary producers will be prevented from flowing to persons who are not primary producers but who, under tax avoidance arrangements, become entitled to a minimal share in income derived by a trust from a primary production business. For the future, a beneficiary in a primary production trust will be able to rely on his or her interest in such a trust to qualify for averaging if his or her share of the trust income in the income year is at least $1,040 or the Commissioner of Taxation is satisfied that the interest was not acquired primarily to gain the benefit of averaging. The amended provisions will apply for the 1977-78 and subsequent income years but for a person who became an income beneficiary in such a trust on or before the specified date they will first apply for the 1978-79 income year.
Deductions are not to be available under section 62A of the Principal Act for capital expenditure incurred under the terms of certain franchises granted by the Commonwealth, a State or a public authority, in respect of expenditure incurred under franchises granted after the specified date.
Shareholder rebates for capital subscriptions to petroleum mining companies (Clauses 14 to 16, 20 and 24)
A new income tax concession is being introduced to encourage exploration for and development of off-shore petroleum fields. The concession will be available in respect of moneys subscribed after 24 August 1977 as paid-up capital to companies holding valid licences or permits under the Petroleum (Submerged Lands) Act, or registered interests in licences or permits under that Act. Those companies will be able to lodge declarations with the Commissioner of Taxation forgoing the right to deductions to which they would become entitled under Division 10AA of the Principal Act for eligible outgoings, i.e., capital expenditure incurred after 24 August 1977 on off-shore exploration for petroleum or on the development of off-shore petroleum fields.
By lodging a declaration, a company will be able to confer an income tax rebate on both corporate and non-corporate shareholders in respect of their share capital subscribed that is spent on eligible outgoings. The tax rebate will be allowable in the subscriber's income tax assessment for the year of income in which the moneys are subscribed and will be an amount of 30 cents for each dollar subscribed.
The concession will be available where moneys are subscribed directly to a petroleum exploration or mining company or to a company interposed between the shareholder and the operating company provided there is an appropriate connection between the interposed company and the operating company.
Under section 78 of the Principal Act, gifts of the value of $2 or more to the funds, authorities or institutions referred to therein are allowable deductions from the assessable income of the donor. Deductions in respect of gifts of property other than money have been available only in respect of property that was purchased by the donor within the preceding twelve months and the amount deductible is limited to the lesser of the value of the property at the time the gift was made and the amount paid by the donor for the property.
It is proposed that the funds specified in section 78 as eligible recipients of tax deductible gifts be extended to include The Australiana Fund, The National Trust of Australia (Northern Territory) and The National Trust of Australia (A.C.T.).
In addition, gifts to collections maintained by The Australiana Fund or by a public library, museum or art gallery will qualify for deduction irrespective of when or how the property was acquired by the donor, where the gift is made in the period 1 January 1978 to 31 December 1980. The amount of the deduction will generally be equal to the value of the property at the time the gift was made, as evidenced by valuations obtained from approved valuers, but may be appropriately reduced where the donee fund, authority or institution does not receive immediate and unfettered control, custody or title to the gifted property.
Benefits paid under the scheme of assistance with the education of isolated children are not to be treated as separate net income of a dependant. As a consequence, payment of these benefits will not result in a reduction in zone or certain other rebates allowable to parents of the children.
Taxation of allowances paid under the Former Regular Servicemen's Vocational Training Scheme (Clauses 4 and 22)
Allowances paid under the Former Regular Servicemen's Vocational Training Scheme are expressly being made subject to tax.
A technical amendment of the averaging provisions for primary producers is proposed to ensure that all taxpayers who had previously elected to withdraw from the averaging system will be able to re-enter the system for the 1977-78 income year.
Notes on each clause of the Bill are set out on the following pages.