WARNING:
This Digest is prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments.
This Digest was available from 2 August 1996.
CONTENTS
Taxation Laws Amendment Bill (No. 2) 1996
Date Introduced: 27 June 1996
House: House of Representatives
Portfolio: Treasury
Commencement: The measures discussed in this
Digest have varing application dates, which are dealt with in the
Main Provisions section of the Digest.
The main amendments contained in the Bill deal with:
- extending the concessional tax treatment in relation to
Off-shore Banking Units to such entities with Australian
investments below a certain level in their investment portfolio
(although the income from Australian investments will not be
subject to concessional treatment);
- the repeal of a provision that has the potential to restrict
certain off-shore mortgage transactions;
- the treatment of commercial debt forgiveness;
- the treatment of certain, award specific superannuation
payments under the superannuation guarantee scheme;
- the use of tax file numbers in the tracing of superannuation
payments; and
- the definition of small fringe benefits to provide that most
benefits under $100 will be exempt.
As there is no central theme to the Bill, the background to the
various amendments will be discussed below.
Offshore Banking Units
Under the Income Tax Assessment Act 1936 (ITAA), the
Treasurer may declare certain organisations to be offshore banking
units (OBUs). The organisations are:
- banks authorised under the Banking Act 1959 to operate
in Australia;
- State authorities that operate as State banks;
- a person in regard of whom the Treasurer is satisfied that that
they are an authorised foreign exchange dealer; and
- a company that is owned by an OBU, other than a foreign
exchange dealer (section 128EA).
OBUs exist to facilitate the flow of international capital, with
the purest form of an OBU being one that engages in borrowing funds
overseas and on-lending the funds to a third party that is also not
resident in Australia. However, the pure model is complicated by a
number of factors, such as the desire to regulate the operations of
an OBU in relation to residents to ensure that domestic banks are
not disrupted by OBU activities, to attempt to restrict
international money laundering and to require resident OBUs to
contribute to taxation revenue.
Prior to 1992, Australian OBUs were offered concessions from
withholding tax in relation to certain transactions in an attempt
to attract more of the industry to Australia. The concessions
proved insufficient, as OBUs continued to pay the normal rate of
company tax on OBU income compared with concessional treatment
available in other countries, particularly in very low tax 'tax
havens'. In the 1992 One Nation statement, it was announced that
the rate of company tax for OBUs would be reduced to 10% for income
from certain, mostly non-resident related transactions. These are
known as offshore banking activities (OBAs) and comprise some very
technical financial definitions. In brief, OBAs are:
- borrowing or lending currency or gold to or from a
non-resident;
- providing a guarantee or underwriting a risk in relation to
offshore activities;
- trading in securities issued by non-residents, shares or units
in a trust issued by a non-resident, in futures, currency or
currency options or certain precious metals that are not expressed
in Australian currency;
- entering certain contracts that are not expressed in Australian
currency;
- acting as a broker, agent or trustee for a non-resident in
relation to an investment that is not made in Australian currency
and involves investing outside Australia;
- providing advice in relation to a type of investment referred
to above; or
- engaging in hedging activity in relation to borrowing or
lending activities.
The reason for the 10% concessional tax rate given in the One
Nation statement was :
A 10 per cent tax rate for profits from offshore banking
will provide further stimulus to the development of offshore
banking in Australia at a time when such activity might be shifted
from Hong Kong to elsewhere in the Asia Pacific region.(1)
The operation of Australian and various overseas OBU concessions
were examined in an article in the Taxation Institute of
Australia's publication Taxation in Australia in August
1994. In relation to potential competitors in the Asia Pacific
region, the most viable competitors were the Cook Islands and
Singapore.
The Cook Islands is a 'tax haven' and imposes no tax on profits
from the operation of OBUs. While OBU activity was growing in the
early 1990s, recent events that have seen the Cook Islands facing
potential bankruptcy are likely to remove some of the
attractiveness of the Cook Islands as a place to invest in due to
an increased risk of political instability.
Singapore has a 10% tax rate on profits from the operation of
OBUs, the same as the Australian rate. However, Singapore has the
additional advantage that dividends paid to residents from OBU
activity are also tax free. In Australia such dividends are taxed
at marginal rates less any franking amount. However, as the rate of
tax is 10%, any franking credits available are likely to be
minimal. Singapore also enjoys other advantages over both Australia
and the Cook Islands, the main one being that it is located in a
time zone that is the closest between Japan and Europe for a major
financial centre, thereby facilitating the 24 hour market between
the major banking operations in the USA, Europe (principally
London) and Asia (principally Hong Kong and Japan). In relation to
the Australian move to match the Singaporian tax rate for OBUs to
attract business to Australia the article comments:
Even if Australia matched incentives available in Singapore,
that may not attract business, given the number of offshore centres
and the fact that so many banks are established in
Singapore.
Australia may well have entered the field too late to become
a major player, although it could be expected that the incentives
it offers would create some growth in the offshore banking
industry.(2)
The proposal to allow OBUs to also have domestic investments,
that will not be subject to the concessional tax rate but will
allow OBU involvement in domestic investment, was first announced
by the previous government as part of the Innovate Australia
statement. The change was seen as allowing Australian based OBUs
greater flexibility to allow them to compete more effectively for
OBU business. The statement also included other, minor measures
that will effect OBUs that will also be implemented by this
Bill.
The second reading speech to the Bill supported the reasons for
the amendments given by the previous government, also arguing that
the amendments would enhance the development of OBUs in
Australia.
A definition of 'portfolio investment' will be inserted into
theITAA by item 11 of Schedule 1. The term is defined to be one or
more investments managed for the benefit of a non-resident. The
average Australian asset percentage (ASP) of a portfolio investment
for a year will be the average of the ASP over the months of the
yearly accounting period for the OBU. The monthly percentage will
be worked out by determining the percentage of the value of
'Australian things' in the portfolio. An 'Australian thing' is
defined to be:
- a resident Australian company;
- a resident unit trust;
- land or buildings located in Australia;
- a loan made to an Australian resident; or
- in any other case, the 'thing' is located in Australia.
Item 10 of Schedule 1 of the Bill will insert a definition of
'portfolio investment' into the categories of OBA contained in
section 121D of theITAA. The proposed definition provides that an
activity will be an OBA, and therefore subject to concessional tax
treatment, if the ASP is 10% or less of the individuals portfolio
investment where it is a managed investment for a non-resident, the
investment was made by the OBU, the investment was made with a
non-resident and the investment was not made in Australian
currency.
There are also a number of consequential amendments related to
the above amendments, including the calculation of the tax payable
(which is determined by a complex formula rather than a fixed 10%
rate, although the result is a 10% tax rate), and the
non-deductibility of foreign tax paid on such investments due to
their concessional tax treatment.
Other amendments contained in Part 1 of the Schedule to the Bill
also include minor changes to the OBU scheme, in particular to
extend certain concessions currently available to activities
involving money to similar activities that involve gold.
Application: For the 1996-7 and later years of
income (Item 29).
Repeal of section 261
Another measure associated with Australia's position in regard
to international transactions is the proposed repeal of section 261
of the ITAA.
Section 261 has a long history and was part of State Land Tax
Acts prior to its inclusion in the original Commonwealth Income
Tax Assessment Act 1915. Basically, section 261 provides that
if a mortgage executed after 13 September 1915 provides for the
mortgagor to be liable to pay the tax in respect of the mortgage,
the agreement will be void. The original intention of the provision
was to prevent a mortgage agreement from imposing taxation
obligations on the mortgagor in addition to other obligations
specified under the agreement.
While the application of section 261 to domestic mortgages has
ceased to be relevant due to changes in changes in the market that
have seen liabilities clearly expressed and not related to taxation
obligation, the provision still has relevance for certain
international transactions, where the potential impact of taxation
is not as easily quantified. In many such transactions, the
borrower (mortgagor if property is involved) agrees to provide
certainty to the lender by agreeing upon a post tax return that
involves the borrower agreeing to pay tax involved on the
transaction. In modern terms, the tax involved is generally the
interest withholding tax imposed on payments to non-resident
lenders.
Prior to 1992, section 261 had not been subject to any taxation
rulings or subject to Court action. That changed with the case of
David Securities Pty Ltd v Commonwealth Bank of Australia,
where the High Court held that a standard international financing
contract that required the borrower to pay the lenders mortgage tax
liabilities prior to paying the specified interest to the lender
was void. In the case, the tax liability borne by the borrower
related to the withholding tax payable in respect of the interest
payable to the lender.
As an after tax payment is a common feature of international
financing, section 261 is largely out of line with international
financial practice. The matter was discussed in an article
published in Taxation In Australia, August 1994, which
recommend the repeal of the section. The explanatory memorandum to
the Bill estimates that the repeal of section 261 will have
negligible revenue effect.
Item 36 of Schedule 1 of the Bill will repeal section 261 of the
ITAA.
Application: In relation to mortgages entered
into after 27 June 1996.
Forgiveness of Commercial Debt
The measures relating to the forgiveness of commercial debt were
announced by the previous government in the 1995-96 Budget.
Substantially the same provisions were included in Taxation Laws
Amendment Bill (No. 5) 1995 which lapsed on the dissolution of
Parliament for the 1996 General Election. Minor differences between
the Bills exist in relation to related companies and record
keeping, but these do not affect the general principles described
below.
For taxation purposes, there needs to be a distinction made
between when debts are waived by the creditor and when they are
declared to be bad debts, which cannot be recovered and satisfy the
criteria for bad debts contained in the ITAA. The amendments
contained in the Bill relate to the position of the debtor where a
debt is waived. The general position is that where a debt is waived
it will cease to exist for taxation purposes and from the time the
debt is extinguished neither the creditor or debtor will not be
able to claim a tax benefit, such as the deduction of a bad
debt.
In relation to the debtor, losses may result when the debt
liability is taken into account in a year of income prior to the
year in which the debt is waived. If the debtor has a tax loss for
a year due to the debt, this loss will be able to be carried
forward to offset tax liability in future years.
It should be noted that a deduction is allowable where outgoings
are incurred in a year of income. The term incurred has been held
by the courts to not only arise when expenditure is actually made,
but also where a taxpayer is committed to a liability, even though
there has been no actual expenditure(3) For example, where a
liability to pay interest on a debt has arisen the taxpayer may
include the interest due in determining whether a loss has been
incurred, even if the interest has not been paid. This can lead to
the situation where the interest is not paid by the debtor and
accumulates as a debt to the creditor. If the debt is subsequently
declared bad, the creditor will, if the requirements as to bad
debts are satisfied, be able to deduct the full extent of the debt,
including the unpaid interest, while the debtor will also have been
able to use the interest liability as a deduction in the year it
was committed to pay the interest and, if there was a loss in that
year, to carry forward the interest component of the loss to future
years. The debt may then be waived with no chance of the value of
the debt being included in future income.
Changes to the above rules were announced in the 1995-96 Budget.
The changes mean: ... the amount forgiven will reduce the debtor's
future tax deductions by reducing in order the following amounts:
prior revenue losses, prior net capital losses, underacted balances
of capital expenditure and cost bases of capital assets. Budget
Paper No. 1 also estimates the revenue gains through the measures
to be $3 million in 1995-96, $20 million in 1996-97, $37 million in
1997-98, and $54 million in 1998-99.
Schedule 2 of the Bill will insert a new Schedule 2C into the
ITAA dealing with commercial debt forgiveness. A debt will be a
legally enforceable obligation to pay an amount to another, but if
the waiver results in a fringe benefits tax liability it will be
excluded from the definition of debt. Interest that has accrued but
has not been paid will form part of the original debt. A debt will
be a commercial debt if the interest payable on the debt, or
interest that would be payable if the debt carried an interest
rate, would be an allowable deduction, or would be deductible
except from a provision of the ITAA that excludes the deduction. If
the debt arises from a share issue, it will be a commercial debt if
a dividend payable in respect of the share would be debt dividend
as defined in the ITAA.
A debt will be taken to have been forgiven where:
- the obligation to pay the debt is waived;
- the right to legally enforce the debt lapses;
- an agreement is entered into by the debtor and creditor where
the obligation to pay all or part of the debt will cease at a
particular time in the future and the debtor incurs no other
obligation or only a nominal or insignificant obligation - in this
case the debt is forgiven when the agreement is entered into;
- the right to the debt is assigned, the assigned debt was not
acquired in the course of trading on a securities market and either
the creditor to whom the debt was assigned was an associate of the
debtor or the new creditor and the debtor were parties to the
agreement under which the debt was assigned; or
- the person was owed money by a company and bought shares in the
company and the company used those funds to repay part or all of
the debt - in this case the debt will be considered to have been
forgiven to the extent that the debt was paid from the funds paid
for the shares.
A debt will not be taken to have been forgiven if the waiving of
the debt results from bankruptcy, is effected by will or is
forgiven for reasons of natural love and affection (which is not
defined).
The value of the debt forgiven is calculated according to the
following steps: First, the notional value of the debt is
calculated. This will generally be the lesser of the value of the
debt to the creditor assuming that the debtor was solvent when the
debt was incurred and remains solvent, and this amount less any
change in value due to changes in market variables, ie. exchange
and interest rates, plus any deductions that have been allowed due
to changes in market variables. Where the debt was incurred to
finance the construction or acquisition of property and the
creditor's rights are connected to the property, the notional value
will be the lesser of the amount of the debt and the value of the
rights over the property.
Secondly, the gross forgiven amount is calculated. This is the
notional value of the debt less, when the transaction was conducted
at arms length, any consideration paid in respect of the debt.
The next step is to calculate the net forgiven amount. This is
the gross forgiven amount reduced by: any amount that will be
included in income as a result of the debt forgiveness; any
deduction that is reduced as a result of the debt forgiveness; and
any amount by which the cost base of an asset is reduced due to the
debt forgiveness. In relation to companies in a group, if an
agreement is reached that the creditor will bear part of the loss
for the debt and this reduces the capital loss that would otherwise
be available to the creditor, the amount of the reduction in
capital loss will also be taken from the gross forgiveness amount
in determining the net forgiven amount.
The total net forgiven amount is to be used by the debtor in the
following order:
- to reduce deductible losses held by the debtor;
- to reduce deductible capital losses held by the debtor;
- to reduce deductions that would be allowed for expenditure in
the year; and
- to reduce the cost base of certain assets held by the
person.
If there remains an amount of net forgiven debt after these
reductions, it will generally be disregarded. However, if the body
holding the net forgiven amount after these reductions is a
partnership, the remaining net forgiven amount will be allocated to
the partners in the same proportion as their share of partnership
profits or losses.
Application: From 7.30 PM on 9 May 1995 (ie.
from the announcement of the 1995-96 Budget).
Superannuation Guarantee
As originally enacted, the Superannuation Guarantee Charge
(Administration) Act 1992 (SG Act) provided that an employer
could discount any percentage of an employees earnings liable to be
contributed under that Act by a percentage contribution required
under an award. This did not provide for circumstances where an
award specified a flat dollar rate of contribution. This matter was
addressed by the Taxation Laws Amendment Act (No. 2) 1995
which provided for flat dollar contributions to be deducted from
the SGC liability of an employer before calculating if any amount
of charge is payable. This Bill further refines those
amendments.
Item 4 of Schedule 3 will substitute a new formula into section
23 of the SG Act dealing with the calculation of the reduction of
SGC liability for any flat dollar contribution. The new formula
takes into account situations where an employee is employed for
less than the hours specified in the award. Circumstances where the
employee works greater hours than those specified are currently
taken into account in the formula. Application:
From 1 July 1994.
The amendments also provide that where an employer contributes
to the Aberfoyle Award Superannuation Fund, which was established
in 1987, the earning base for the purposes of the SGC is to be the
earning base as specified in the award. This will allow
contributions made under the award to satisfy the SGC requirements.
Application: For 1995-96 and earlier years.
Tax file numbers - Superannuation
Tax file numbers (TFN) have a number of uses in superannuation,
including in the tracing of unclaimed money, the transfer of money
between funds and approved deposit funds and the supervision of
funds. While TFNs have a role in the superannuation industry, there
is no compulsion on a member of a fund to provide their TFN.
Provisions dealing with TFNs aim to encourage the provision of the
TFN, with the encouragement to members often being based on the
greater ability to trace people who have unclaimed money in a fund.
The amendments relating to TFNs will consolidate provisions in the
Superannuation Industry (Supervision) Act 1993 (SIS Act)
dealing with TFNs and require funds to request members who have not
provided their TFN to do so. Members will not be compelled to
provide their TFN.
The amendments are substantially the same as those contained in
Taxation Laws Amendment Bill (No. 5) 1995, which lapsed on the
dissolution of Parliament for the 1996 General Election. The main
difference between the Bills is that this Bill proposes to extend
the provisions to public, as well as private, superannuation
funds.
Item 15 of Schedule 3 will insert a new Part 25A, dealing with
TFNs, into the SIS Act. Main features of the proposed Part are:
- employees may provide their TFN to their employer;
- if a TFN is provided, the employer may notify the trustee of
the fund to which contributions are made in respect of the employee
of the employee's TFN before another contribution is made in
respect of the employee;
- where a TFN is provided, the employer must generally provide
the trustee with the TFN within 14 days of its provision;
- a trustee may request a beneficiaries TFN at any time;
- if a person is a beneficiary and the trustee does not have
their TFN, the trustee must request that they provide their TFN
(there will be no obligation for it to be provided);
- TFNs may be used to locate and identify amounts held for a
person and to comply with the SIS Act. They are to be destroyed
when they cease to be of use; and
- if money is transferred to another fund, the trustee of the
first fund must provide the persons TFN to the trustee of the fund
to which the money is transferred unless the person requests that
it not be supplied (where the fund from which the money is
transferred is an exempt public fund, there is no obligation on the
trustee to provide the TFN, although the trustee may provide
it).
Application: The later of 1 July 1996 and the
28th day after the Bill receives Royal Assent.
Fringe Benefits Tax
Section 58P of the Fringe Benefits Tax Assessment Act
1986 provides that fringe benefits are exempt from tax if they
satisfy the criteria in the section. The main criteria are:
- the benefit is 'small' - the Australian Taxation Office has
taken the view that 'a benefit with a notional taxable value in
excess of $50 is unlikely to be small....';
- the frequency and regularity with which similar benefits are
provided;
- the sum of the value of small benefits provided during the
year;
- the difficulty for the employer of determining the value of the
benefit; and
- the circumstances in which the benefit is provided (TD
93/197).
In the Coalition's statement Capital Gains and Fringe
Benefits Tax Reform, issued prior to the 1996 General
Election, it was announced that the value for a benefit to be
considered to be small would be increased to $100. The policy also
announced that a Coalition government would simplify the rules in
relation to entertainment and parking and consider aligning the
fringe benefits tax year with the income year. It was estimated in
the document that the combined cost of these measures would be $9
million per year. The explanatory memorandum to the Bill states
that the proposed increase in the value of small benefits 'will
have an unquantifiable cost to revenue.'
Item 1 of Schedule 5 of the Bill will remove the requirement in
section 58P for a benefit to be 'small' and substitute the
requirement that the benefit be less than $100.
Application: From the time the Bill receives
the Royal Assent.
- One Nation, p. 77.
- Rodney Fisher, Offshore Banking Units, Taxation in Australia,
August 1994.
- For example, see Federal Commissioner of Taxation v James Flood
Pty Ltd (1953) 88 CLR 492.
Chris Field Ph. 06 277 2439
6 August 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
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the public.
ISSN 1323-9032
© Commonwealth of Australia 1996
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Published by the Department of the Parliamentary Library,
1996.
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Last updated: 5 August 1996
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