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
Taxation Laws Amendment Bill (No. 2) 1997
Date Introduced: 13 February 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The application dates of the various
measures is outlined in the Main Provisions section.
The Bill will mostly implement anti-avoidance measures announced
in the 1996-97 Budget which are aimed at protecting revenue. Main
amendments relate to:
- the carrying foward of previous year capital gains losses for
members of a company group to implement similar tests that apply to
the carrying foward of income losses;
- to apply the general anti-avoidance provisions of Part IVA of
the Income Tax Assessment Act 1936(ITAA) to certain
withholding tax transactions and to implement specific
anti-avoidance provisions in respect of 'interest' payments and the
inter-positioning of tax exempt, or minimal tax paying entities, in
relation to the receipt of certain interest payments;
- to introduce a 'public offer' test that will apply to increase
the situations where Australian entities may raise funds through
off-shore debentures;
- to deny certain tax concessions to dual resident entities;
- to remove the 'standard' employer deduction for superannuation
deductions which will require employer contributors to calculate
the amount that may be deducted in regard of each employee;
and
- to alter the rules that apply to the leasing of cars that have
a value greater than the depreciation limit for luxury vehicles to
ensure that the rules for luxury cars cannot be overcome by leasing
arrangements.
As there is no central theme to the Bill the Background to the
various measures will be discussed below.
Capital Gains Tax
The measures relating to Capital Gains Tax (CGT) were announced
in the 1996-97 Budget and relate to the transfer of previous years
capital losses between members of a company group, and, to a lesser
extent, determining which year's capital losses can be carried
forward to a future year.
Companies
Before dealing with the treatment of capital losses, it is
relevant to deal with the treatment of situations where a company
may carry forward a loss of ordinary income from a previous year,
which may be used as a deduction in a future year. For the transfer
of company losses a number of tests must be satisfied, the major
ones being that the companies amongstwhich the loss is transferred
satisfy either the continuity of ownership or continuity of
business tests. These tests must be satisfied in the year in which
the loss is transferred.
The continuity of ownership test provides that where losses are
transferred between members of a company group, more than 50% of
the shareholder's voting, dividend and capital rights need to be
beneficially owned by the same people as at the time when the loss
was incurred. This test aims to address the situation where prior
year losses could be transferred between related companies even
though the underlining ownership of those companies has
significantly changed. For example, a profitable company may wish
to buy a company that has made losses for a number of years and to
subsequently use the losses to reduce it's own income, and
therefore tax. As the company being acquired has accumulated
losses, the price of the company may be less than the value of the
tax deductions to the profitable company.
The continuity of business test provides that if a company is
still able to claim prior year losses even if there has been a
change in the continuity of ownership. Simply, this test provides
that if there has been no change in the substantial nature of the
business, the business has not entered into any substantially new
activities and satisfies the anti-avoidance provisions, it will be
able to carry forward prior year losses.
The situation with capital losses is significantly different in
effect. While there are a provisions to prevent the transfer of
capital losses in a year where neither the continuity of business
or ownership is satisfied (subsection 160ZP(9)), capital losses
from a previous year are deemed to have been incurred in the year
in which the claim for the loss is made and are available to set
off against capital gains as if the prior year losses were incurred
in the same year that the gain was made. It is therefore possible
for a company to acquire another company that has capital losses
from previous years, become a related company and then transfer the
acquired losses to offset a capital gain that will be reduced by
the amount of the loss. This will reduce the amount of CGT payable
on the acquiring company's capital gain.
It was announced in the 1996-97 Budget that the treatment of
capital losses would be more generally aligned with that for income
so that the continuity of business or ownership tests must be
satisfied in relation to the year when a capital loss was incurred
before the loss can be transferred to a group company.
Under Division 4 of Part IIIA of the ITAA, which deals, in part,
with the transfer of capital losses between members of group
companies, a group company is defined to be one which is a
subsidiary of a company or two or more companies that are
subsidiaries of the same company (section 160ZP). For capital
losses to be transferred a number of conditions must be met,
particularly that the companies between which the transfer occurs
are group companies and thateither the continuity of ownership or
business tests are satisfied (section 160ZP).
Amendments to section 160ZP require capital losses to be offset
against capital gains in the year accrued, and allow any access
losses to be accrued (Items 10 to 14 of Schedule 1). Item 15 is the
major operative provision and provides that where an agreement is
made to transfer a loss to another group company (the agreement is
necessary for the transfer to occur), the loss will only be
transferable to the degree that:
- where the loss and the gain are accrued in the same year of
income and the continuity of business or ownership tests are
satisfied, the amount of the loss; or
- in other cases (ie. where neither test is satisfied) the amount
of the loss incurred in the same year as the gain is accrued
[proposed subsection 160ZP(7AAA)].
Individuals
The principal that capital losses must be used to offset capital
gains in the year incurred, or in the next year that an offset is
claimed, will be extended to individuals. This will have little
practical effect for individuals.
The explanatory memorandum to the Bill estimates the revenue
increase from this measure to be $20 million in 1996-97; $80
million in 1997-98; and $55 million in 1998-99 and 1999-2000.
Application: The amendments will apply to the 1996-97 and later
years of income. If there is a carry-over of losses from previous
years at the end of the 1995-96 year of income (Item 22).
Withholding Tax
Schedule 2 the Bill contains a number of amendments relating to
withholding taxwhich are aimed to reduce avoidance of the tax.
Withholding tax is imposed on interest, royalties and dividends
paid to a non-resident. Generally, the system works by requiring
the entity paying the interest, royalty or dividend to subtract a
certain percentage of the payment before remitting the remainder of
the amount overseas. There are a number of specific exclusions from
the withholding tax scheme, such as fully franked dividends, and
the rate of withholding tax may be effected by any double tax
agreement Australia has with the country to which the payment is
remitted. Interest payable to a non-resident who is conducting
business in Australia through a permanent establishment will not be
subject to withholding tax as it will be subject to normal
Australian taxation.
In the 1996-97 Budget a number of anti-avoidance means were
announced in regard to withholding tax. The proposals are for an
extension of the general anti-avoidance provisions in Part IVA of
the ITAA to be extended to withholding tax and to make a number of
specific amendments aimed at particular types of payments
(interest, royalty or dividend) and particular tax minimisation
schemes. Until recently, the scope of Part IVA had been restricted
by a number of High Court decisions and it is likely that doubts as
to the reach of Part IVA resulted in the specific anti-avoidance
provisions contained in the Bill.
However, the High Court in Commissioner of Taxation v Spotless
Services Limited, the judgement of which was delivered on 3
December 1996, significantly extended the scope of Part IVA. In
summary, Part IVA requires that there be a sole or dominant purpose
when entering into a scheme to obtain a tax benefit. Prior to the
Spotless case, it was considered that so long as the transaction
was commercially viable or the obtaining of a tax benefit was less
than 50% of the reason for entering the transaction, Part IVA would
not apply. This was overturned by the Spotless case and the
Commissioner now has a discretion to deny a tax benefit even if the
scheme is commercially viable if of the opinion that the sole or
dominant purpose of the scheme was to obtain a tax benefit. The
High Court also found that a purpose could be a dominant purpose
even though that purpose comprised less than 50% of the total
purposes for entering into the transaction. This appears to give
the Commissioner significantly greater power to use Part IVA in
relation to 'artificial' transactions that have the result of
reducing the amount of tax that would have been payable had the
transaction not been entered into. The full scope of the Spotless
decision has yet to be tested.(1)
Item 12 of Schedule 12 will insert a new section 177CA into Part
IVA of the ITAA which will provide that the Part will apply if a
taxpayer is not liable to pay an amount of withholding tax that
would, or could reasonably be expected to have been, included in
liability to pay withholding tax had the scheme not been entered
into. Where a tax benefit is subject to proposed section 177CA, the
Commissioner may determine that all or part of the amount is
subject to withholding tax. If such a determination is made, it is
to apply, and the amount assessed will be payable, and the taxpayer
may appeal against the determination, which is normal taxation
practice (Items 13 and 16). If the Commissioner determines that
withholding tax, or additional withholding tax, is payable, penalty
rates will apply to the difference between the amount of tax paid,
if any, and the amount determined by the Commissioner (Item
17).
Schedule 2 will also insert a new definition of interest for the
purposes of withholding tax. Currently, the term interest is
defined to include 'an amount in the nature of interest'. Item 1 of
Schedule 2 will repeal this definition, while Item 3 will insert a
new definition so that interest will include:
- an amount in the nature of interest; or
- an amount that could reasonably be regarded as equivalent of
interest, a substitute for interest or an amount received in
exchange for interest.
The use of tax-exempt, inter-imposed entities to disguise the
nature of the payment and final recipient is dealt with in Item 5.
Proposed section 128AF provides that if a tax-exempt entity
receives an amount attributable to interest, royalties or
dividends, the amount is to be attributed to the non-resident. The
provision aims to address the situation where payments are made to
a tax-exempt body which then forwards all or part of the amount to
the non-resident, who so avoids the need to pay withholding
tax.
Royalties are dealt with in Items 6 to 11 of Schedule 2. The
amendments will apply where a royalty is derived by a non-resident
and:
- the incomeis derived by a person who carries on business
outside Australia or through a permanent establishment overseas and
the royalty is not an outgoing wholly connected with the overseas
operation; or
- the royalty paid by non-residents in connection with the
carrying on of a business in Australia.
In the first case, the royalty payment will be deemed not to be
an outgoing incurred in carrying on the overseas business (which
will mean that the royalty will be incurred in Australia and so
subject to withholding tax). In the second case, the royalty will
also be deemed to have been paid in relation to the Australian
business, and so be subject to withholding tax. The measures are
designed to address arrangements where an overseas establishment or
resident is interposed between the payer of the royalty and the
recipient which would have the effect of excluding the payment from
Australian withholding tax (Items 6 and 7).
The explanatory memorandum to the Bill estimates that the
measure will raise $85 million in 1996-97 and $100 million per year
in later years.
Application: From 20 August 1996.
Further amendments relating to withholding tax and related
matters are contained in Schedule 5 of the Bill. Section 128F of
the ITAA provides for circumstances where withholding tax will not
apply to certain debentures. A new section 128F will be substituted
into the ITAA by Item 12 of Schedule 5. The new section will apply
to certain debentures listed on overseas capital market and
provides that the Division relating to withholding tax will not
apply where:
- the company was a resident of Australia when the debenture was
issued and when interest was paid on the debenture;
- the debenture was issued outside Australia for the purpose of
raising capital outside Australia;
- interest is paid outside Australia; and
- the public offer test is satisfied.
There are a number of ways that the public offer test can be
satisfied, including that the debenture was offered to 10 or more
finance providers; was offered to at least 100 people who have
acquired debentures in the past or are likely to be interested in
acquiring debentures; or was offered to a dealer, underwriter or
manager who will offer the debentures for sale within 30 days.
Where a non-resident subsidiary of a resident company issues
debentures solely to raise funds for the parent company, the issue
of debentures by the subsidiary will be taken to be an issue by the
parent company and so an issue by an Australian resident.
A major difference between the current and proposed section 128F
is that the proposed section does not contain a requirement that
the funds raised be used in respect of an Australian business. In a
Press Release dated 25 June 1996, the Treasurer stated:
The end use requirement in section 128F that the borrowed funds
be used in an Australian business will be removed to extend the
exemption to overseas borrowings to make loans to home buyers and
consumers.
The public offer test is also new and will replace current tests
that provide that regard is to be had to the method of the offering
of the debentures. This requirement has developed into a test that
requires debentures to be widely distributed on overseas markets.
This will be replaced by the public offer test.
There will be transitional provisions so that if a debenture is
issued after the date of effect of the amendment (1 January 1996)
and before the passage of this legislation, the current law will
have effect (Item 16).
The explanatory memorandum to the Bill estimates that the
measure will have a negligable cost to revenue.
Application: 1 January 1996.
Dual Resident Companies
A company can be a resident of more than one country. Subsection
6(1) of the ITAA defines a resident company to be one which is:
- incorporated in Australia;
- is not incorporated in Australia and has either its central
management and control in Australia; or
- is not incorporated in Australia and the voting power in the
company is controlled by Australian residents.
If a company is a resident company, including a dual resident
company, it is able to claim a number of concessions that are not
available to non-resident companies. It was announced in the
1996-97 Budget that a number of benefits available to dual resident
companies would be removed and anti-avoidance provisions extended
to certain dual resident companies. The measures are aimed at
preventing companies that are not incorporated in Australia from
using dual residency status where that status is based on an
artificial scheme.
Item 1 of Schedule 3 will insert a definition of 'prescribed
dual resident' into section 6 of the ITAA. There will two types of
such residents:
- where a company is a resident, there is an international tax
agreement in force with the other country in which the company is a
resident and the agreement contains a provision to the effect that
the company is a resident of the foreign country; and
- where the company is a resident solely because it has its
management and control in Australia and it also has management and
control in another country.
The effect of the amendments will be to place prescribed dual
resident companies in the same position as non-residents for a
number of purposes and to deny access to the following
concessions:
- rebates for certain unfranked dividends paid to a prescribed
dual resident company;
- certain transfers of losses between company groups where a
prescribed dual resident company is involved; and
- certain concessions that apply to resident companies in respect
of security payments.
The changes will also treat prescribed dual residence companies
as non-resident companies for the purpose of determining if a
company is foreign controlled for the purpose of the thin
capitalisation rules and for debt creation rules (the provisions
relate to anti-avoidance measures in relation to non-resident
companies and the effect of the latter amendments is to include
prescribed dual resident companies in these regimes in the same
manner as they now effect non-resident companies).
The explanatory memorandum to the Bill estimates that the
measure will result in savings of $50 -$100 million per year.
Application: 1 July 1997.
Superannuation Contribution Limit
Section 82AAC of the ITAA provides limits on the amount that an
employer may claim in respect of deductions for contributions to an
employee's superannuation. There are currently two methods an
employer of 10 or more employees may use to calculate their
allowable deductions. First, and this method also applies to
employers with less than 10 employees, there is an aged based limit
so that the maximum deduction claimed is based on the age of the
employee. The limits for 1996-97 are $9 782 for an employee under
35; $27 170 for those aged between 35 and 49; and $67 382 for those
aged 50 and over. The deduction limits recognise that younger
employees should be able to contribute for longer periods to
provide adequate superannuation. The limits are subject to
indexation. The second method is to calculate the deduction on the
flat rate of $27 170 for each employee for 1996-97 (and this amount
indexed for later years). This is known as the standard
contribution rate.
The standard method provides greater administrative simplicity
for employers with 10 or more employees. For example, if an
employer has 100s of employees, the need to calculate the maximum
deduction allowable in relation to each employee would be a
considerable administrative exercise. The same would be true of a
small business with 10 or more employees where the small employer
would be required to make a calculation in respect of each
employee. On the other hand, if an employer has a generally
youthful workforce aged under 35 the standard method would allow
significantly greater deductions than if the aged based method was
used.
It was announced in the 1996-97 Budget that the standard
provisions would be abolished from the time of the Budget
announcement. The reason for the abolition is given in the second
reading speech as:
The standard contribution limit was introduced for reasons of
administrative simplicity. However, the standard contribution limit
has been subject to abuse with some employers claiming deductions
for contributions on behalf of particular employees well in excess
of the age based limits.
The abuse has come at a cost to revenue and the Government
believes that the standard contribution limit can no longer be
justified.
The explanatory memorandum to the Bill estimates the revenue
savings from this measure to be $35 million in 1997-98; $40 million
in 1998-99; and $40 million in 1999-2000.
In relation to compliance costs the explanatory memorandum
states:This measure will result in a slight increase in compliance
costs for affected taxpayers.
Item 2 of Schedule 4 of the Bill will repeal subsections
82AAC(2D) to 82AAC(2H) of the Principal Act which contain the
provisions for standard employer deductions.
As the measures were announced to apply during a financial year,
Item 4 contains transitional provisions that provide that if an
employer elects that subsection 82AAC(2D) is to apply to the
financial year in which 20 August 1996 occurs, the maximum
deduction that may be claimed in respect of an employee during that
year is the maximum of either:
- the amount of contributions made in respect of the employee
until the time of the announcement; or
- the individual deduction limit in respect of the employee.
Application: The year of income in which 20 August 1996 occurs
and later years of income.
Luxury Car Leases
The use of car leases, rather than outright purchase of a
vehicle, is becoming a more common method of financing a car,
particularly for cars used in business.Where a car is purchased and
used for business, the owner may claim a deduction in respect of
use of the car for business purposes and claim depreciation on the
vehicle up to a certain maximum level (currently $55 134). The
limit is known as the luxury car threshold. The depreciation
allowance, and the luxury car threshold, also apply to lessors in
respect of the vehicles they lease.Changes to the treatment of car
leases were announced in the 1996-97 Budget and are designed to
counter schemes where the amount deductible under the lease, as
lease payments, exceeds the amount that would otherwise be
deductiblehad the car been purchased.While the luxury car threshold
available to the lessor as owner of the vehicle would apply to set
a maximum on the depreciation claimable, the additional value of
depreciation above the luxury car threshold can be built into the
lease and subsequently claimed as a deductionby the lessee where
the vehicle is used for business purposes.
Schedule 6 of the Bill will insert a new Schedule 2E, dealing
with the leasing of luxury cars, into the ITAA. A lease is defined
to be any arrangement to let a car on hire where the right to uses
the car is granted by the owner to another person for monetary or
other consideration, or where such a right to use a car is
transferred to a third person (ie. a sub-lease), but dose not
include a short term hiring agreement or a hire purchase agreement
(proposed section 42A-115).
The proposed Division will apply to leased luxury cars that are
not held as trading stock where the lease is entered into after the
time of the Budget announcement (ie 7.30 pm on 20 August 1996). If
a lease is renewed after this time, it will be treated as a new
lease and so be subject to the proposed Schedule (proposed section
42A-10). Where the proposed Division applies, the lessor will be
treated as having disposed of the vehicle to the lessee, who will
be deemed to be the owner of the car. However, if the car is
sub-leased, the lessee will cease to be the owner of the vehicle
(proposed section 42A-15).
The value of the lease will be the amount specified in the lease
where the lease is negotiated at arms length. In other cases, it
will be value of the vehicle if it were sold to the lessee at arms
length. For sub-leases, the depreciated value of the car will
generally be used (proposed section 42A-20).
Proposed section 42A-25 provides that the lessor will be deemed
to have made a loan to the lessee and the value of the loan will be
the value of the car plus a financial charge (this is defined in
proposed section 42A-130 to be the total payments under the lease
plus any other costs, such as any amount payable on the ending of
the lease, less the notional loan principal, ie. basically the
total amount payable under the lease less the value of the
car).
The amount to be included in the lessor's income will be the
accrual amount for the period of the loan during the financial year
(this is the outstanding amount of the deemed loan on the car
multiplied by the implicit interest rate). In addition, if the
lessor makes a profit on an actual or nominal sale of the vehicle,
such an amount is to be included in the lessor's assessable income
(proposed section 42A-35).
The lessee will be able to claim a deduction for the notional
loan for the period of the financial year in which the loan remains
current. The lessee will not be able to claim a deduction for the
actual lease payments (proposed sections 42A-50 and 42A-55).
Proposed section 42A-65 provides for adjustments of the lessor's
assessable income on the termination, renewal or extension of a
lease. The amount of the adjustment is based on the formula:
notional loan principal (ie. the principal of the deemed loan under
this Schedule) plus the assessed accrual amount (ie. the amount
that is included in assessable income for the year under
consideration). Where the total amount payable to the lessor
exceeds the amount calculated under the formula, the excess is
included in assessable income. Where the amount received is less
than this amount, the difference is allowed as a deduction.
Proposed section 42A-70 contains a mirror provision that provides
that where an amount is included in assessable income under the
previous section, an equal amount is allowable as a deduction to
the lessee and, where a deduction is allowed under the previous
section, an equal amount is included in the assessable income of
the lessee.
If a lease is extended or renewed, after the adjustment
described above is undertaken, proposed section 42A-80 takes
effect. This section provides that the original notional loan will
be deemed to have been repaid and a new notional loan entered into,
and measures similar to those applicable to the original loan will
apply. If an amount is paid by the lessee to acquire the car at the
end of the lease, such an amount will not be assessable income for
the lessor or as a deduction for the lessee. The lessee will be
considered the owner of the car until it is disposed of (proposed
section 42A-85). If the lessee ceases to have a right to use the
vehicle, it will be deemed to have been disposed of to the lessor,
who will be taken to have acquired the vehicle for the balance of
the notional loan, less any amount paid to the lessor plus any
amount refundable by the lessor, or, if it is impracticable to
calculate this amount, the market value of the car.
The provisions apply to leases and not to short term hiring
arrangements. However, where there are consecutive arrangements
that extend for more than 6 months, the arrangement will be deemed
to be a lease (proposed section 42A-125).
- The Information and Research Service will be releasing a
Consultant Paper on the implications of the Spotless decision.
Chris Field
6 June 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 1328-8091
© Commonwealth of Australia 1997
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Published by the Department of the Parliamentary Library,
1997.
This page was prepared by the Parliamentary Library,
Commonwealth of Australia
Last updated: 12 June 1997
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