Bills Digest 103 1996-97 Taxation Laws Amendment Bill (No. 4) 1996


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WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History

Taxation Laws Amendment Bill (No. 4) 1996

Date Introduced: 12 December 1996
House: House of Representatives
Portfolio: Treasury
Commencement: The application dates of the various measures described in this Digest are listed in the main provisions section of the Digest.

Purpose

The main amendments in the Bill relate to:

  • the requirement for entities to calculate whether there has been a change in the underlying interests in the entity for the purposes of the capital gains tax;
  • small business roll-over relief from capital gains tax;
  • an earlier cut-off date for the accelerated depreciation rate for Australian trading ships;
  • the insertion of generic definitions of Commonwealth education and training programs;
  • concessions for companies that have not converted their franking accounts for the purpose of dividend imputation; and
  • a relaxation of the applicability, and increased benefits under, the concessional tax treatment available in relation to employee share acquisition schemes.

Background

As there is no central theme to the Bill the background to the various measures will be discussed below.

Main Provisions

Capital Gains Tax

Disposal

CGT is payable on the difference between the sale price and indexed cost base of assets acquired after 19 September 1985 when such an asset is disposed of, or there is a deemed disposal of the asset. While assets acquired before 20 September 1985 are exempt from CGT, if there is a change in ownership of the asset it will become subject to CGT.

Section 160ZZS of the Income Tax Assessment Act 1936 (ITAA) provides that where an asset is acquired before 20 September 1985 it will be deemed to have been acquired after that date, and so subject to CGT on disposal, unless the Commissioner is satisfied that there has been no change in the 'majority underlining interest' in the asset since 19 September 1985. The term is defined in section 82KZC to be more than half of the beneficial interest in either the asset or the income from the asset. The Commissioner has issued a number of rulings on the meaning of the term, the main effect of which are to exempt normal share trading in publicly listed companies and trusts, so that the Commissioner need only be satisfied that there has been no change in the majority underlining interest where there has been abnormal trading, such as a take over or merger or where there is a major change in ownership outside the stock market.

It was announced in the 1996 Budget that the operation of section 160ZZS would be altered to require public entities, ie. publicly listed companies, unit trusts and mutual insurance organisations, to determine whether there has been a change in the majority underlining interest between 20 September 1995 and 20 September 1996. If there has been such a change, CGT will be payable when the asset is disposed of (the amount of CGT payable will be discussed below). The entities will also be required to perform such an operation every five years after 1996. It is stated in Budget Paper No. 1 that:

The measure is consistent with the Government's objective of reducing compliance costs and increasing the efficiency of the capital gains tax system.(1)

The question of compliance costs has been addressed by a number of commentators. For example, it has been reported that a partner of Coopers and Lybrand has stated that: 'This is going to be quite an administrative problem for a company listed on the Australian Stock Exchange. You are going to have to make a comparison and a tracing of your shareholders' interests between September 1985 and the present time [20 September 1996] ....not an easy task.'(2) Other commentators have been more straightfoward. The President of the Taxation Institute of Australia has been quoted as stating: That's [the reduction in compliance costs] just absolute bulldust. Both of these statements are absolutely wrong. They're either deliberately misleading people or they have completely misunderstood the changes they've made.'(3) However, the argument may be made that such entities would be required to make such a calculation on the disposal of each asset if a literal interpretation of the ITAA applied, rather than the view adopted in the various rulings made by the Commissioner.

It is estimated in Budget Paper No. 1 that the measure will result in additional revenue of $15 million per year.(4)

Item 7 of Schedule 4 of the Bill will insert a new subdivision C into Division 20 of Part IIIA of the ITAA. Proposed section 160ZZSA provides that a public entity (ie. a public company, mutual insurance organisation or a publicly traded unit trust - proposed section 160ZZRR) will be required to calculate whether there has been a continuity of ownership of an asset acquired before 20 September 1985. The calculation is to be made at the test time, which is defined to be 20 January 1997, a day that is five years after this date or a multiple of five years after that date. If the owner of the interests cannot be identified, there will be a presumption that the owners have changed unless the Commissioner is satisfied that it is reasonable to presume otherwise.

If a public entity fails to make a calculation in relation to an asset acquired before 20 September 1985, it will be presumed that the asset was acquired after that date and so subject to CGT (proposed section 160ZZSB).

If an entity becomes a public entity after 20 January 1997 and no continuity of ownership is found when first required by the Bill to test continuity of ownership, or the new entity fails to determine if there has been a change in continuity of ownership, the entity will be deemed to have acquired the asset on 20 January 1997, for it's market value.

If the entity is required to conduct a test before 20 January 1997, or under an earlier ruling of the Commissioner, and no continuity of ownership is found at the time that the test was required to be made it will be taken to have acquired the asset on the earlier of the time that no continuity of ownership was found or 20 January 1997. If a lack of continuity of ownership is found, the entity will be deemed to have acquired the asset at the later test time and to have acquired it for it's market value at that time (proposed section 160ZZSC).

Abnormal trading is dealt with in proposed Subdivision D, which will provide a statutory definition of the term. The occasions when it will be taken to have been abnormal trading are:

  • the trading is abnormal having regard to all relevant factors, including the timing of the transaction, the number of shares/units traded compared to normal trading, and any connection between the trading and other trading in the shares/units;
  • if more than 5% of an entities shares/units are traded in one transaction;
  • the trading relates to a merger or takeover that the company/trust knows about or ought reasonably to have known about; or
  • if more than 20% of the entity's shares/units are traded over 60 days.

Subdivision E deals with situations where holdings of shares/units by another entity are less than 1%. For direct holdings, or holdings where another company/trust is imposed between the holder and the entity making the ownership calculation, where the holder is entitled to less than 1% of the capital/units or dividends/income of the entity those holdings will be deemed to be held by a same natural person at both the test time and the base time (generally 19 September 1985). The effect of the provisions is that there will be no need to trace holdings of less than 1% and they will be deemed not to have changed ownership. However, if the Commissioner is of the opinion that the majority underlying interest would have changed except for these rules, they will not apply.

Similarly, where a superannuation fund, approved deposit fund, special company (a mutual insurance company, a company that cannot make a distribution or a prescribed company) or government body is imposed between the entity determining continuity of ownership and those beneficially entitled to the imposed entity, the entity checking continuity of ownership may assume that the superannuation fund etc. is the beneficial owner of the interest. If the superannuation fund etc. has less than 50 members, the entity determining continuity of ownership may trace those entitled to the beneficial interest in the entity as if they held equal entitlements to the entity (subdivision F).

Where the interest was held by a mutual insurance organisation which ceases to be a mutual body, members of the entity at the time that it ceased to be a mutual body will be deemed to have held their interest at the base time. This will mean that the demutualisation will not automatically mean that the interests held by that body have changed ownership (subdivision G).

Application: 20 January 1997, however, as noted above, if a continuity of ownership test was required under a ruling of the Commissioner before that date, the ruling will have effect from that earlier date.

Small Business Roll-over Relief

Roll-over relief from CGT applies in a number of circumstances and provides that CGT is deferred when an asset is disposed of until there has been a subsequent disposal that is not subject to roll-over relief. Examples of current roll-over relief include: involuntary disposal, transfers to a wholly owned company or within company groups, changes to superannuation trust deeds and the merger of superannuation funds. Prior to the 1996 General Election, the Coalition announced that as part of CGT reform roll-over relief would be available where a trading business disposes of an asset to purchase a like kind of asset or where a business is disposed of to purchase another business of a like kind. The roll-over relief announced would be subject to a number of conditions, including that the disposal and purchase occur within 12 months of each other, the disposal price for the asset or business does not exceed $5 million and that the relief would only be available once every five years.(5)

The decision to implement the proposal was announced in the 1996-97 Budget. The scheme as announced is substantially the same as that announced before the election, with the major differences being that:

  • roll-over relief will be restricted to taxpayer's whose net business assets do not exceed $5 million;
  • relief will only be available in respect of 'active assets', ie. assets used by a taxpayer to generate income from a trading business; and
  • it will be sufficient if the acquired asset is used in the same business or a business of a like kind, so that the like kind asset test will not apply.

Following consultation with small business and professional groups, further changes were announced by the Treasurer in a Press Release dated 3 December 1996. The changes are that the like kind business test will be removed and the period between disposal and acquisition will be extended from 12 months to 2 years.

It was estimated in Budget Paper No. 1 1996-97 that the measure would cost $150 million in 1998-99 and $160 million in 1999-2000. The Treasurer's Press Release of 3 December 1996 estimated that the changes announced at that time would cost an additional $50 million in 1998-1999. The explanatory memorandum to the Bill estimates the cost of the measure at $200 million in 1998-1999 and $215 million in 1999-2000.

Schedule 5 of the Bill will insert a new Division 17A into Part IIIA of the ITAA. Proposed section 160ZZPL contains a definition of the assets that will be relevant for the new Part. Basically, the definition of an asset adopts that currently used for CGT purposes, that includes any form of property, including options, debts and other rights, and incorporeal property, such as goodwill. However, the usual CGT definition of an asset will be modified to include motor vehicles used in the production of income and to exclude personal use assets, rights under a superannuation or approved deposit fund and life insurance policies. An active asset will be one that is used, or held to be used, in the production of assessable income or which is inherently used in the production of such income (the example given in the Bill is goodwill but will also include other incorporeal assets). Certain assets are specifically excluded from the definition of an active asset, including:

  • shares in companies;
  • interests in trusts; and
  • financial instruments, such as loans, bonds and futures contracts.

The definition of an active asset is extended, by proposed subclause 160ZZPL(6), to include assets that are acquired with the intention of their being an active asset where it was acquired within 2 years of the roll-over relief being sought where the asset was an active asset at the end of that period.

Proposed subdivision B deals with the treatment of assets for the purpose of roll-over relief. Proposed section 160ZZPP contains a threshold test that will exclude roll-over relief where:

  • the net value of the taxpayers assets, as defined, exceed $5 million;
  • if the taxpayer, or an associate,is a member of a partnership, the net assets of the partnership exceed $5 million; or
  • if the total value of the net assets of the taxpayer, any connected entities (this is defined in proposed section 160ZZPN to generally be an entity in which the taxpayer holds half or more of the rights to the entity - different rules apply to trusts), the value of the assets of unconnected entities of the taxpayer or an associate exceed $5 million.

When roll-over relief will be available is dealt with in proposed section 160ZZPQ, which contains a number of conditions that must be satisfied before relief is available. The conditions are:

  • the criteria in proposed section 160ZZPP are satisfied;
  • except for these amendments CGT would have been payable;
  • either the asset was an active assets at the time of the roll-over, or if the business had ceased to be carried out within 12 months of the disposal, the assets was an active asset at the time the business ceased;
  • the asset was an active asset for more than half the time it was owned by the taxpayer;
  • where the proposed relief has been used before in regard to the asset, it was acquired by the taxpayer more than 5 years before relief is sought again; and
  • the taxpayer elects that roll-over relief applies.

If relief is available, the CGT provisions, other than the proposed amendments, will not apply to the asset.

If there is an amount of roll-over relief available, proposed sections 160ZZPR and 160ZZPS provide that any capital gain that is subject to roll-over is first to be used to reduce any capitallosses that the taxpayer has incurred.

Where roll-over relief is available, the taxpayer may nominate an asset, or assets, as the replacement asset/s. Replacement assets must be active assets and acquired between 1 year before and 2 years after the disposal of the asset subject to roll-over relief. If the asset disposed of is not goodwill, the replacement asset must also not be goodwill. As an anti-avoidance provision, the replacement asset cannot be the asset disposed of. If no replacement asset is nominated, CGT will be payable (proposed section 160ZZPT).

Where roll-over relief has been used, the cost base of the replacement asset is to be reduced by the amount of the relief that has been apportioned to the asset, with the maximum reduction being to reduce the cost base to nil (proposed sections 160ZZPU, 160ZZPV and 160ZZPW).

Where a replacement asset is disposed of or ceases to be an active asset and further roll-over relief is not available, CGT will be payable (proposed section 160ZZPX).

Application: the amendments will apply to assets disposed on or after 1 July 1997.

Depreciation - Trading Ships

The ITAA provides an accelerated depreciation rate for certain Australian trading ships. To be eligible for the accelerated rate of depreciation, which is set at the rate of 20% per annum rather than the standard calculation based on the productive life of the asset, ships must be eligible Australian ships that satisfy certain conditions, including that:

  • they are wholly owned and used by Australian residents;
  • they are wholly and exclusively used to produce assessable income;
  • the ship is crewed by Australian residents or others approved by the Department of Transport;
  • the crew level of the ship complies with the Department's requirements;
  • income produced from the ship is subject to Australian tax; and
  • the ship is delivered prior to 1 July 2002.

Certain ships are excluded from the accelerated rate of depreciation, including tugboats, fishing vessels and pleasure craft.

The accelerated rate of depreciation is related to grants available for the construction of eligible vessels. Prior to 1996, grants were payable in respect of eligible vessels that were to be delivered prior to 1 July 1997. The Shipping Grants Legislation Act 1996 altered the availability of grants to ships delivered prior to 1 July 1996. However, if the eligible vessel is subject to an agreement regarding its construction or purchase that was made before 1 May 1996 (the date of the announcement of the measure), the vessel will continue to be eligible for the grant. The latter measure was inserted as an amendment to the original Shipping Grants Legislation Bill 1996.

The proposed change to the rate of depreciation was also announced when the Shipping Grants Legislation Bill 1996 was introduced (ie. 1 May 1996).

The change to rate of depreciation is estimated in the explanatory memorandum to the Bill to save $10 million in 1997-98 and $15 million in each of 1998-99 and 1999-2000.

Item 1 of Schedule 1 will restrict the availability of the accelerated depreciation for eligible Australian ships delivered prior to 1 July 1997 by amending subsection 54M(4) of the ITAA.

Application: As noted above, the measure will apply to ships not delivered by 1 July 1997.

Education and Training Payments

The ITAA contains a number of references to individual Commonwealth schemes that provide payments in respect of secondary and tertiary education and the taxation treatment that is to be given to such payments. Similarly, there are also a number of government payments connected with labour programs. As noted in the explanatory memorandum to the Bill, there has been a proliferation of such schemes, particularly in regard to labour market programs under the previous government. Each program currently requires its tax treatment to be dealt with separately, with at times differing components of a program being dealt with in a different manner.

Part 2 of Schedule 1 of the Bill will replace the references to the various programs with the generic terms Commonwealth education and training program and Commonwealth labour market program. The amendments will maintain the general rules in respect of education and training programs, ie. that supplementary payments are not exempt, while other components of the payment are exempt. Similar changes will be made in respect of relevant rebates.

The measures are substantially the same as those contained in the Taxation Laws Amendment Bill (No. 5) 1995, which lapsed due to the 1996 General Election. The explanatory memorandum to the Bill estimates that the changes are not expected to have any effect on revenue.

Application: The substantive measures will be deemed to have commenced on 1 July 1996.

Dividend Imputation

Dividend imputation refers to the scheme introduced to prevent the double taxation of company dividends. Prior to the introduction of the scheme, a company would be subject to corporate tax rates on its income and any dividend paid would be subject to tax in the hands of the person in receipt of the dividend. Under the imputation scheme, companies are allowed a franking credit in respect of the tax that they have paid, and this can be passed to shareholders and used to reduce the tax payable by the shareholder. There is a corresponding debit to the franking account held by the company passing on the imputed dividend.

Initially, the scheme involved only one franking account, based on the company tax rate applicable at the time the scheme was introduced. However, since that time there has been two changes to the company tax rate, from 39% to 33% and then to 36%. As a result there are three possible franking accounts, A, B and C reflecting the relevant tax rates. There are also provisions for the conversion of class A and B accounts to the 36% rate contained in Class C accounts.

The concept of Class C franking accounts was introduced by the Taxation Laws Amendment Act (No. 4) 1995, which also contained a transitional provision, section 160ASF, which provides that where a company receives a Class C franking credit, at the end of the 1995-96 franking year for the company, or at an earlier time nominated by the company, Class A and Class B credits are to be converted to Class C credits (thus making it theoretically possible for a company to have all three class of franking accounts).

On 31 July 1996 the Treasurer announced changes to the transitional arrangements concerning the conversion to Class C credits. The Treasurer announced that if a company received a Class C franking credit, it would have the option of ignoring the credit, and so lose its value for imputation, or having 14 days, or such further time as the Commissioner allows, to convert its other credits to Class C credits. The reasons given by the Treasurer for the relaxation of the rules was that:

  • some companies might not have been aware of the need to convert to Class C credits on the receipt of a Class C credit and would suffer penalties for paying other classes of credits after this time; and
  • companies may have received small Class C credits, disregarded such receipts and continued to pay other credits after they were meant to convert.

The changes were to apply from the beginning of a company's 1995-96 franking year.(6)

The changes as announced by the Treasurer will be implemented by Item 3 of Schedule 2 that will insert a new section 159A into the ITAA.

Application: As noted above, the amendments will apply from the beginning of a company's 1995-96 franking year.

Employee Share Acquisition Schemes

Division 13A provides for concessional tax treatment for shares acquired after 28 March 1995 where those shares were acquired under an employee share acquisition scheme. To qualify for the concessional treatment, a number of conditions must be satisfied, including:

  • the shares or rights are qualifying shares or rights:
    • the company is the employer or holding company of the employer of the taxpayer;
    • the shares or rights are ordinary shares or rights in the company;
    • at least 75% of the employees of the company were or are entitled to participate in the scheme;
    • after the acquisition the taxpayer does not hold more than 5% of the beneficial interests or voting rights in the company.
  • the exemption conditions are satisfied:
    • there are no conditions attached that could result in the forfeiture of the shares;
    • there are no restrictions on disposal after the earlier of 3 years after acquisition or when the employee ceases to be employed by the company; and
    • the scheme operates on a non-discriminatory basis.
  • If the eligibility conditions are satisfied, two types of concessional treatment are available:
  • tax on the value of any discount on the cost of the shares acquired may be deferred for a maximum of 10 years (this period varies in a number of conditions); or
  • the taxpayer may elect to include the value of the discount in the year the acquisition occurred and will receive a discount of $500 on the value to be included.

Two main changes to the scheme were announced in the 1996-97 Budget. First, the conditions for a share of right to be a qualifying share or right will be altered so that the scheme need only be available to two-thirds of the permanent employees of the company, and, secondly, the value of the discount available will be increased to $1 000.

The explanatory memorandum to the Bill estimates that these changes will cost $15 million per year.

The changes described above will be implemented by Schedule 3 of the Bill, which will also make similar changes in the conditions and value of deductions available for the employer.

Application: The above amendments will apply to shares acquired after 30 June 1996.

Endnotes

  1. 1996 Budget Paper No. 1 1996-97, p. 4-20.
  2. The Australian, 22 August 1996.
  3. The Sydney Morning Herald, 22 August 1996.
  4. Budget Paper No. 1 1996-97, p. 4-5.
  5. Capital Gains Tax and Fringe Benefits Tax Reform, p. 3.
  6. Treasurer, Press Release, 31 July 1996.

Contact Officer and Copyright Details

Chris Field
14 February 1997
Bills Digest Service
Information and Research Services

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.

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

ISSN 1323-9031
Commonwealth of Australia 1996

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

Published by the Department of the Parliamentary Library, 1997.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 25 March 1997



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