Bills Digest 82 1995-96 Taxation Laws Amendment Bill (No. 1) 1996


Numerical Index | Alphabetical Index

WARNING:
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

CONTENTS

Passage History

Date introduced: 9 May 1996
House: House of Representatives
Portfolio: Treasury
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.

Purpose

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.

Background

As the Bill deals with two separate measures, the background to each measure will be discussed in the Main Provisions section.

Main Provisions

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 circumstances).

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 are satisfied:

  • 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 deduction.

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.

Contact Officer and Copyright Details

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 amendments.

PRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1323-9032
© Commonwealth of Australia 1996

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1996.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 17 May 1996

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