Bills Digest 59 1996-97 Taxation Laws Amendment Bill (No. 3) 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 22 November 1996.

CONTENTS

Passage History

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.

Purpose

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.

Background

As there is no central theme to the Bill, the Background to the various amendments will be discussed below.

Main Provisions

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:

  • Superannuation

- 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.

Endnotes

  1. The Australian Financial Review, 16 September 1996.
  2. Development Allowance Authority, 1995-96 Annual Report, p. 7.
  3. The Australian Financial Review, 25 October 1996.
  4. The Australian Financial Review, 18 October 1996.
  5. The Treasurer, Press release, 20 August 1996.
  6. The Australian Financial Review, 22 November 1996.

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Chris Field Ph. 06 277 2439
22 November 1996
Bills Digest Service
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ISSN 1323-9031
© Commonwealth of Australia 1996

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Published by the Department of the Parliamentary Library, 1996.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 5 December 1996
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