Explanatory StatementRELEASED BY AUTHORITY OF THE TREASURER, THE HON. P.J. KEATING, M.P. CANBERRA, 4 JUNE 1987
The draft of the Taxation Laws Amendment Bill (No. 3) 1987 contains proposals to amend the income tax laws in a number of ways. The main features of the draft Bill are as follows:
Rebate on dividends paid as part of dividend stripping operation (Draft clauses 6 and 7)
The existing provisions of section 46A of the Income Tax Assessment Act 1936 ("the Assessment Act") limit the amount of rebate allowable on intercorporate dividends if the Commissioner is satisfied that the dividends are paid in the course of a dividend stripping operation. In brief terms, the section requires that certain deductions (principally the cost of shares or other relevant property acquired as a part of the dividend stripping operation) be offset against the dividends otherwise subject to the rebate.
Section 46B of the Assessment Act applies where shares in a company are purchased for dividend stripping purposes, the stripped dividend is paid to another company on a special class of shares but the cost of the shares purchased from the first company (and the resultant tax loss) is borne by a company or other entity associated with the stripping company. Where the conditions of the section are met the dividend is not eligible for the intercorporate dividend rebate.
Both sections 46A and 46B operate where the relevant property is acquired as trading stock or in circumstances where any profit that would arise from the disposal of the relevant property would be included in the assessable income of the shareholder, or any loss that would arise from the disposal would be an allowable deduction. As presently worded, the sections do not apply to limit or deny the intercorporate dividend rebate in cases where a dividend stripping operation gives rise to a net capital gain or a net capital loss for the purposes of Part IIIA of the Assessment Act.
The provisions contained in the draft Bill are designed to extend the operation of sections 46A and 46B to ensure that the intercorporate dividend rebate will be reduced or denied, as appropriate, where a dividend is paid in the course of a dividend stripping operation and the relevant property was acquired after 19 September 1985, i.e., where Part IIIA would apply to a disposal of the share or property.
As announced by the Treasurer on 4 June 1987, these measures would apply in relation to relevant dividends paid after that day.
Franked dividends paid as part of a dividend stripping operation (Draft clauses 19, 20, 21, 22 and 23)
Amendments to the income tax law contained in clause 14 of the Taxation Laws Amendment (Company Distributions) Bill 1987 will insert a new Part in the Assessment Act - Part IIIAA - to implement the imputation system of company tax. Under proposed new sections 160APP and 160APQ of that Part, a resident company will be entitled to a franking credit if, during a franking year, it receives a franked dividend either directly as a shareholder or indirectly through a partnership or trust estate. Proposed new sections 160AQU, 160AQX, 160AQY and 160AQZ of Part IIIAA will operate to allow a rebate of tax - calculated by reference to the extra amount included in the shareholder's assessable income under new section 160AQT - in the assessments of resident individuals and certain trustees for franked dividend income received directly, or indirectly through a partnership or trust.
The provisions contained in the draft Bill are to ensure that franking credits are not available under sections 160APP and 160APQ where franked dividends are paid as a part of dividend stripping operations. They will prevent companies from engaging in dividend stripping arrangements to gain the benefit of franking credits attaching to franked dividends.
The intercorporate dividend rebate has in the past been used by companies engaging in dividend stripping operations to gain the benefit of losses arising from those operations while at the same time receiving a significant reimbursement of that loss in the form of a tax free dividend. As franked dividends will be effectively tax free in the hands of resident individuals under the new imputation system, the double benefit from dividend stripping previously gained by companies would become available to these taxpayers. To prevent this, the provisions in the draft Bill are designed to exclude from eligibility for the rebate of tax, franked dividends received by resident individuals and certain trustees (whether directly or through a partnership or trust estate) where those dividends are paid in the course of dividend stripping operations.
The foregoing provisions will deny franking credits to companies and franking rebates to individuals and certain trustees under the new imputation system in any case where the payment of a dividend arises out of, or is made in the course of, a scheme that is by way of, or is in the nature of, dividend stripping, or has substantially the same effect as such a scheme.
These provisions will apply in relation to dividends paid on or after 1 July 1987, when the new imputation system will be in force.
Dividends paid out of profits arising from the revaluation of certain assets (Draft clause 8)
These provisions are designed to address a means of avoidance of tax by companies on profits - in the form of income or capital gains, as the case may be - on the disposal of assets. In the most typical situation, a company which would otherwise be liable to pay tax on the gain arising from the sale of an asset could arrange its affairs so that the asset (or assets) concerned is held by a wholly owned subsidiary. The subsidiary would revalue the asset to reflect its market worth at the time, and pay a dividend to the parent out of the profit on revaluation, the dividend being effectively free from tax because of the intercorporate dividend rebate. The dividend could be funded in a number of ways, e.g., by the purchase of further shares in the subsidiary by the parent, or by a loan to the parent or a loan to the subsidiary by another (related or unrelated) party. The parent company, having effectively received the taxable gain on the asset in an untaxed form, would then be able to dispose of the shares in the subsidiary at a price equal to the paid-up value of the shares held - thus avoiding tax on the gain. The arrangements could be suitably ordered to ensure that the purchaser of the shares (and therefore the asset) acquired a cost base equal to the market value of the asset concerned, thus also ensuring that the purchaser was not exposed to tax on the gain realised by the vendor.
This draft clause would insert a new section - section 46E - in the Assessment Act, the provisions of which would operate to deny the intercorporate dividend rebate to the vendor company in the types of circumstances outlined. The provisions would have effect only where the company revaluing its assets is not a listed company and where the revalued asset or assets of the company out of which dividends had been paid (being assets the disposal of which would, broadly, have given rise to a "taxable" gain) represented at least 75 per cent of the net worth of the company at the time of disposal of the shares by the "parent" company.
Loans etc. to shareholders and associates and excessive payments to shareholders, directors and associates deemed to be dividends (Draft clause 15)
Sections 108 and 109 of the Assessment Act are anti-avoidance provisions which relate to private companies. In broad terms, they enable amounts to be deemed to be dividends where private companies -
- make loans and advances to their shareholders which are disguised distributions of income, thereby avoiding personal tax at the shareholder level (section 108); or
- pay excessive remuneration and retirement allowances to their shareholders and directors and their relatives, thus obtaining a deduction at the company level (section 109).
The draft Bill would re-enact the provisions in order to remedy technical deficiencies that have become apparent in their application over the years.
Section 108 : Loans etc. to shareholders and associates deemed to be dividends
Under the existing section 108, disguised distributions to shareholders by way of loans or advances or by way of payments by the company on behalf, or for the individual benefit of any of its shareholders, to the extent they represent distributions of income are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section 108 would be repealed and a strengthened provision inserted in its place.
The new draft section 108 would apply in a greater range of circumstances than the existing section. It would encompass those blatant arrangements that fall outside the scope of section 108 as it is currently worded but which achieve, in essence, exactly the same end at which the section is directed.
Instead of being limited to purported loans or advances to, or payments by a company on behalf of, or for the individual benefit of, actual shareholders, the new section would apply to loans or advances to, or payments or amounts credited on behalf of, or for the individual benefit of, a person associated with the company. An associated person for the purposes of the new section is defined to include an indirect beneficial shareholder in addition to an actual shareholder, as well as a relative of such shareholders.
To the extent such amounts represent, in the opinion of the Commissioner, a distribution of profits (in lieu of income on the existing section) they would be deemed to be dividends paid by the company out of profits derived by it, as if the recipient of the amount were a shareholder.
Section 109 : Excessive payments to shareholders, directors and associates deemed to be dividends
Under existing section 109, amounts paid or credited to a past or present shareholder, director or relative of a shareholder or director, either as remuneration for services rendered or as a retirement or termination payment to the extent they exceed a reasonable amount, are not deductible against the company's assessable income and are deemed to be dividends paid by the company, other than for withholding tax purposes. The existing section would be repealed and a strengthened provision inserted in its place.
As with the revision of section 108, the scope of the new section 109 would be extended to encompass those transactions which have essentially the same effect as those against which the existing provisions are directed.
To remove any doubt which may exist, the reference to amounts paid or credited is to be expressly made to include an asset transferred. The class of recipients of excessive payments to which the proposed new section applies would be extended to include indirect beneficial shareholders and their relatives.
To the extent that amounts paid or credited as remuneration for services rendered or as a retirement or termination payment exceed, in the Commissioner's opinion, a reasonable amount, they would not be deductible against the company's assessable income, and would be deemed to be dividends paid by the company out of profits derived by it as if the recipient of the amount were a shareholder.
Amounts deemed to be dividends under the new sections 108 or 109 would not be subject to the dividend franking rules which are to apply under the imputation system, as they do not fall within the definition of "frankable dividend" contained in section 160APA of Part IIIAA which is proposed to be inserted in the Assessment Act by clause 14 of the Taxation Laws Amendment (Company Distributions) Bill 1987.
New sections 108 and 109 would apply to relevant payments made on and after 5 June 1987.
Gifts (Draft clause 11)
The draft Bill would give effect to announced proposals to extend those provisions of the Assessment Act that authorise deductions for gifts of the value of S2 or more made to specified organisations to include the Australian-Hellenic Memorial Trust Fund and the Lionel Murphy Foundation. In accordance with announcements previously made, gifts made to the Lionel Murphy Foundation on or after 24 April 1987 would qualify for deduction, while those made to the Australian- Hellenic Memorial Trust Fund would qualify for deduction only where they are made on or after 1 April 1987 and on or before 30 June 1989.
The draft Bill would also modify references to certain organisations currently listed in the gift provisions of the Assessment Act, to reflect changes in the names of the bodies concerned.
Contributions to superannuation funds by eligible persons : Interpretation (Draft clause 12)
The draft Bill would amend the provisions of the income tax law to maintain eligibility for the deduction for contributions to private superannuation funds in circumstances where the contributor is also the subject of certain employer-provided superannuation benefits.
Under sections 82AAS and 82AAT of the Assessment Act, a deduction, limited to S1,500, is available for contributions made to qualifying superannuation funds, provided that the contributor is not a person for whom provision for superannuation benefits - to any extent - is funded by an employer or any other person.
On 26 June 1986, the Conciliation and Arbitration Commission agreed to the ratification by it, or a State industrial tribunal, of agreements between unions and employers providing for limited employer contributions to superannuation funds under certain conditions. The draft Bill would give effect to the proposal, announced on 22 December 1986, to amend the income tax law to ensure that taxpayers would not be denied deductions for contributions to qualifying superannuation funds by reason only that -
- they also receive employer-provided superannuation support arising from such an agreement; or
- in cases where an agreement cannot be ratified because of an industrial tribunal's limited power, they also receive employer-provided superannuation support arising under an agreement identical to a ratified agreement for employees in the same industry.
The amendment would apply in respect of employer contributions made under such agreements on or after 1 July 1986.
Taxing of certain educational assistance (Draft clauses 5, 17, 18, 35 and 36)
From 1 January 1987 payments under the Commonwealth's Assistance for Isolated Children Scheme (AIC) and the Veterans' Children Education Scheme (VCES) to or in respect of students 16 years or over are to be subject to tax. The removal from 1 January 1987 of the existing exemptions for these payments is consistent with the removal, from the same date, of the exemption for AUSTUDY secondary education assistance (previously paid under the Secondary Allowances Scheme (SAS)) by the Taxation Laws Amendment Act (No. 4) 1986.
The payments under AIC or VCES may be made to the student, or where the student is 16 or 17 years old, to a parent, guardian or trustee in respect of the student. Payments made to a parent, guardian or trustee would be treated as having been received in trust for the student. As such, the payment would not be assessable income of the parent, guardian or trustee.
The payments would be separate net income of the student for concessional rebate purposes.
This draft Bill would also extend, from 1 July 1987, the availability of the beneficiary rebates to students assessed on payments of AIC or VCES allowances. This is consistent with the availability of the rebates to recipients of AUSTUDY secondary education assistance from that date.
Changes to deeming provisions on change of residence (Draft clause 24)
The provisions of the draft Bill would implement the proposal, announced on 23 December 1986, to amend the capital gains and capital losses provisions of the Assessment Act relating to the treatment of assets owned by a taxpayer who ceases to be a resident.
Resident taxpayers are liable to tax on capital gains on the disposal of assets wherever situated, while non-residents are liable to tax on capital gains on the disposal of taxable Australian assets only. Where a taxpayer ceases to be a resident of Australia, the existing law deems there to have been a disposal of all the assets owned by the taxpayer at the time that the taxpayer ceases to be a resident (other than taxable Australian assets or assets that were acquired by the taxpayer before 20 September 1985). Also, where a resident partnership ceases to be a resident, the partners in the partnership are deemed to have disposed of the assets of the partnership (other than taxable Australian assets or assets that were acquired by the partners before 20 September 1985). These requirements are necessary to ensure that tax on gains in respect of assets other than taxable Australian assets that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non- resident status.
Under provisions contained in the draft Bill, the application of subsections 160M(8) and (11) of the Assessment Act would be modified where a taxpayer (not being a company or trustee of a trust estate) has been a resident for a total period of less than five years in the period of ten years immediately before the time that the taxpayer ceased to be a resident or a partnership in which the taxpayer is a partner ceased to be a resident partnership. Broadly, by draft subsection 160M(llA) an asset that otherwise would be deemed to have been disposed of, would not be taken to have been disposed of in circumstances where the asset was owned by the taxpayer at the time he or she last became a resident, or was acquired by the taxpayer since that time as a beneficiary in the estate of a deceased person or as a surviving joint tenant.
Another change, contained in draft subsection 160M(11B), is that a taxpayer (being a natural person) who ceases to be a resident could elect that the provision, that would otherwise deem a particular asset to have been disposed of when he or she ceased to be a resident, not apply. By draft subsection 160M(11C), the election would have to be made in writing on or before the date of lodgment of the return for the year of income in which residency ceased and it would have to apply in respect of all assets owned by the taxpayer that would otherwise be deemed to have been disposed of.
The effect of the election is that an asset subject to the election would be treated as a taxable Australian asset until the time of its disposal, or until immediately after the taxpayer again becomes a resident. This would mean that gains and losses on the asset which relate to the period in which the taxpayer was not a resident would be included in the gain or loss which is subject to the capital gains and capital losses provisions at the time of disposal of the asset.
By draft subclause 36(13), these new provisions would apply to assessments made for the year of income in which 20 September 1985 occurred (the date of first effect of the tax on capital gains) and all subsequent years of income.
Return of capital on investment in trust (Draft clauses 25 and 26)
The draft Bill would omit existing subsections 160ZM(2) and (3) of the Assessment Act and replace them with new subsections 160ZM(2-3A) to give effect to the proposal announced on 17 December 1986 to amend the capital gains and capital losses provisions relating to the return of capital on an investment in a trust. Section 160ZM operates to reduce the cost bases of interests or units in a trust where a beneficiary or unit holder receives a distribution that is not included in the assessable income of the beneficiary or unit holder, and is not in respect of the disposal of the interest or unit.
The provisions contained in this draft Bill would apply where the distribution made by the trustee includes income that was freed from tax by the allowance of deductions for capital expenditure on traveller accommodation or certain income- producing buildings. In these circumstances, the cost base of the interest or units in the trust would not be reduced for the purpose of determining capital gains by the amount of the distribution which is attributable to the deductions allowed. By draft subclause 36(14), these new provisions would apply where such a payment is made by a trustee after 17 December 1986.
Partly paid bonus shares and bonus units (Draft clauses 27 to 33)
Under the existing capital gains and capital losses provisions, the date of acquisition of bonus shares is taken to be the date on which the taxpayer acquired the original shares in respect of which the bonus shares are issued. Accordingly, a gain or loss on the disposal of bonus shares, where the original shares were acquired before 20 September 1985, is not subject to the capital gains and capital losses provisions because the deemed date of acquisition of the bonus shares is before 20 September 1985.
Similar rules also apply to the issue of bonus units that resulted in no amount being included in the assessable income of the recipient unitholder.
By substituting new sections 160ZYD and 160ZYG in the Assessment Act, the draft Bill would implement the proposal announced on 10 December 1986 to amend the law where the original shares or units were acquired before 20 September 1985, the bonus shares or units were issued after 1pm Eastern Summer Time on 10 December 1986, and a payment is subsequently made by or on behalf of the taxpayer in respect of the bonus shares or units, e.g., payments of calls of capital in respect of such partly paid bonus shares or units. In this case, the date of acquisition of the bonus shares or units would be taken to be the date on which liability to make the first payment arose.
Where the new provisions would apply to bonus shares or units to deem them to have been acquired at the date on which liability to make the first payment arose, the cost base of the bonus shares or units would include an amount which is, broadly, equal to their market value at that time.
Where bonus shares issued after 30 June 1987 are not within the changes contained in draft clause 33 in respect of bonus shares issued after that date (that is, where no part of their paid-up value is a dividend), these new measures in respect of partly paid bonus shares could apply.
Bonus shares issued after 30 June 1987 (Draft clause 33)
The draft Bill would also amend the capital gains and losses provisions by the inclusion of new rules dealing with bonus shares issued after 30 June 1987. This proposal was announced on 10 December 1986.
The amendments would apply to all bonus shares issued after 30 June 1987, where some or all of the paid-up value of the bonus shares is a dividend. Accordingly, bonus shares paid wholly out of a genuine share premium account would continue to be subject to the existing rules (including those rules as they would be modified by the new provisions in the draft Bill in respect of partly paid bonus shares).
Under draft Division 8A which would be inserted by this draft Bill in Part IIIA of the Assessment Act, the cost base, indexed cost base and reduced cost base of the bonus shares would include that part of their paid-up value that was included in assessable income as a dividend under that Act. The acquisition date of the relevant bonus shares would be determined under section 160U. This would mean that generally the bonus shares would be taken to have been acquired at the time of their issue, so that their disposal would be subject to the capital gains and capital losses provisions, irrespective of the date of acquisition of the original shares in respect of which the bonus shares were issued.