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. 5) 1997
Date Introduced: 23 October 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The amendments described in this
Digest commence on Royal Assent.
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.
As there is no central theme to the Bill, the background of the
various measures will be discussed below.
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.
- House of Representatives, Hansard, 24 March 1997.
- The Australian Financial Review, 15 May 1997.
Chris Field
17 November 1997
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1997
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Last updated: 18 November 1997
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