Bills Digest No. 86  1999-2000 Taxation Laws Amendment Bill (No. 10) 1999


Numerical Index | Alphabetical Index

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
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details

Passage History

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.

Purpose

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.

Background

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

Main Provisions

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)).

Endnotes

  1. The Age, 26 March 1999.

  2. ibid.

  3. Prime Minister, Transcript of Interview, 25 March 1999.

  4. See Esso Resources Australia v Commissioner of Taxation [1998] 851 FCA.

Contact Officer and Copyright Details

Chris Field
22 November 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

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 1999

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

Published by the Department of the Parliamentary Library, 1999.

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