This Digest is prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments.
This Digest was available from 17 May 1996
Date introduced: 9 May 1996
House: House of Representatives
Commencement: Royal Assent. However, measures
relating to the valuation of off-market share buy back schemes will
have affect from the time of announcement, ie. when the 1995-96
Budget was announced.
The Bill will:
- reduce the provisional tax uplift factor for the 1996-97 years
of income from 8% to 6%; and
- alter the rules applying to the calculation of the value of
off-market share buy backs.
As the Bill deals with two separate measures, the background to
each measure will be discussed in the Main Provisions section.
Provisional Tax Uplift Factor
Provisional tax is levied on individual taxpayers and most
trustees who earn assessable income that is not subject to the PAYE
scheme that applies to those that earn wages and salaries.
Provisional tax applies where the income from wages and salary is
$1000 or more in the previous income year or, if the taxpayer
earned no wages or salary in the previous year, where they would
have been liable to tax in the previous year. A common area where
provisional tax applies is investment income, such as regular
payments of interest or dividends.
The amount of provisional tax payable is based on the previous
years income subject to provisional tax multiplied by the `uplift
factor'. The uplift factor is used to calculate the expected income
in the year of taxation and, hence, the amount of tax payable on
that income. Where the provisional tax payable in the previous year
did not exceed $8 000, provisional tax is payable at a time
specified by the Commissioner of Taxation, which is not to be
earlier than 30 March in the year of income. Where provisional tax
in the previous year exceeded $8 000, provisional tax is generally
payable in four instalments equally spaced through the year
commencing on 1 September in the year of income. The final payment
is used as an adjustment to reconcile the provisional tax paid
during the year with the tax payable.
If a taxpayer considers that their income will not increase by
the amount of the uplift factor they may elect to self-assess their
provisional tax liability. However, penalties apply if there is a
substantial underestimation of the provisional tax payable.
Currently, the Income Tax Assessment Act 1936 (ITAA)
provides that the uplift factor for 1996-97 is 8% and, unless
Parliament otherwise provides, 10% for other years (it is normal
for the uplift factor to be altered to reflect changes in economic
Prior to the 1996 General Election, the then Opposition
announced that if elected it would reduce the uplift factor for
1996-97 from 8% to 6%, stating that the reduced rate would be of
benefit to small business as it would reduce the instalments of
provisional tax payable by such entities.
It may be noted that the proposed uplift factor significantly
exceed the expectations for economic growth for 1996-97, which is
estimated by Treasury to be currently running at 3.25%.
Item 1 of Schedule 1 of the Bill provides that
the uplift factor for 1996-97 will be 6% and will remain at 10% for
other years unless Parliament provides otherwise.
Share Buy Backs
Companies with share capital are restricted in the circumstances
in which they may buy back shares in the company. Broadly, a
company may only buy back its shares if the following conditions
- the articles of association permit a buy back;
- only ordinary shares can be bought back;
- the buy back does not exceed 10% of the company's shares in a
12 month period; and
- the directors have made a solvency declaration within 2 months
of the buy back.
The taxation implications of buy backs centre on two main areas,
the calculation of the consideration that the seller has received
for the shares for purposes of the capital gains tax (CGT); and the
amount of income or loss that is to be included in ordinary income.
This Bill deals only with the later matter.
In determining the consideration paid for the shares, the
procedure to be used depends on whether the share was purchased on
the stock market, where the buyer and seller would generally not be
aware of each others identity, and off market transactions. In the
former case the determination is simple as the purchase price is
used. The later is more complex and is dealt with in section
159GZZZQ of the ITAA which provides that the amount received in
consideration for the share will be its purchase price less any
amount that was a dividend. This section will be amended by Part 2
of Schedule 1 of the Bill.
The first amendment is that, subject to the amendments mentioned
below, the consideration received will be the purchase price of the
share (item 6).
Subject to the application of any reduction amount (see below),
the amount of consideration received will be the market value of
the share as if there was no buy back proposal. The reduction
amount is any dividend included in the consideration, determined
according to existing section 159GZZZP, that is included in the
taxpayers assessable income or is an eligible non-capital amount,
ie. an amount that is not attributable to a share premium account,
a share capital account, or profits from the revaluation of assets
that have not been disposed of.
However, if the amount calculated above results in the taxpayer
incurring a capital loss or a deduction, the reduction amount will
be reduced if a rebate has been allowed in respect of the dividend.
The amount of the reduction will be the rebate divided by the
company tax rate. The maximum reduction will be the amount of the
loss. This will have the effect of reducing the capital loss or
Application: The amendments will apply to buy
backs after 7.30 pm. on 9 May 1995. However, transitional
provisions mean that if the proposed buy back was announced,
arranged or began to be implemented before this time and was not
part of a scheme to increase losses or deductions the amendments
will not apply to such buy backs (Division 2).
This measure is the same as one contained in Taxation Laws
Amendment Bill (No. 5) 1995. That Bill lapsed on the dissolution of
Parliament for the 1996 General Election.
Chris Field Ph. 06 277 2439
16 May 1996
Bills Digest Service
Parliamentary Research Service
This Digest does not have any official legal status. Other
sources should be consulted to determine whether the Bill has been
enacted and, if so, whether the subsequent Act reflects further
PRS staff are available to discuss the paper's contents
with Senators and Members and their staff but not with members of
© Commonwealth of Australia 1996
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Published by the Department of the Parliamentary Library,
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Last updated: 17 May 1996
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