Bills Digest No. 103   1997-98 Taxation Laws Amendment Bill (No. 5) 1997


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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. 5) 1997

Date Introduced: 23 October 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The amendments described in this Digest commence on Royal Assent.

Purpose

The main amendments contained in the Bill relate to:

  • extending capital gains tax roll-over relief available to small businesses to certain shares and units;
  • to introduce an accreditation scheme in relation to sales tax exemptions on personal computers and associated items as an anti-avoidance measure; and
  • introduce a scheme which will allow a lender to claim a rebate equal to the interest deduction that would otherwise be available to the borrower where funds are used for an approved land infrastructure facility.

Background

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

Main Provisions

Capital Gains Tax - Extended Roll-over Relief for Small Business

Prior to the 1996 general election, the coalition proposed that rollover-relief be available for small trading businesses that dispose of an asset or business and the proceeds from the disposal are used to purchase a like kind of asset/business. The measure was introduced by the Taxation Laws Amendment Act (No. 1) 1997 and is subject to a number of conditions. The main conditions for relief to be available are:

  • the asset must be an active asset (this is principally an asset used in the course of business and shares in companies and units in a trust are specifically excluded from the definition - section 160ZZPL of the Income Tax Assessment Act 1936 (ITAA));
  • the replacement asset or business must be acquired within 2 years;
  • the assets of the business must not exceed $5 million (section 160ZZPP);
  • the replacement asset/business must be an active asset/business;
  • roll-over relief is to be first used to reduce any capital losses available to the person; and
  • roll-over relief is only available once every five years.

There are also different rules applying to the disposal of an asset where the asset consists of goodwill, so that if the asset disposed of is not a goodwill asset it must be replaced by another non-goodwill asset. The measures have applied since 1 July 1997.

Although the question of an extension to roll-over relief to shares and trust units was not specifically addressed by the Small Business Deregulation Task Force in its November 1996 report, the government response to that report, which was delivered inParliament by the Prime Minister in March 1997, proposed the extension of the relief available. The Prime Minister stated:

We will also liberalise capital gains tax rollover relief even further. It will now apply to the sale of shares in a small business. This will assist those small business owners who prefer to realise their interest by selling shares rather than the underlying assets ofthe business.(1)

The same relief will also be extended to units in a trust which operates a small business.

The explanatory memorandum to the Bill estimates that the cost to revenue of the additional roll-over relief is expected to be $90 million per year.

Section 160ZZPL of the ITAA contains the definition of roll-over asset. This will be amended by item 8 to include a share in a company where the company is resident, a private company, the taxpayer is the controlling individual in respect of the company at the time of disposal and section 160ZZPP is complied with. Similarly, a unit in a unit trust will fall within the definition if the trust is a resident, is not publicly listed, the taxpayer is the controlling individual of the trust and section 160ZZPP is complied with.

For a company, a person will be the controlling individual if they are a director or employee of the company and controls 50% of the voting power, rights to dividends and 50% of the capital of the company. For a unit trust, the individual will be considered to be in control if they are an employee of the trust and are entitled to at least 50% of the income and capital of the trust (proposed section 160ZZPNA).

The conditions that must be satisfied for roll-over relief to be granted will be altered by item 13 to provide that the asset must have been an active asset for more than half of the period in which it was owned by the taxpayer (basically an active asset is one used in business). The calculation of the amount of non-goodwill roll-over is to be the lesser of the notional capital gain and the amount calculated according to the formula contained in proposed subsection 160ZZPQ(3A), which is based on the proportion of the capital gain that the shares or units represent of the total shares or units in the company or trust.

Item 16 provides that roll-over relief will also be available where the assets into which funds are rolled-over are certain other shares or units. In relation to shares, the main conditions that must be satisfied are that the taxpayer is the controlling individual of the company and the market value of the active assets of the company are at least 80% of the market value of all the company's assets. Similar rules will apply to unit trusts.

Section 160ZZPV, which deals with the replacement of non-goodwill assets to obtainroll-over relief, will be amended by item 17 to take account of the extension of roll-over relief to shares and units in a unit trust. The main impact of the amendment will be to restrict the relief available to the proportion of the shares/units held in a similar manner to proposed amendments to section 160ZZQ. The effect of the amendment will be to restrict the roll-over relief to the interest held in the shares or units in a trust. Item 18 makes a similar amendment in relation to cases where the asset acquired includes goodwill.

Proposed section 160ZZPXA deals with the situations where a taxpayer has nominated an asset as a replacement where roll-over relief is sought. Essentially, the proposed section provides that where the roll-over relief provision relating to shares and unit trusts is breached, such as the 80% holding rule, then capital gains tax will be payable on the amount ascertained in accordance with proposed amendments to sections 160ZZPV and 160ZZPW. The effect of this amendment will be to deny roll-over relief where share/unit holding falls below the prescribed (80%) limit. However, proposed section 160ZZPXA also provides that the rules will not apply where the fall in ownership limits is a result of changes in the market value of the shares/units held.

The amendments will operate from 1 July 1997.

Sales Tax

The Bill proposes to introduce anti-avoidance provisions in relation to the sale of personal computers and related products. The measure was announced as part of the 1996-97 Budget and follows concerns in both the industry and the Australian Taxation Office (ATO) about certain operators gaining a market advantage and reducing the revenue through avoidance of sales tax. Under the Sales Tax (Exemption and Classification) Act1992, computers and associated equipment, such as printers, keyboards and monitors, are taxed at the general rate which is currently 22%. If the equipment is purchased by a sales tax exempt body, no sales tax is payable.

Schemes to avoid sales tax in the computer industry involve a number of variations, but the most popular scheme involves a business gaining a quotation number, which allows the business to buy goods without paying sales tax on the basis that they will not be sold retail or if sold retail then sales tax is paid. However, whether sales tax is actually payable is determined at the end of the year for which the power to quote an exemption was given. This is avoided as the business closes before the end of the year in question and so the sales tax is not recoverable from the business. In such cases the ATO, if possible, will attempt to trace the retail purchasers of the goods and require them to pay the sales tax.

The main concern to industry is that those sellers who are avoiding sales tax are able to offer similar equipment at a substantial discount compared to those who do pay sales tax. For example, a retailer for a major chain store is reported as saying that a seller of a printer who did not pay sales tax could price the printer at $389 while his store needed to charge $599. This has obvious effects on the sales of legitimate dealers and also threatens the long-term availability of support for equipment. There have also been suggestions that since the proposed tightening of this area, similar schemes have been extended to the mobile phone industry.

In the Treasurer's Press Release on the matter, released at the time of the 1996-97 Budget, a proposed scheme was suggested whereby dealers would not be able to quote and so will be liable for sales tax, and where the sale was one where sales tax was not payable, the seller would be eligible for a credit on the amount paid. Also, if the final purchaser is an exempt body, it would be able to claim a refund of the sales tax within 28 days. However, this was suggested as only a possible option and it was made clear that there would be further consultation before a final system was put in place. The main differences between the proposal and the Bill is that the Bill provides for exempt organisation not to have the sales tax and so not have to seek a refund, and that there would be a system of approval for dealers who in the past had proved themselves not to take advantage of the anti-avoidance schemes. These people will be able to continue the present practice of quoting.

The explanatory memorandum to the Bill estimates that the total cost to the revenue of the schemes is approximately $80 million per year. It is not clear what proportion of this amount is expected to be recovered.

Item 23 of Schedule 2 of the Bill inserts a new Part 7A into the Principal Act. A Part 7A good is defined in proposed section 91C to be personal computers, laptops, notebooks, palmtops, monitors, keyboards, dot matrix, bubble jet and laser printers, CD ROM drives, modems and computer components (motherboards, CPUs, memory, disk drives and controller cards). The proposed definition also allows goods to be included or excluded from the definition (eg. mobile phones could be included).

The following categories of people may apply to be accredited under Part 7A:

  • a registered person (ie. people who are registered for quoting);
  • people who have granted, or intend to grant, eligible long or short term leases on goods covered by Part 7A, or if the lessee has given evidence that they intend to export the goods or the lease requires the lessor to export the goods; or
  • where the Commissioner is satisfied there are special circumstances for accreditation or the Commissioner has agreed to the application to be made for accreditation (proposed section 91F).

If a person is eligible to make an application for accreditation, the must comply with all the requirements of proposed section 91G unless the Commissioner exempts them from one or more of the requirements, which are:

  • the applicant has conducted business activities for which accreditation is sought and has carried on that business at or from established premises that have been advertised to the public for that purpose;
  • the applicant has a tax file number (TFN) and has quoted their TFN in relation to each business account to their financial institution/s;
  • if the applicant is an individual, their business and private accounts are maintained separately;
  • the applicant and any person relevant to them (see below) has complied with all their obligations under Acts administered by the Commissioner for 3 years before the application;
  • the applicant must have maintained, for 3 years, accounts in English that list the details of purchases and sales, the names of suppliers and customers and details of purchases and sales with regard to which sales tax was not paid;
  • a person that applies, a director of a company that applies, a trustee of a trust that applies or a member of a partnership that applies is either an Australian citizen or the holder of a permanent visa;
  • the individual who applies, or if the applicant is not an individual a relevant person to the application, has not, in the last three years, been convicted of an offence, or subject to any penalty, in relation to an offence in Australia or overseas regarding taxation, customs, misdescription of goods, trade practices, fair trading or defrauding government;
  • the individual who applies, or if the applicant is not an individual a relevant person to the application, has not been refused accreditation or had their accreditation revoked in the past 3 years; and
  • the individual who applies, or if the applicant is not an individual a relevant person to the application, has not been a relevant person in relation to an application that has been refused in the past 3 years.

A person can be relevant to the applicant in a number of circumstances, including: where the applicant is accustomed, is under an obligation, or may reasonably be expected to act to act in accordance with the directions of the person; the person is a director of an applicant company acting in the interests of applicant; if the applicant is a trust the relevant person will be the trustee; and, if the applicant is a partnership, the relevant person will be a partner.

If the tests contained in proposed section 91G are satisfied the Commissioner will still have a discretion to refuse accreditation if the Commissioner has reasonable grounds to believe that sales tax in respect of Part 7A goods will not be paid, or that the application was false or misleading in a material way, and the Commissioner believes that this would assist in achieving the object of the new rules. This will, basically, give the Commissioner a very wide power to refuse accreditation subject to the Commissioner believing that there are reasonable grounds. Such an opinion may be disputed in court but such a challenge would still result in the application being considerably delayed and the applicant having to incur significant costs (proposed section 91K).

In addition, the Commissioner will be given power to revoke accreditation where of the opinion that the conditions for application or accreditation have not been met, or that there are grounds for the Commissioner's power under proposed section 91K to be exercised. Again, this will grant the Commissioner a considerable discretion in determining whether to revoke accreditation (proposed section 91L).

Decisions of the Commissioner will be subject to the normal avenues of appeal in regard to taxation matters (proposed section 91M).

Authorisation

In addition to being required to be accredited, proposed Division 3 of Part 7A provides that the transaction must be authorised and provides for both single transaction and standing authorisations and for certain transactions to be exempted from the authorisation rules.

Authorisation will be required:

  • except where the good is not locally entered and is to be used for an exempt purpose;
  • the good is not a local entry and the person quoting is registered, not acquiring the goods for resale and the value of the goods is below the 'low purchase threshold' (see below);
  • the quote is made in prescribed circumstances; or
  • where the person accepting the quote was reasonably satisfied that any of the above conditions applied.

The low purchase threshold will be satisfied where the value of the current dealing, and previous dealings in the year prior to the current dealing and expected dealings within a year after the current dealing, will be less than $6 000 or such other amount as prescribed, in goods covered by proposed Part 7A. For a person to be satisfied that the threshold will not be exceeded, they will need to obtain a signed statement from the purchaser to the effect that the threshold test will be satisfied (proposed section 91S).

The Commissioner will be able to give authorisation for a single transaction or a standing authorisation which will cover dealings in the class dealt with in the authorisation. An authorisation may be refused if the Commissioner has reasonable grounds to believe that, even if the above tests are satisfied, sales tax is unlikely to be paid (proposed section 91U).

Proposed Division 4 provides for the withholding of the amount of sales tax where an accredited person makes a purchase from an unaccredited person. The purchaser must withhold an amount that is equivalent to the sales tax that would be payable on the goods. It will be an offence to breach this requirement. In addition if a person, other than a government body (ie. the Commonwealth, a State or Territory or an authority of such an entity - these bodies are not covered by the proposed rules to satisfy Constitutional requirements) fails to withhold the tax they will be liable to a penalty equal to the amount not deducted plus interest on this amount at the rate of 16% pa. Similar rules will apply where the amount is withheld but not forwarded to the Commissioner (such amounts are to be remitted monthly - proposed section 91Z).

Land Transport Facilities Borrowings

Prior to February 1997 concessional tax treatment was available in respect of various infrastructure projects where the project was approved by the Development Allowance Authority. The scheme allowed lenders of funds to claim a rebate equivalent to the interest deduction that would otherwise have been available to the borrower. The scheme aimed to bring forward the timing of the deduction to make the financing of major infrastructure projects more attractive. However, the scheme was subject to some abuse whereby interests in lendings for infrastructure projects could be used to increase the total amount of rebate available and to direct the rebates to areas where the tax advantage was maximised. As a result, the Treasurer announced on 14 February 1997 that no new applications would be accepted under the scheme and that transitional provisions would apply to applications made before the closure. For further information on the previous scheme and reasons for its closure, refer to the Bills Digest for the Taxation Laws Amendment (Infrastructure Borrowings) Bill 1997(No. 146 of 1996-97).

It was announced in the 1997-98 Budget that a new scheme for land transport infrastructure would be introduced. The basis of the scheme will be the same as the previous scheme with a rebate being available to the lender equivalent to the amount that otherwise would have been available as a deduction for the borrower. It was announced that the rate of rebate available will be the lesser of the persons marginal tax rate and the rate of company tax. The rebate will not be tradeable, but if the loan is transferred, the rebate will continue to be available to the new lender. The maximum cost of the scheme will be $75 million per year, including administrative costs, and once this amount is reached no further projects will be accepted during the year. Applications for assistance will be called twice annually and the projects selected from the applicants. There will be two stages in the selection process, the first phase determining if the application is an eligible application and the second assessing the commercial feasibility and public benefit of the project. The announcement also provided for transitional arrangements that will allow certain projects for which an application was made, or an application made and approval granted, before the closure of the previous scheme to be eligible under the proposed scheme, even if the project does not fall within the definition of a land transport facility contained in the Bill.

It has been reported that reaction to the announcement has not been very positive. A director in Coopers and Lybrand is reported as stating that the low level of funding available and the eligibility criteria would make it difficult for small projects to qualify. It was also reported that the chief executive of the Australian Council for Infrastructure Development 'said the new scheme would "shut down" private sector investment in regional Australia and do nothing to meet national infrastructure needs.'(2)

Schedule 3 of the Bill will insert a new Division 396 into the Income Tax Assessment Act 1997. The land transport facilities that can be approved are dealt with in proposed section 396-45 and are a road, tunnel, bridge or railway line in Australia that is used to carry the public or their goods at a charge. Related facilities which are reasonably necessary for the land transport facility to operate are also included. Related facilities may include: railway rolling stock, buildings to store freight, passenger and freight terminals and maintenance facilities.

A borrower can only be approved if they are an incorporated body, a corporate limited partnership, a corporate unit trust or a public trading trust which intends to operate as such an entity for the time of the project covered by the scheme. Such a body will not be eligible to be approved if they are applying as a partnership with another such body and government and government owned bodies will not be approved (proposed section 396-50). A body will only be an approved lender if it is an Australian resident for the entire year in which the rebate is claimed (proposed section 369-55).

If an application is approved (the approval will be subject to the criteria discussed below), proposed section 396-15 provides that the lender will be able to claim a offset of tax (ie a rebate) calculated by multiplying the company tax rate by the relevant LFT interest (see below) in the project. The deductions available to the borrower will be decreased by the amount claimed by the lender, so that double concessions will not be available (proposed section 396-25).

LFT interest is defined in proposed section 396-30 to be the amount of interest paid by the borrower that, apart from these provisions, would be deductible to the borrower (including interest payable on certain securities) and for the lender will be the amount of interest received that is to be included in assessable income (again including interest received in relation to certain securities). In a theoretical case, the LFT interest held by the borrower and lender will be the same in cases where the entire concession is made available to the lender, which maximises the concessions available under the scheme. However, the definition of the LFT interest also takes account of occasions where other conditions apply, such as part of the interest income being exempt for the lender.

The Treasurer will be able to set the maximum cost to the Commonwealth of the scheme in a financial year (proposed section 396-20).

The approval of projects is dealt with in proposed subdivision 396-D. The Minister may approve a project for a maximum of 5 years and in considering whether to approve a project the Minister is to have regard to:

  • the commercial viability of the project;
  • the tax benefit that would be received and the revenue foregone;
  • economic and social benefits and costs of the project;
  • the extent to which the project complies with Commonwealth and State policies and planning requirements;
  • the degree of consultation with affected people;
  • other matters that the Minister considers relevant; and
  • any matter that the Commissioner has advised the Minister of regarding the application.

There is to be a formal agreement regarding the project, which is to deal with a number of matters including the use of the funds, accountability and, if relevant, the maximum amount of assistance available under the scheme. Certain conditions, including those relating to accountability, will be in all agreements (proposed sections 296-80 and 296-85).

Decisions relating to the approval of a project or the concessions available will not be subject to review by the Administrative Appeals Tribunal (proposed section 396-10).

Part 3 of the proposed division contains transitional provisions. The main provisions relate to:

  • applications for infrastructure assistance under the previous scheme made on or before 14 February 1997 will be taken to be applications in respect of a land transport facility, therefore allowing projects that are not related to land transport facilities as defined in the Bill to be considered where the application for assistance was made prior to the closure of the previous scheme (item 20); and
  • if an application was made on or before 14 February 1997 and a certificate of approval had been issued but had no effect because of the legislation closing that scheme, the Minister may approve the project under this Bill (item 21).

Other

The remainder of the Bill contains, largely uncontroversial amendments. The current exemption for payments under the Commonwealth Rebate for Apprentice Training (CRAFT) scheme, which aim to compensate employers for the release of apprentices to attend full-time instruction, will be repealed but it has also been announced that the payments will be increased to compensate for the change. The measure is largely an accounting exercise so that expenditure under the scheme is contained in the outlays side of the Budget, rather than in both the expenditure and revenue sides.

The other main amendments are technical amendments to the Income Tax Assessment Act 1997. (It may be questioned as to why such extensive, technical amendments need to be made to the rewritten provisions of the taxation laws contained in the Income Tax Assessment Act 1997. If the proposed rewritten laws need such substantial amendment in the same year that the Act was passed, it may be argued that the new legislation will be as difficult to interpret, due to the difficulty in finding the amendments to the legislation, as the current legislation.)The Bill also amends a number of other Acts to reflect prior changes to the tax law.

Endnotes

  1. House of Representatives, Hansard, 24 March 1997.
  2. The Australian Financial Review, 15 May 1997.

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Chris Field
17 November 1997
Bills Digest Service
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ISSN 1328-8091
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