WARNING:
This Digest is prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments.
This Digest was available from 22 November 1996.
CONTENTS
Taxation Laws Amendment Bill (No. 3) 1996
Date Introduced: 31 October 1996
House: House of Representatives
Portfolio: Treasury
Commencement: The measures contained in the Bill
have various application dates which are detailed in the Main
Provisions section.
The amendments relate to:
- the introduction of a tax rebate for self funded aged
people;
- an increase in the threshold for the medical expenses
rebate;
- removing a tax exemption available to prospectors;
- providing an incentive for equity investment by money-lenders
in small and medium sized enterprises;
- removing a deduction available to co-operative companies;
- providing general rules applicable where a body loses its tax
exempt status;
- preventing double benefits being taken in relation to
infrastructure bonds; and
- reducing the deduction available in regard to research and
development, excluding syndicates from research and development tax
deductions and making other changes to the research and development
scheme.
As there is no central theme to the Bill, the Background to the
various amendments will be discussed below.
Tax Rebate for Self Funded Aged People
In its' policy document for the aged, titled Security for
Older Australians, released prior to the 1996 General
Election, the Coalition announced that if elected they would extend
the pension rebate to self funded retirees. It was estimated that
this would cost $70 million per year.
The pension rebate is contained in section 160AAA of the
Income Tax Assessment Act 1936 (ITAA) and is available to
recipients of a range of social security pensions, including the
age pension, disability support pension, wife pension, carer
pension (for the last three pensions the recipient must be of
pension age to be eligible for the rebate) and the sole parent
pension. The rebate is also available for those in receipt of
taxable service pensions. The full rebate applies until a certain
income threshold from sources other than the pension is reached and
above this threshold the pension is reduced by 12.5 cents for each
dollar earned in excess of the threshold. As a result, after a
certain level of income from non-pension sources is reached, the
rebate will cease to apply (the cut-out threshold). The actual
level of the thresholds and the rate of phasing-out of the pension
is determined by regulation rather than by the ITAA. As the
government has indicated both before and after the 1996 General
Election that the rebate for self funded retirees would be the same
as for pensioners, it may be considered that the current pension
provision will apply through the regulation for the proposed self
funded retirees rebate.
The levels of the pensioner rebate are adjusted annually in
accordance with movements in the value of the various pensions
which are indexed to reflect movements in the CPI. For 1995-96, the
following levels of rebate, threshold and cut-out threshold
apply:
| Status |
Rebate level |
Rebate threshold |
Cut-out threshold |
| Single |
$1 157 |
$11 185 |
$20 441 |
| Couple (each) |
$805 |
$9 452 |
$15 865 |
| Couple (separated due to illness)
(each) |
$1 094 |
$10 870 |
$19 622 |
The rebate ensures that people on the full pension and receiving
non-pension income of up to $2 444 for a single person or $4 264
for a couple will not be subject to tax. If there were no rebate
for pensioners, they would be subject to the normal tax regime,
which would exempt the first $5 400 of a taxpayers income from tax
and apply the relevant marginal rates to income above this amount.
The rebate ensures that tax will not be payable until the above
income levels are reached.
Item 1 of Schedule 1 of the Bill will insert a new section
160AAAA into the ITAA which deals with the rebate for individuals
who are not pensioners but who have reached pension age. The amount
of the rebate will be fixed by regulation and, based on the
assumption that it will be the same as the pensioner rebate, will
be as detailed above. To qualify for the rebate, taxpayers must be
of pension age and satisfy the resident requirements necessary to
receive an age pension (ie. 10 years residence unless they are
exempt from the residence requirements).
Similarly, proposed section 160AAAB provides that where a
trustee is subject to tax as a beneficiary of a trust is presently
entitled to a share of income from the trust but is under a legal
disability (and so cannot receive the income), the low income
rebate may be available to the trustee. To receive the rebate the
beneficiary must fall below the income threshold, have reached
pension age, have 10 years qualifying residence in Australia, or be
exempt from the residence requirement, and not be in prison.
Application: For the 1996-97 and subsequent years of income.
Medical Expenses Rebate
Section 159P of the ITAA provides a rebate of 20% for medical
expenses over $1 000 incurred in a year. Expenditure that is
recouped from government bodies, associations or funds are not
included in the calculation of whether the $1 000 threshold has
been reached, so that refunds from Medicare and private health
insurance funds are excluded from the calculation. Expenditure in
respect of the taxpayer and their dependents are taken into
consideration in determining if the threshold is reached.
Medical expenses included in the calculation include payments to
doctors, nurses, chemists, dentists, opticians and optometrists.
Medical and surgical appliances are also included in allowable
medical expenses, as are payments to private or public hospitals
for treatment. Payments to nursing homes approved under the
National Health Act 1953, and most payments to hostels,
are also included.
It was announced in the 1996-97 Budget that the threshold would
be increased to $1 500 in a full year. As the measure will apply
from the time of the announcement, the threshold for the 1996-97
income year will be $1 430 (to take into account the higher
threshold applying from 20 August 1996 until the end of the year)
and $1 500 for the 1997-98 and subsequent income years. The
explanatory memorandum to the Bill estimates that the measure will
save $26 million in 1997-98, $23 million in 1998-99 and $24 million
in 1999-2000. There is no estimate of the savings for 1996-97.
Application: For the 1996-97 and subsequent income years.
Prospectors
Income from the sale, assignment or transfer of mining rights
for certain minerals by a bona fide prospector is exempt from tax
under paragraph 23(pa) of the ITAA. A bona fide prospector is an
individual who has personally carried out the whole or the major
part of the field work or who has contributed to the cost of the
prospecting. A company will be a bona fide prospector if it has
carried out the whole or the major part of the field work. If a
deduction has been allowed in respect of expenditure incurred in
the prospecting, the exemption will only apply to income in excess
of the allowed deductions.
The minerals to which the exemption applies are gold and those
minerals listed in the regulations (the explanatory memorandum
contains a list of these minerals). The exemption was designed to
encourage prospecting in Australia.
It was announced in the 1996-97 Budget that the exemption would
be abolished. In a Press Release dated 20 August 1996, the
Treasurer explained the reasons for the removal of the exemption as
that it was no longer necessary 'in light of Australia's reserves
and the globalised trading environment'. The Press Release also
states:
The exemption is unequal in its application and effect. Not
all prospectors are eligible to claim the exemption. Not all metals
and minerals attract the exemption.
In practice paragraph 23(pa) has proved costly to administer
and the law difficult to interpret.
There is some disagreement between the announcement and the Bill
regarding the application of the amendment. the Press Release
states that the amendments will remove the exemption for 'income
derived under contracts entered into after 7.30 pm EST 20 August
1996'. However, the Bill provides that the exemption will continue
to apply to contracts entered on or before 31 December 1996. No
explanation for the differing dates is given.
The explanatory memorandum estimates the saving from the measure
to be $2 million in 1997-98, $20 million in 1998-99 and $40 million
per year thereafter.
Application: The exemption will cease to apply for income
derived under a contract entered into after 31 December 1996.
Investment in Small-Medium Enterprises
(SME)
Finance for SMEs is often difficult to find at a competitive
rate to larger businesses. When a SME borrows money from a
financial institution they will generally be charged a higher rate
of interest than other borrowers, including larger businesses. This
is largely related to the risk associated with SMEs which have less
resources and are more likely to fail than larger enterprises. With
the increased risk a premium is charged by lending institutions to
justify the greater chance of default.
Equity investment in SMEs is also restricted. Although the
Australian Stock Exchange Second Board aims to provide a vehicle
for SMEs to access equity capital, listing on the Exchange involves
compliance costs for the SME which may be borne by larger SMEs that
wish to raise a reasonably large amount of capital, but the
compliance costs for small enterprises can make listing
prohibitively expensive particularly for an enterprise which wishes
to only raise a small amount of capital. The listing rules for the
Second Board provide that fees are payable on listing on the Second
Board and additional compliance costs will be involved in relation
to the preparation of a prospectus and other documents. As well, a
SME may not comply with the listing rules and so not be able to
access the Second Board. A further disincentive to listing is the
possibility that a listed company will be subject to a
take-over.
In accessing both investment and equity capital, SMEs also face
problems with the supply and dissemination of information regarding
the company. SMEs often do not have comprehensive records that
would enable an investor to accurately determine the position of
the company and the degree of risk involved in the investment. If a
potential investor cannot accurately gauge the risk involved they
are likely to either demand a higher return or not invest in the
company, preferring to invest elsewhere where more information, and
hence greater certainty, is available.
The coalitions small business policy, A New Deal for Small
Business, announced a range of policies relating to the access
to capital of SMEs and confirmed the policy to allow banks to
invest in SMEs. The policy promised that difficulties with SMEs
raising capital would be addressed through a number of different
approaches, including:
- exempting SMEs from prospectus requirements;
- revising prudential guidelines to allow banks to invest in
SMEs; and
- improving the operation of the Pooled Development Funds
program.
SME is defined in proposed section 128TK to be a company with
assets valued at $50 million or less. The value of the assets are
to be determined by reference to an audited statement prepared
within 12 months of shares being issued. If a company does not have
such an audited statement before issuing shares, it will not be a
SME.
The intention of proposed Division 11B of Part III of the ITAA
is clearly expressed in proposed section 128TG, which provides a
summary of the proposed Division, to be that if a money-lending
business is issued with shares by a SME then once the taxpayer has
acquired at least 10% of the shares in the SME any gain or loss on
those shares will be treated as capital gains or losses, rather
than income or a deduction. This provides more favourable tax
treatment for the taxpayer who has acquired the shares as
indexation will apply to reduce any gain under the capital gains
tax.
However, the other sections of the proposed Division do not
clearly express the intended treatment of shares acquired in a SME.
For example, proposed section 128TH is titled 'When Division
applies' although the section deals with when the section rather
than the Division applies. It does not deal with the consequences
of the section applying. A similar situation applies in relation to
proposed section 128TI, which is titled 'Consequences of Division
applying' but which deals with 'If this section applies' and
proceeds to state that if the section applies (it is not detailed
when the section applies) then any gain or loss is not to be
treated as income or a deduction. It does not provide that the CGT
will apply to such gains or losses when realised.
Application: The amendments will apply to a threshold interest
(ie. 10% of the shares in the company) acquired in a SME on or
after 1 July 1996.
Co-Operative Companies
Division 9 of Part III of the ITAA provides special treatment
for co-operative and mutual companies to reflect their status as
being owned by the members.
A co-operative company is defined in section 117 of the ITAA to
be one which has rules that limit the number of shares that may be
held by any one shareholder, prohibit the listing of shares on a
stock exchange or any other method of offering shares to the public
and has primary objects that fall within one or more of the
following categories:
- the acquisition of commodities or animals for disposal or
distribution to its shareholders;
- the acquisition of commodities or animals from its
shareholders;
- the storage, marketing, packaging or processing of commodities
of its shareholders;
- the rendering of services to its shareholders; or
- obtaining funds from its shareholders to make loans to its
shareholders to enable them to acquire land or buildings as a
residence or as a residence and business.
In addition, to retain its status as a co-operative the company
must conduct at least 90% of its business of acquiring commodities,
disposing of commodities or storage and packaging in a year of
income with its shareholders (section 118).
The income of co-operatives is subject to taxation, but special
rules relating to the deductions that may be claimed are contained
in section 120, which allows deductions for:
- income distributed among shareholders based on the amount of
business done by the shareholder and the company;
- income distributed to shareholders as interest or dividends;
and
- for a company that has as its primary object the acquisition of
commodities or animals amongst its shareholders for disposal or
distribution, income applied for the repayment of a loan from a
government that was used to carry-on its business or to repay the
government for any asset acquired from the government. This last
deduction will only be allowed where shares representing at least
90% of the capital of the company is held by people who supply
commodities or animals to the company.
In effect, what the final category of deduction allowed by
section 120 provides is that loans from a government to a
co-operative either to carry-on its business or to acquire an asset
would be subject to this special deduction. Such loans would
usually be used to acquire land or buildings for company premises
or to fund the initial start-up operations of the company.
In addition to the special deductions, co-operative companies
are also eligible for the normal business deductions available
under section 51 of the ITAA, which allows deductions for expenses
incurred in carrying-on a business to produce assessable income.
For example, funds spent on the acquisition of business premises or
in operating a business, and interest on a loan taken out for such
purposes, will be an allowable deduction - hence a co-operative can
claim two deductions in respect of relevant loans from
governments.
It was announced in the 1996-97 Budget that the special
deduction relating to loans from governments available to
co-operative companies would be removed.
In a Press Release dated 20 August 1996, the Treasurer gave two
main reasons for the change: that it is consistent with competitive
neutral policies and the governments policy of removing tax
anomalies; and that the government was concerned about possible use
of the deduction to give an advantage to some government-owned
financial institutions.
It has been reported that there is some concern about the
possible effect of the removal of the deduction, including concern
expressed by some Federal members of the National Party. It has
been argued that co-operatives are not on the same footing as other
companies as they cannot raise equity capital and pay a higher
rates on borrowings than private sector operators. Concern was
centred on the effect the change would have on food co-operatives
in particular.(1)
The removal of the special deduction in relation to loans from
governments will be accomplished by Part 6 of the Bill, which will
repeal current sub-section 120(1) and insert a new section which
continues the first two categories of deductions referred to
above.
Application: The amendment will apply to loans entered into
after 7.30 pm on 20 August 1996. However, transitional provisions
will apply where:
- the loan was entered into on or before 31 December 1996 to
acquire a specified asset and before 20 August 1996 the companies
business plan authorised the acquisition of that asset, or a
contract for the acquisition of that asset had been entered into,
and the asset is plant, articles or building, the asset was ready
for use on or before 30 June 1998, and the co-operative was or will
be entitled to a deduction under section 120(1)(c) in respect of
another loan which existed during the period 20 August 1993 to 20
August 1996; or
- a loan was entered into after 20 August 1996 and before that
time an agreement had been entered into for the provision of
finance in relation to a specified asset and before commencement
time the company had entered into an agreement to acquire the
asset. This transitional provision will cease to apply if the
acquisition of the asset ceases to be the sole purpose of the loan.
In such a case, the transitional provision will cease to have
effect from the time that the purpose of the loan changed.
Loss of Tax Exempt Status
A number of bodies are exempt from taxation, including public
authorities, local government bodies, public and non-profit
hospitals, trade unions and employer associations and non-profit
cultural, sporting and friendly societies. Unless there are special
provisions, the treatment of such entities when they lose their
exempt status is unclear. Income and deductions over the entire tax
year, ie. when the body was exempt and non-exempt, may be included
in the calculation or the year may be divided into the separate
periods and only the income and deductions relating to the
non-exempt period being subject to taxation. The proposed rules for
such bodies were first announced by the former government on 3 July
1995 and were contained in the Taxation Laws Amendment Bill (No. 5)
1995, which lapsed on the dissolution of Parliament for the 1996
General Election, and the provisions contained in this Bill are
substantially the same as those contained in the 1995 Bill. The
main differences between the two Bills is that the provisions in
this Bill are numbered according to the method used under the
Taxation Laws Improvement project. In announcing the new rules
contained in the 1995 amendments, the then Treasurer stated in a
Press Release dated 3 July 1995 that:
To date, the tax treatment has been assessed on a
case-by-case basis, using the principles that underpin the transfer
of assets between taxpayers when an entity is sold.
Where major sales of Commonwealth assets have been involved, the
relevant legislation dealing with the sale of the entity has
generally contained specific provisions relating to taxation
treatment. In announcing the changes in the Press Release referred
to above, the than Treasurer stated:
This case-by-case approach risks a perception that different
entities could be treated inconsistently. The Government has
therefore formulated a standard treatment to be used in dealing
with entities entering the tax net. The approach will apply from
today.
The new rules will apply to bodies that were tax exempt at a
particular time and after that time becomes to any extent subject
to tax. The time when the body becomes subject to tax will be known
as the transition time (proposed section 57-5).
A body will be taken to have derived income at the time the
service or good in relation to which the income was derived was
performed or provided (proposed section 57-15). A similar rule will
apply to losses and deductions (proposed section 57-20).
The rules relate to:
- Disposal and acquisition of assets and liabilities: Where a
transition taxpayer has owned an asset since between the transition
time and the time of disposal of the asset, proposed Subdivision
57-E deals with the value of the asset for capital gains purposes
and other provisions of the ITAA where the disposal of the asset is
relevant (eg. in claiming a deduction in respect of the asset). The
basic rule is that the taxpayer will be deemed to have disposed of
the asset immediately before the transition time and to have
purchased the asset at the transition time for its market value.
This will not apply in respect of certain taxation categories,
including depreciation, development allowance, and special
provisions relating to certain activities of primary industries,
industrial property and Australian films. In addition, the proposed
rules will not apply to certain assets which have specific tax
treatment where those assets were acquired before the commencement
of those provisions and has been held by the taxpayer at all times
before the transition time. The category of assets affected by this
rule are:
- the calculation of income and deductions relating
to traditional securities;
- the disposal of certain securities where the ITAA
provides for an amount reflecting the difference between the
disposal price and the cost of the security to be included in the
taxpayers assessable income;
- certain foreign exchange gains and losses;
and
- provisions dealing with assessability in respect
of certain payments from securities.
Similar rules will apply to the deemed disposal and
re-acquisition of liabilities, which for future tax purposes will
be treated as having been re-acquired for their market value.
Subdivision 57-F will deny the following deductions to bodies
that have a transition time during their year:
- for defined benefit schemes, which will not have
all individual entitlements funded, that proportion of the
employers contributions that do not exceed the unfunded liability
for the period before the transition time. However, if the taxpayer
has allocated an amount greater than their unfunded liability in
respect of the pre-transition period, the excess will be
deductible; and
- for other schemes, the amount of contributions
that does not exceed the greater of the contributions required to
be made under an award or otherwise, and the amount that would be
required to be contributed under the superannuation guarantee
scheme, before the transition time.
- Long service and annual leave payments: so much of the payments
due in respect of long service and annual leave that do not exceed
the amount that would be payable if all employees began to take
such leave at the transition time and any other amount that would
become payable at a later time in respect of service before the
transition time.
- Bad debts: so much of the debts as does not exceed the total
apportioned doubtful debt provisions as relate to debts owed to the
taxpayer at the transition time.
- Eligible termination payments: so much of the payment as
relates to service before the transition time.
- Depreciation: a taxpayer, or their associate, who has owned a
depreciable asset will be deemed to have claimed depreciation on
the property between acquisition time and the transition time. The
method of depreciation used during this period will be that chosen
by the taxpayer at the first time after the acquisition time that
depreciation was claimed.
- Capital allowances and certain other deductions: Sub-Division
57-J provides that for the allowances and deductions listed it is
to be assumed that the allowances and deductions were available to
the taxpayer and provides that in the transitional year the
taxpayer will be able to claim a deduction or allowance for that
proportion of the year when they ceased to be exempt. The
allowances and deductions include those relating to: environment
impact statements; environmental protection; Australian films;
gifts; research and development; and water conservation. The full
list of allowances and deductions is contained in proposed section
57-85.
Proposed subdivision 57-K provides that if certain provisions of
the ITAA would allow deductions to be claimed, or income included,
for that part of the transitional year when the taxpayer was
exempt, the deduction, or inclusion of income, will only be allowed
for the non-exempt period of the year. The items covered by this
provision are listed in proposed section 57-110 and include:
capital works; depreciation; mining and quarrying; and research and
development.
Application: As noted above, the amendments will apply to bodies
that lose their tax exempt status after 2 July 1995.
Infrastructure Financing
The Development Allowance Authority Act 1992
establishes a scheme, known as Develop Australia Bonds (DAB), that
provides a tax incentive to encourage private investment in large
infrastructure projects. Such projects are normally unattractive to
private enterprise as there is generally no return for a number of
years and so no deductions can be claimed for borrowing costs until
income is earned from the project. The deductions can be
accumulated as losses and carried forward for future years, but
this does not help the investor in the shorter term. The basis of
the DAB scheme is that the lender receives the deductions that
would otherwise be available to the borrower, so that the lender
may claim a rebate on the amount that would otherwise be used by
the borrower as a deduction. This reduces the interest rate that
the borrower needs to pay as the total return to the borrower will
include the tax rebate which means that the lender can receive the
same return at a reduced interest rate. The DAA has reported that
'Borrowers are now able to borrow funds at rates as low as 60% of
normal commercial rates.'(2)
During 1995-96, DABs involving investment of approximately $3
billion were approved for 9 projects. As at 30 June 1996, the DAA
had applications for seven projects involving investment of over $3
billion. Projects already approved include the Melbourne City Link,
the M2 Motorway in NSW, the Ultimo to Pyrmont Light Rail, and a
natural gas electricity and steam supply plant in South Australia.
A relatively recent feature of the DAB scheme has been the offering
by financial institutions of investments covered by the scheme to
retail investors, so that the benefits are now available to small,
as well as large, investors.
There are three categories of DABs that are subject to the
treatment referred to above, providing other eligibility criteria
are satisfied. These are:
- direct infrastructure borrowings (DIB) - where the lender
provides funds directly to the entity engaged in an eligible
project;
- indirect infrastructure borrowings (IIB) - where the borrower,
which must be a company, lends the funds to another who is engaged
in a DIB; and
- refinancing infrastructure borrowing - where funds are borrowed
to repay a DIB or IIB.
In late 1995, problems with the relationship between DIBs and
IIBs were discovered that resulted in the DAB scheme being used to
increase tax concessions without increasing the amount of
infrastructure expenditure. The schemes involve the holder of a IIB
selling the rights to a project to another taxpayer while retaining
the IIB status. As a result, the original lender may gain the tax
advantages as a holder of an IIB and the taxpayer to whom the
rights to the project were sold will also be eligible for the
advantages as a holder of a DIB. Problems were also identified with
the use of such schemes by non-residents, where the result was that
they would not be subject to Australian withholding tax. the
problems were identified in a Press Release by the then Treasurer
dated 30 October 1995, which announced that legislation to correct
the problem would be introduced to apply from the date of the Press
Release. It was announced in the 1996-97 Budget that the government
would proceed with the legislation proposed by the former
government and that it would apply from the date of the original
announcement (ie. 30 October 1995).
Section 93I of the DAA Act deals with the requirements that
borrowers must satisfy to be eligible for DAB treatment. Item 6 of
Schedule 3 will amend this section to provide that in respect of
IIBs and restructuring finance borrowings, the borrower must be a
non-exempt resident company or corporate limited partnership and
intends to be such a body within the applicable borrower
requirement period (ie. while the borrowing is held or 25
years).
Proposed section 93ZAA provides that if a certificate that
enables DAB concessions to be received is in force in respect of a
IIB or a refinancing infrastructure borrowing and the holder ceases
to be a resident company or corporate partnership, the DAA will be
taken to have cancelled the certificate from the date when the body
ceases to be a resident.
If the holder of a IIB transfers their rights, interest and
obligations to another and, after 30 days, the IIB holder has
neither repaid the whole of the borrowing, returned their
certificate or satisfied the certificate transfer test (ie. an
application has been made and the certificate transferred), the DAA
will be taken to have cancelled the certificate. If only some of
the holders rights, interests and obligations are transferred, this
will also apply unless the borrowings have been wholly repaid
(proposed section 93ZAB).
Similarly, if the DIB to which an IIB relates is wholly repaid
and the above conditions relating to the return etc. of the
certificate are not satisfied, proposed section 93ZAC will deem the
certificate to have been cancelled. If only part of the DIB is
repaid, the holder of the related IIB will be required to repay
that amount and if they fail to do so their certificate will be
deemed to have been cancelled (proposed section 93ZAD).
Application: The amendments will apply to certificates issued on
or after 30 October 1995.
Research and Development
The principal assistance for industry to encourage investment in
research and development (R&D) is the 150% tax deduction
available in respect of eligible expenditure. The scheme was
introduced in May 1985 as a temporary measure, but was made
permanent in the 1992-93 Budget. The effectiveness of the scheme
has been examined in recent years by the Industry Commission (IC),
Bureau of Industry Economics (BIE) and the Australian National
Audit Office. The various studies were used by the Department of
the Treasury which examined the cost effectiveness of the tax
concession in the Winter 1995 edition of the Economic
Roundup. Main findings of the Treasury included:
- both the IC and the BIE found that the scheme provided net
benefits to Australia;
- the IC found that as much as 90% of R&D investment would
have occurred without the tax concession, while the BIE found that
the concession encouraged between 10% and 17% of R&D
expenditure;
- only 20% of R&D expenditure was on 'genuinely innovative'
projects; and
- investment decisions are often based on the tax consequences of
the investment rather than the nature of the R&D being
undertaken, particularly when investment syndicates are
involved.
The former government's response to the IC report of 15 May 1995
was released on 6 December 1995 and provided for the continuation
of the 150% tax deduction, subject to the tightening of certain
eligibility criteria, particularly regarding the registration
requirements.
As noted above, the use of syndicates has tended to distort the
use of the tax concession away from R&D spending and towards
gaining the maximum tax benefit. This is achieved by a syndicate
acquiring an entity that has tax losses from previous R&D and
which cannot afford to continue the R&D. A syndicate is formed
to invest in the entity, usually a company, and the accumulated tax
losses are then used to offset other income, resulting in lower tax
being paid by the syndicate members and no additional money being
dedicated to further R&D. Another use of syndicates is for
non-residents to form a syndicate which acquires the rights to
Australian R&D which is then transferred to another overseas
entity at an inflated price and is subsequently transferred to the
Australian entity that is conducting the R&D at the inflated
price, thus allowing the Australian entity to claim a tax deduction
based on the inflated price. These are simple examples of schemes
that may be used to increase the tax deductions available in
respect of R&D.
The Minister and the Treasurer announced on 23 July 1996 that
new syndicates would not qualify for the tax concession after the
time of announcement, ie. 5 pm. on 23 July 1996. The Press Release
making the announcement noted that a BIE report released on the 23
July 1996 supported this decision, as did the Industry Research and
Development Board (the Board). It was also announced at that time
that the eligibility criteria for the deduction would be tightened
with the aim of restricting the deduction to actual expenditure on
R&D (the Press Release announcing these changes also contains
examples of the use of R&D to gain tax advantages).
As may be expected, the proposed changes to the R&D scheme
were generally opposed by those using the current scheme. It has
been reported that a survey conducted by Price Waterhouse of 250
businesses showed that more than half expected to reduce their
R&D expenditure by at least 20% and 25% expected their
compliance cost to rise by 100%.(3)
Similarly, it has been reported that a survey of 150 businesses
by Deloitte Touche Tomatsu found that:
- 34% of the companies surveyed and which had claimed the
deduction over the past five years were considering moving their
R&D overseas because of higher tax concessions offered
overseas;
- 24% of companies surveyed which had received the benefit were
reconsidering doing R&D; and
- 21% of those surveyed said they would continue to undertake
R&D but would not claim a deduction.(4)
It was announced in the Budget that a new scheme, the Strategic
Assistance for Research and Development (Start) program would be
introduced to provide R&D assistance. Start aims to provide a
new program for syndicates in relation to large projects and a mix
of grants, loans, and interest subsidies. It was envisaged that
grants and loans would be provided for R&D with clear economic
spillovers and which otherwise would not proceed due to lack of
finance. The Board would determine who is eligible for
funding.(5)
The Minister for Industry, Science and Tourism announced on 21
November 1996 that Start would provide assistance of $540 million
over four years and provide support of up to 50% of total
expenditure. For assistance over the 50% level, the funds would be
repayable through royalties on commercialisation. The Minister's
Media Release also states:
While the first year's appropriation for Start ($40 million)
is available unconditionally, funding for future years is
conditional upon the successful passage of legislation to implement
measures announced in the Budget, as well as the previously
announced measures on syndication.
It has been reported that the Minister has denied that Start
will involve the 'picking of winners', and that reaction to the
Ministers announcement included comments that the scheme involved a
'fistful of dollars thrown at a politically embarrassing problem'
and that a partner from Coopers and Lybrand commented that the
eligibility criteria for small and medium enterprises amounted to
asking people to be 'over 90 years old and accompanied by their
parents'.(6)
Division 1 of Schedule 4 of the Bill will change references in
the ITAA to the R&D tax concession from 1.5 (150%) to 1.25
(125%). Application: from 20 August 1996.
Syndication: Proposed section 39PA of the Industry Research
and Development Act 1986 provides that the Board is not to
register companies jointly after 5 pm on 23 July 1996. However,
this will not apply where a favourable advance approval opinion in
respect of a joint registration has been given before this time.
Similarly, if the Board had refused joint registration before that
time and this decision is subsequently overruled by the
Administrative Appeals Tribunal, the Board will not be prohibited
from registering the joint companies after that date (item 72 of
Schedule 4).
Division 2 of Schedule 4 will amend section 73B of the ITAA to
provide that if the Board issues a certificate under proposed
section 39PB of the Industry Research and Development Act
1996 (the correct title to this Act is the Industry
Research and Development Act 1986 - IR&D Act), then a
deduction will not be allowed under section 73B of the ITAA, which
provides the 150%/125% deduction for R&D, from the date of the
issue of the certificate. (Proposed section 39PB is inserted by
this Bill - see below for an explanation of the provision.) This
will not apply where the companies are already registered under
section 39J of the IR&D Act. The effect of these provisions is
that partnerships of companies which go beyond the activities
identified in their application will cease to be eligible for the
extended deduction. Application: 23 July 1996.
Interest paid on financing R&D expenditure will be
deductible at the normal rate of 100% through Item 18 - 21 which
clarifies the definition of R&D to include interest payments
and does not include the ability to deduct interest in a part of
section 73B that allows the extended deduction. Application: 23
July 1996.
Feedstock: The deduction for feedstock will be restricted to the
difference between the value of feedstock inputs and the value, in
an arm's length transaction, of products produced in the R&D
activity. Currently, all feedstock expenditure for R&D is
subject to the extended deduction. Application: 23 July 1996.
Core technology: Core technology is defined to be technology
conducted for the purpose of obtaining new knowledge based on that
technology or to create new or improved materials, products,
processes, techniques or services. Amendments contained in Division
6 of Schedule 4 will restrict the deduction allowed for core
technology to one third of the amount of related R&D
expenditure during a year. The restriction will apply to
expenditure incurred under a contract entered into after 5 pm on 23
July 1996. As this rule may result in some core technology
expenditure not being an allowable deduction in a year, this amount
may be carried forward to future years, and if income is gained
through the disposal of the core technology, the amount to be
included in assessable income is to be reduced by any undeducted
amounts.
Pilot plant: Expenditure on a pilot plant incurred after 5 pm on
23 July 1996 will be deductible under Division 7 of Schedule 4 of
the Bill, which proposes that where a taxpayers aggregate R&D
amount is $20 000 or less in a year, it will be deductible
according to the annual deduction percentage. Where the aggregate
R&D expenditure exceeds $20 000, it will be deductible at the
rate of 1.5 times the annual deduction percentage (this will change
to 1.25 from 20 August 1996 in line with the general reduction in
the extended deduction provisions for R&D expenditure). Annual
deduction percentage is dealt with in proposed subsection 73B(4H)
under which the percentage falls as the useful life of the pilot
plant increases. If the useful life is less than 3 years, the full
amount will be deductible in the year of expenditure.
Proposed section 39PB provides that where two or more companies
are jointly registered in relation to a project (ie. a syndicate) a
person may apply for an extension of their registration. The Board
must not grant the extension unless satisfied that the extension
would result in certain consequences, including: expenditure not
being incurred in respect of a project other than those stated in
the application; no additional expenditure being incurred on core
technology; the commercial exploitation of the technology; and that
the total amount of R&D expenditure would not exceed that
stated in the application.
- The Australian Financial Review, 16 September
1996.
- Development Allowance Authority, 1995-96 Annual Report, p.
7.
- The Australian Financial Review, 25 October 1996.
- The Australian Financial Review, 18 October
1996.
- The Treasurer, Press release, 20 August 1996.
- The Australian Financial Review, 22 November
1996.
Chris Field Ph. 06 277 2439
22 November 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.
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the public.
ISSN 1323-9031
© Commonwealth of Australia 1996
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Published by the Department of the Parliamentary Library,
1996.
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