Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 Amounts repaid are excluded from assessable income
Outline of chapter
3.1 Schedule 3 to this bill amends the ITAA 1997 to treat previously assessable income as not assessable income nor exempt income where the taxpayer must repay an amount in a later year of income. It will also amend the ITAA 1936 to permit amendments of income tax assessments for the year in which the amount was originally treated as assessable income despite the normal time limit for amendments to assessments being exceeded.
Context of amendments
3.2 There is no provision in the ITAA 1936 or the ITAA 1997 which permits an amount of previously assessable income to be excluded from an assessment where that income is repaid in a later year of income. Where a taxpayer is not carrying on a business, there is also no deduction available in the year of income in which the previously assessable income is repaid, because the repayment is not incurred in gaining or producing the assessable income of the later year.
3.3 The taxpayer would have paid or been required to pay income tax on the payment in the income year in which the payment was received. However, the taxpayer may be required to repay some or all of the payment in gross terms, that is including the amount of tax paid or payable on the amount.
Summary of new law
3.4 This measure inserts Division 22 into the ITAA 1997. This Division provides that amounts that were previously treated as assessable income and that must be repaid are not assessable income. Those amounts are also not exempt income.
3.5 This measure amends section 170 of the ITAA 1936 to insert subsection 170(10AB) to permit amendments of assessments in respect of repayments of previously assessable income despite time limits for amendments being exceeded.
Detailed explanation of new law
3.6 Schedule 3 amends the income tax law so that taxpayers will be permitted to amend an earlier year's income tax assessment to exclude previously assessable income which must be repaid when it is repaid in a later year of income. [Schedule 3, item 4, paragraphs 22-5(1)(a) and (b)]
3.7 The provision will apply even if the amount which must be repaid is only a part of the amount which was initially received. The obligation to repay an amount may have existed when the payment was made or it may have come into existence at a later time. [Schedule 3, item 4, subsection 22-5(2)]
3.8 For example, the ADF has paid retention bonuses to their members to encourage them to serve an agreed period in the ADF. These bonuses are paid as a lump sum, and are required to be repaid on a pro-rata basis if the ADF member resigns before the end of the agreed retention period. The amount to be repaid includes any tax paid or payable on that part of the retention bonus when it was received which results in the taxpayer being in a detrimental financial position.
3.9 The amendment will ensure that where a taxpayer must repay previously assessable income and satisfies the requirements of the provision the taxpayer is able to amend the income tax assessment for the year in which the amount was paid. The taxpayer will then receive a refund of the tax paid.
3.10 The provision will not apply where a taxpayer can claim a deduction in respect of the repayment of previously assessable income. This will occur where the taxpayer is carrying on a business and the repayment occurs as part of carrying on that business. [Schedule 3, item 4, paragraph 22-5(1)(c)]
3.11 The provision also will not apply where a taxpayer has received instalments of money that have to be repaid upon receipt of a lump sum for compensation or damages for a wrong or injury suffered in the taxpayer's occupation. This would occur, for example, where a taxpayer had received instalments of worker's compensation or sickness allowance and later received a lump sum in respect of these payments necessitating the repayment of the instalments. [Schedule 3, item 4, subsection 22-5(3)]
3.12 The usual time limits within which to request an amendment to an assessment do not apply to these amendments to treat previously assessable income as not assessable income or exempt income. [Schedule 3, item 1, subsection 170(10AB)]
Application and transitional provisions
3.13 The amendments are to apply to the 1996-1997 and later years of income. Since the ITAA 1997 did not commence until the 1997-1998 year of income there are some transitional provisions. [Schedule 3, items 6 to 8]