Senate

Taxation Laws Amendment Bill (No. 4) 1995

Income Tax (Franking Deficit) Amendment Bill 1995

Income Tax (Deficit Deferral) Amendment Bill 1995

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
This Memorandum Takes Account of Amendments Made by the House of Representatives to the Bill as Introduced

General outline and financial impact

TAXATION LAWS AMENDMENT BILL (NO. 4) 1995

Capital gains tax - amendments relating to value shifting

Amends the CGT provisions of the income tax law to:

·
introduce specific provisions for the transfer of depreciable assets between commonly owned companies;
·
allow for grouping of assets for the purpose of determining whether adjustments to the cost bases of shares and loans in a transferor company are required; and
·
introduce other technical amendments to simplify and clarify the operation of the division.

Date of effect: The proposed amendments apply generally to assets transferred after 7.30 pm AEST on 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: The cost to revenue of this measure will be insignificant.

Compliance cost impact: The amendments will considerably reduce the compliance costs of company group reorganisations. Currently, the cost base adjustments apply on an asset by asset basis. The amendments will permit the grouping of some assets. The amendments also simplify the cost base adjustments in relation to transfers of depreciable assets by enabling companies to use data already available in their records.

Capital gains tax - increase in personal-use asset thresholds

Amends the CGT provisions to increase the thresholds applying to personal use assets. The new thresholds will be $500 for listed personal-use assets and $10000 for non-listed personal-use assets. The amendment will also:

·
include a measure in relation to listed personal-use assets to ensure that the threshold applies appropriately to sets of articles; and
·
ensure that where an asset is jointly owned, the threshold is apportioned appropriately.

Date of effect: The amendment to increase the thresholds for listed and non listed personal-use assets will apply to disposals of assets from 1 July 1995. The amendments relating to sets of listed personal-use assets and jointly held assets will apply to assets acquired after the date of Royal Assent.

Proposal announced: 1995-96 Budget.

Financial impact: A cost to revenue of up to $2 million per year is expected from the measures.

Compliance cost impact: An overall reduction in compliance costs is expected from the measures due to the reduction in the number of personal use assets to which CGT will apply.

Capital gains tax - taxable Australian assets

Amends the income tax law to ensure that CGT will apply to disposals of taxable Australian assets used to produce franked dividends or income subject to withholding tax.

Date of effect: Applies generally to disposals of taxable Australian assets on or after 20 September 1985. Where a private binding ruling has been issued to a taxpayer in accordance with the Taxation Administration Act 1953 in relation to a transaction entered into prior to 7.30 pm AEST on 9 May 1995, the terms of the ruling will prevail.

Proposal announced: 1995-96 Budget.

Financial impact: The financial impact of this measure is unquantifiable.

Compliance cost impact: This amendment is designed to remove any uncertainty in the law and will therefore reduce the cost of complying with the law. Non-residents who, in the absence of a private binding ruling, have not included in their returns realised gains on the disposals of affected taxable Australian assets will incur costs in amending earlier assessments to reflect the capital gains realised. However, the normal time limits on original and amended assessments will apply.

Capital gains tax - exempt receipts

Amends the CGT provisions to:

·
extend the CGT relief for disposals of shares in foreign companies which give rise to dividends, to shares created prior to 26 June 1992;
·
limit the CGT relief available under subsection 160ZA(7) for disposals of shares giving rise to dividends to amounts which are not paid out of capital, or share premium or revaluation reserves; and
·
limit the operation of subsection 160ZA(8) to eligible termination payments.

Date of effect: The proposed amendment to extend CGT relief to disposals of shares created before 26 June 1992 will apply to disposals of assets occurring on or after the commencement of the 1990-91 income year of the taxpayer (the year from which section 23AJ applies).

The amendments to limit the CGT relief provided by subsections 160ZA(7) and 160ZA(8) will apply to disposals occurring after 7.30 pm AEST on 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: The financial impact of these measures is unquantifiable.

Compliance impact: There will be some increase in compliance costs for resident companies as they have to obtain information from foreign companies regarding the source from which dividends are paid. However, only resident companies with a 10% or greater voting interest in the foreign companies will be affected.

Capital gains tax - compulsory rollover of assets

Amends the CGT provisions to require that, where a company disposes of an asset to a related company and the disposal gives rise to a capital loss, there will be a compulsory rollover of the asset for CGT purposes. An exception will be provided for assets transferred to companies which are to be sold outside the group in the income year of the transfer or the next income year. Cost base adjustments for transfers of interests in controlled foreign companies and foreign investment funds are also included.

Date of effect: The amendment will apply to the transfer of assets between related companies taking place after 7.30 pm AEST on 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of this amendment can be made. However, the measure has the potential to prevent a significant future loss to revenue.

Compliance cost impact: There will be no increase in compliance costs as a consequence of the compulsory rollover of loss assets. Companies are already required to determine the CGT consequences of asset transfers whether or not a gain or loss is to be realised at the time of the transfer. There will be a marginal increase in record keeping requirements for the rollover assets. Where a loss is able to be realised on the transfer of an asset because the transferee company is to be sold within two income years, records have to be maintained to confirm that the sale takes place and that the asset is not reacquired by the transferor in the four year period following the transfer.

Capital gains tax - amendment or replacement of trust deeds

Amends the income tax law to provide that CGT will not apply where a complying approved deposit fund (ADF) converts to a complying superannuation fund, or an existing complying superannuation fund or complying ADF amends its trust deed in order to comply with the Superannuation Industry (Supervision) Act 1993 , (the SIS Act) provided that there is no change in the assets of the fund or interests of members in the fund.

Date of effect: Applies to disposals of assets occurring on or after 12 January 1994.

Proposal announced: 1995-96 Budget.

Financial impact: The revenue impact of this proposal is insignificant.

Compliance cost impact: None.

Dividend imputation

Amends the income tax law as a result of the increase in the company tax rate from 33% to 36% to require companies to establish a class C franking account and to convert existing class A and class B franking account balances into that account.

These amendments include the correction of certain existing defects in the dividend imputation provisions to ensure they are not replicated when implementing the new class C franking account arrangements. As a result:

·
mutual life insurance companies will be entitled to a franking rebate for franked dividends received through a trust or partnership; and
·
non-mutual life insurance companies will not be entitled to a deduction for the imputation credit attached to a franked dividend received through a trust or partnership if a franking rebate is available.

Date of effect:

The class C franking account arrangements will apply from 1 July 1995.

The life insurance company amendments will apply from the time the defects in the current provisions first arose. This means from 22 August 1990 for the mutual life company amendment, and from 7 December 1990 for the non-mutual life company amendment.

Proposal announced: The class C franking account arrangements were announced in the 1995-96 Budget. The other amendments have not previously been announced.

Financial impact:

There is insufficient data available on which a reliable estimate of the revenue impact of the class C franking account arrangements can be made. However, it is considered that the revenue impact is minimal.

The mutual life insurance company amendment will prevent an unintended gain to the revenue arising over a period of years.

The non-mutual life insurance company amendment will prevent a significant potential loss to the revenue.

Compliance cost impact:

The class C franking account arrangements will reduce compliance costs for most companies because they will convert from the present dual franking account system to a single franking account. Initial costs will be incurred in establishing the class C franking account but these are not expected to be significant.

The other amendments will have no impact on compliance costs.

Franking credits - international profit misallocation

Amends the income tax law to deny franking credits under the imputation system for tax paid by companies as a result of a transfer pricing or non-arm's length dealing adjustment made under the Income Tax Assessment Act 1936 or a double taxation agreement.

Date of effect: 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: Estimated gains to revenue are $3 million in the 1994-95 year, $21 million in the 1995-96 year and $25 million for subsequent years.

Compliance cost impact: A slight increase in compliance costs by those companies which have misallocated or shifted profits offshore. Modification to franking accounts would need to be made to ensure that franking credits do not arise in relation to tax payable as a result of a transfer pricing or non-arm's length dealing adjustment.

Demutualisation of insurance companies

Inserts a new Division into the income tax law to deal with the taxation treatment of certain transactions likely to take place in the course of the demutualisation of a life or general insurance company.

Date of effect: Applies to entities that existed as mutual life or general insurance companies at 7.30 pm AEST on 9 May 1995 and which undertake a demutualisation arrangement after that date.

Proposal announced: 1995-96 Budget.

Financial impact: The nature of the measure is such that the cost to revenue cannot be reliably estimated.

Compliance cost impact: Most costs incurred in the demutualisation process will be incurred irrespective of the taxation consequences. There will be some costs incurred in ascertaining the 'embedded value' of a life insurance company or the 'net tangible asset value' of a general insurance company. These costs are inevitable if the general tax system is to apply to subsequent transactions in the shares of the demutualised companies.

Establishment costs of horticultural plants

Amends the income tax law to allow capital expenditure incurred in establishing plants for horticulture to be written off for taxation purposes.

Date of effect: Applies to expenditure incurred in establishing horticultural plantations after 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: There is expected to be a cost to revenue of $1 million in 1997-98, $2 million in 1998-99 and $4 million in 1999-2000.

Compliance cost impact: Taxpayers will need records to show what capital expenditure they incur in establishing plants for horticulture, and when those plants become capable of use in horticulture or are destroyed. Other records may be needed, if plants are sold or if 'safe harbour' effective life rates are chosen.

Forestry plantations

Amends the income tax law to ensure that tax is only levied on the net proceeds of the sale of standing timber, where taxpayers who conduct timber operations purchased the timber as an existing forest or plantation.

Date of effect: Applies to sales of standing timber after 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: There is expected to be a cost to revenue of $1 million in 1995-96 and $4 million in subsequent years.

Compliance cost impact: The records of the cost of acquisition of standing timber, already routinely kept by taxpayers in these circumstances, will now be required for taxation purposes.

Research & development

Amends the income tax law to deny deductions under section 73B for expenditure incurred to a private tax exempt body, where that expenditure is not fully at risk.

Date of effect: Expenditure incurred from 7.30 pm AEST 9 May 1995. Arrangements with at least finance scheme approval before that time have the benefit of transitional rules.

Proposal announced: 1995-96 Budget.

Financial impact: There is expected to be a gain to revenue of $20 million in 1995-96, $85 million in 1996-97, $120 million in 1997-98 and $145 million in 1998-99.

(Note: The revenue gain of this measure is less than was announced in the 1995-96 Budget because of a change to the transitional arrangements.)

Compliance cost impact: There will be a minor compliance cost impact on syndicates that were approved by 9 May 1995. Those syndicates will not be affected by the proposed amendment if they registered with the Industry, Research and Development Board and had documented contractual arrangements in place by 3 August 1995.

Sales tax - exemption for rice milk

Amends the Sales Tax (Exemptions and Classification) Act 1992 to provide for an exemption for beverages consisting principally of rice milk.

Date of effect: The amendments will apply from the date of introduction of the Bill.

Proposal announced: The measure was announced by the Treasurer in a Press Release dated 20 September 1995.

Financial impact: The cost to revenue of exempting rice milk from sales tax is estimated to be less than $300,000 per annum.

Compliance cost impact: This measure will reduce compliance costs that might otherwise be incurred in the sale of certain rice milk beverages. That is, manufacturers, importers, and wholesalers of rice milk, that is exempt from sales tax, will no longer need to lodge returns in relation to that rice milk.

Trust losses

Inserts a new Schedule , dealing with trust losses, into the income tax law. This Schedule sets out rules that have to be satisfied by trusts before a deduction is allowed for prior year and current year losses.

Date of effect: Subject to certain transitional arrangements, the proposed measures will apply to all trafficking in trust losses from 7.30 pm AEST on 9 May 1995.

Proposal announced: 1995-96 Budget.

Financial impact: The measures will prevent a significant erosion of the tax base that would otherwise have arisen from trafficking in trust losses. The estimated gain to revenue from the measures is $90 million in 1995-96, $185 million in 1996-97, $155 million in 1997-98 and $65 million in 1998-99.

Cost of compliance: The measures will mainly apply where there is an attempt to use trust losses to obtain an unjustified benefit.

There will be some costs for trusts in monitoring the ownership of trust interests to ensure that the continuity of ownership test is satisfied. This is unlikely to be a problem for trusts that have natural persons as beneficiaries. However, it will be more difficult to monitor changes of interests in trusts where there are entities interposed between the loss trust and the final beneficiaries. Special tracing rules will apply to family trusts which will assist in reducing compliance costs in this area.

Trusts with a large of number of beneficiaries, such as some unit trusts, will also face difficulties in testing for changes in ownership. However, for listed, widely held public unit trusts, concessional rules have the effect that ownership should be tested generally only where there are abnormal transactions. Abnormal transactions would include those associated with activity in the nature of takeover or merger. Consequently, the costs will be kept to a minimum consistent with the objectives of the measures. Moreover, listed, widely held public unit trusts would generally have to test for continuity of ownership only if they fail the same business test.

Concessional rules for testing changes in ownership are also provided for widely held public unit trusts that are not listed.

The new provisions have been written in the simplified drafting style. This should assist taxpayers in obtaining a clear understanding of the provisions and therefore help to minimise costs of complying with the law.

Non-compulsory uniforms or wardrobes

Amends the income tax law to transfer responsibility for the maintenance of the Register of Approved Occupational Clothing (the Register) from the Textiles, Clothing and Footwear Development Authority (TCFDA) to the Department of Industry, Science and Technology.

Date of effect: 1 March 1996.

Proposal announced: 1995-96 Budget.

Financial impact: This change will have no impact on revenue.

Compliance cost impact: This change will have no impact on the compliance cost of employers. The Register will continue to be administered in the same way and it is envisaged that the application procedure will remain unchanged. The new administration unit will have the same address as the former TCFDA.

INCOME TAX (FRANKING DEFICIT) AMENDMENT BILL 1995

Amends the Income Tax (Franking Deficit) Act 1987 to impose class C franking deficit tax. The liability for class C franking deficit tax is provided for as part of the class C franking account arrangements introduced by the Taxation Laws Amendment Bill (No. 4) 1995.

Date of effect: 1 July 1995.

Proposal announced: The class C franking account arrangements were announced in the 1995-1996 Budget on 9 May 1995.

Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of the class C franking account arrangements can be made. However, it is considered that the revenue impact is minimal.

Compliance cost impact: The class C franking account arrangements will reduce compliance costs for most companies because they will convert from the present dual franking account system to a single franking account. Initial costs will be incurred in establishing the class C franking account but these are not expected to be significant.

INCOME TAX (DEFICIT DEFERRAL) AMENDMENT BILL 1995

Amends the Income Tax (Deficit Deferral) Act 1994 to impose class C deficit deferral tax. The liability for class C deficit deferral tax is provided for as part of the class C franking account arrangements introduced by the Taxation Laws Amendment Bill (No. 4) 1995.

Date of effect: 1 July 1995.

Proposal announced: The class C franking account arrangements were announced in the 1995-1996 Budget on 9 May 1995.

Financial impact: There is insufficient data available on which a reliable estimate of the revenue impact of the class C franking account arrangements can be made. However, it is considered that the revenue impact is minimal.

Compliance cost impact: The class C franking account arrangements will reduce compliance costs for most companies because they will convert from the present dual franking account system to a single franking account. Initial costs will be incurred in establishing the class C franking account but these are not expected to be significant.


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