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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment Bill (No. 10)
1999
Date Introduced: 14 October 1999
House: House of
Representatives
Portfolio: Treasury
Commencement: The measures contained in the
Bill have differing dates from which they apply. Refer to the main
provisions section for the application dates of the various
measures.
The amendments
contained in the Bill of a relative minor nature and do not
implement new policy. They correct the unintended operation of
certain tax laws and introduce new rules relating to:
-
- the transfer of pre-existing collective investment schemes to
the requirements of the Managed Investment Fund regime
-
- allowing the return of concessional capital as franked
dividends to investors in film licensed investment companies
-
- exempting distributions from the Cyclones Elaine and Vance
Trust Fund
-
- the amount of deductions available when calculating balancing
adjustments relating to mining and quarrying operations, and
-
- clarifying who may claim a deduction for certain expenditure
incurred for petroleum exploration.
-
As there is no central theme to the Bill the
background to the various measures will be discussed below.
Managed Investment Funds
(MIFs)
MIFs were introduced in 1998 as a new structure
for collective investment bodies. Prior to MIFs, collective
investments had a two-tier structure with a management company
responsible for the day to day management of the scheme and a
trustee responsible for income distribution and ensuring that the
trust deed was complied with. MIFs replaced the two tier structure
with a 'single responsible entity' responsible for the operation of
the scheme and performing the functions conferred on it by the
scheme's constitution and the Corporations Law. MIFs could be used
from 1 July 1998 and there is a two year period for existing
collective investment schemes to change over to the MIF
structure.
Conversion of existing entities operating under
the old structure to the new MIF structure had the potential to
give rise to a number of adverse tax consequences, principally
regarding capital gains tax (CGT). The transfer of assets from the
old entity to the new would constitute a disposal for CGT purposes
and result in the need to pay CGT on any gains. There are also a
number of other possible adverse tax consequences arising from a
change to the new entity, including possible loss of the ability to
carry-forward existing losses.
In a Press Release dated 28 July 1988, the
Assistant Treasurer announced that CGT rollover relief would be
available during the transition period (ie between 1 July 1998 and
1 July 2000) to entities changing to the new structure so long as
the following conditions were met:
-
- the scheme existed at the time of the announcement
-
- the transfer of assets occurred according to the transitional
provisions contained in the Managed Investments Act 1998,
and
-
- there is no change in the underlying ownership of the property
involved.
These measures were enacted in Taxation Laws
Amendment Act (No. 7) 1999.
Further changes were announced by the Assistant
Treasurer on 12 March 1999 that would assist trust funds converting
to the MIF requirements where they also made certain changes to
their trust deeds that were not required to comply with the MIF
structure, but improve the operation of the scheme under
consideration. Under the announced changes, rollover relief would
remain available where the above conditions where met and after the
change:
-
- there would be no change in value between members or classes of
members
-
- the market value of members rights was not reduced, and
-
- there was no change in membership of the scheme.
Schedule 1 of the Bill will
amend the Income Tax (Transitional Provisions) Act 1997 to
provide that rollover relief will also be available where a change
which satisfies the above conditions will affect member interests.
This will generally apply where there is a subsequent change not
essential to satisfy the requirements to change to a MIF but which
improves the operation of the scheme.
Application: From 1 July 1998
(subclause 2(2)).
Film Licence Investment
Companies (FLIC)
The FLIC scheme was introduced in 1998 to
authorise the Minister for Arts to recognise a company as a FLIC
and to enable investors in a FLIC to claim a 100% deduction for the
purchase of shares in a FLIC. The scheme was introduced on a trial
basis for 1998-99 and 1999-2000 and aims to ensure better targeting
of the tax concessions available for investment in Australian
films. The scheme also allows greater certainty of the deduction
for investors as once a company has been declared to be a FLIC the
deduction is guaranteed without the need to satisfy the various
requirements applying to the general concessional provisions
relating to investment in Australian films that allow a similar
deduction and co-exist with the FLIC scheme.
To be recognised as a FLIC a number of
conditions must be satisfied, including that revenue or losses are
not transferred to another company and that deductions cannot be
claimed for the expenditure raised subject to the tax concession.
As a result, if capital subject to the deduction is used for
another purpose not associated with the FLIC's operations it will
also not be subject to a deduction. If the capital is returned to
the contributors it will therefore be subject to tax in both the
hands of the FLIC (as no deduction will be allowed) and the
recipient. To prevent such double taxation, the Assistant Treasurer
announced in a Press Release dated 19 March 1999 that returns of
concessional capital would be treated as frankable dividends in the
hands of the recipient, thus preventing double taxation.
Schedule 2 of the Bill will
insert a new section 375-872 into the Income
Tax Assessment Act 1997 (ITAA97) which states that capital
returned through a share buy-back or other method, and for which a
deduction has been allowed as a contribution to a FLIC, will be
treated as a dividend. The maximum amount that may be treated in
this manner will be equal to the deduction allowed to the taxpayer
to whom the capital is returned, and the requirements of the
Corporations Law in respect of dividends must be complied with
(item 3 of Schedule 2).
Application: From 7 December
1998 (subclause 2(3)).
Cyclones Elaine and Vance Trust
Fund
Cyclones Elaine and Vance caused significant
damage to the Onslow, Exmouth and Moora areas and the Gascoyne
Pastoral areas of north-western Western Australia in March 1999.
Cyclone Vance, reported to be 'the biggest storm to ever hit an
Australian town'(1) (Exmouth) caused the most damage, destroying
112 homes and seriously damaging another 200.(2) Assistance from
the Commonwealth and Western Australian government was announced on
25 March 1999 when the Prime Minister announced the establishment
of a $10 million assistance fund, comprising $5 million from each
government, to be used to provide general relief and assistance to
business. The Prime Minister also announced that the Commonwealth
would make a grant $1 000 to each family whose home was destroyed
or severely damaged plus $200 per child.(3) The $10 million
assistance package was paid into the Cyclones Elaine and Vance
Trust Fund (the Trust Fund), which is being used to provide
assistance to individuals, communities and businesses.
Schedule 4 of the Bill provides
that amounts received for businesses assistance from the Trust Fund
are not to be included in income and that no CGT consequences are
to arise from the receipt of such money.
Application: The amendments
will apply for assessments for the 1998-99 and 1999-2000 income
years (item 4).
(N.B. The explanatory memorandum for the Bill
dealing with Schedule 4 refers to non-profit organisations
conducting fishing and aquaculture operations. This appears to have
no relevance to the provisions of the Bill and references to item 4
of Schedule 1 are mistaken as Schedule 1 of the Bill has only two
items which deal with the restructuring of MIFs).
Mining and Quarrying Balancing
Items
Where a mining or quarrying operator ceases to
use property for those purposes an adjustment is made where there
is a difference between the deductions allowed and the amount
received for the property and the total capital expenditure of the
taxpayer this regard. Where the former amount is less than the
actual capital expenditure an amount is included in assessable
income, while if it is less, a deduction is allowed. This differs
from the normal rule that no deduction is allowed for capital
expenditure.
In a recent case before the Federal Court, it
was accepted that the amount that could be claimed when calculating
the total capital expenditure was all, rather than certain
portions, of the relevant total capital expenditure.
The Federal Court rejected the Commissioner of
Taxation's argument that the deduction should be restricted to that
proportion of the capital expenditure which related to the Division
of the ITAA36 which provided for the balancing adjustment (ie which
allowed the deduction of capital expenditure).(4)
The Commissioner's view will be incorporated
into the ITAA97 by Schedule 5 of the Bill which will restrict the
amounts that can be included in the calculation of capital
expenditure to those allowed as a deduction under the relevant
provisions of ITAA97. (The Federal Court decision was based on
provisions of the Income Tax Assessment Act 1936 which
have been rewritten when incorporated as part of ITAA97 so that the
amendments contained in Schedule 5 do not refer to the terms used
in the judgment. The result achieved is as described above.)
Application: From 3 December
1998 (item 2). (This is the time that it was
announced in a Press Release by the Treasurer, released at that
time, that the restriction on such deductions would apply.)
Petroleum Resource Rent Tax
(PRRT)
PRRT is imposed on offshore petroleum projects
and is levied at a rate of 40% of a project's taxable profits, that
is its assessable receipts minus deductions (this is a simplified
statement of the operation of PRRT which can be very complex in its
calculation). In the situation where a project is abandoned, rather
than transferred, the calculation of deductions available to the
new operator of the site will include expenditure by the previous
operator on that site. As a result, the entity which actually
incurred the earlier expenditure will not be able to claim the
deduction for the expenditure unsuccessfully incurred. It was
intended that the availability of the deduction would follow the
party that incurred the expenditure unless the site was sold,
rather than abandoned.
Schedule 6 will amend the
Petroleum Resource Rent Tax Assessment Act 1987 to provide
that the deduction will be allowable to the person who incurred the
expenditure when a site is abandoned, rather than the new operator
of the site. The deductions will only be transferred where
consideration is received for the change in the lease for the
relevant site.
Application: From Royal Assent
(item 3 and subclause 2(1)).
-
- The Age, 26 March 1999.
- ibid.
- Prime Minister, Transcript of Interview, 25 March 1999.
- See Esso Resources Australia v Commissioner of
Taxation [1998] 851 FCA.
Chris Field
22 November 1999
Bills Digest Service
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ISSN 1328-8091
© Commonwealth of Australia 1999
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