Bills Digest No. 136  1999-2000Taxation Laws Amendment Bill (No. 5) 2000

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 & Copyright Details

Passage History

Taxation Laws Amendment Bill (No. 5) 2000

Date Introduced: 17 February 2000

House: House of Representatives

Portfolio: Treasury

Commencement: Royal Assent. However, the measures contained in the Bill have differing application dates which are dealt within the Main Provisions section of this Digest.

Purpose

To:

• alter the calculation of the market value of shares for calculations under provisions dealing with the taxation of employee share ownership schemes where an employee share offer is made in conjunction with a public offer by a listed company
• provide the Commissioner with a discretion to extend the time for reporting by trustees of closely held trusts and to allow such trustees to recoup from others tax paid in certain circumstances, and
• exempt from sales tax the additional cost of manufacturing motor vehicles for use by, or in relation to, disabled persons.

Background

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

Main Provisions

Employee Share Ownership Schemes (ESOS)

Since the introduction of the Capital Gains Tax in 1985 and the Fringe Benefits Tax (FBT) in 1986, the provision of shares, or rights to shares, in lieu of income has been a less attractive method of tax minimisation for both employers and employees. In order to escape FBT liability, shares or rights provided under an ESOS must satisfy the criteria contained in the Income Tax Assessment Act 1936 (ITAA36). Subject to transitional provisions, shares or rights issued prior to 6pm on 28 March 1985 had to comply with section 26AAC, while since that time Division 13A of Part III of the ITAA36 has had to be complied with. Division 13A was introduced to curtail the use of ESOS as a tax minimisation scheme and the remainder of this Digest will deal with the situation since the introduction of Division 13A.

Tax Treatment

Under Division 13A, any discount between the price that a share or right is acquired for and its market value is to be included in the income for the year in which it is acquired (the calculation of the amount of discount can vary depending on circumstances of acquisition and disposal) unless the share or right is a qualifying share or right and the taxpayer has not elected that Division 13A is not to apply.

If a share or right qualifies for concessional treatment under Division 13A, the main advantages are that the first $1 000 of such income is to be excluded or the inclusion of any discount associated with the receipt of the share/rights in assessable income may be delayed by up to 10 years.

To be a qualifying share or right, it must be provided under an employee share scheme (ESS) as defined in section 139C, which is basically where the share or right is provided in relation to employment or the provision of a service by the taxpayer or an associate and the share or right is provided for less than market value (ie there is a discount). If acquired under an ESS, a share or right will be a qualifying share or right if the following conditions are satisfied:

• the share or right is in the company employing the taxpayer or the holding company of the employing company
• the shares or rights to be acquired relate to ordinary shares
• at the time the shares are acquired by the taxpayer at least 75% of the permanent employees of the employer are, or were at an earlier time, entitled to acquire shares or rights under the ESS or another ESS (the Commissioner may deem this condition to be satisfied if the employer has done everything reasonably practicable to ensure that the condition is satisfied), and
• immediately after the acquisition the taxpayer does not hold more than 5% of the shares in the company or more than 5% of the voting rights in the company (section 139CD).

If a share is a qualifying share and the taxpayer does not wish to defer the inclusion of the discount amount in assessable income in the year it is acquired, but does wish to take advantage of the exemption of the first $1 000 of the value of the share, the following conditions must be satisfied:

• the scheme does not have any conditions that can result in ownership being forfeited
• shares, rights or shares acquired as a result of exercising rights cannot be disposed of within 3 years of the acquisition of the share or right unless the taxpayer ceases employment with the employer, and
• the scheme operates on a non-discriminatory basis (this is expounded on in section 139GF and is basically that there is no different treatment for different categories of employees) (section 139CE).

(Generally it could be expected that the choice that the taxpayer will make between the $1000 exclusion and possible 10 year deferral will depend on the value of the shares/rights received. If the value of the discount received in a year is $1 000 or less, the most tax effective course is to immediately include the amount in income. However, if the amount is substantial the taxpayer is likely to take advantage of the deferral which can be used in conjunction with other tax planning, such as inclusion in other years when assessable income is low, to result in a lower overall tax bill.)

Once the value of the discount has been taken into account through inclusions in assessable income, normal capital gains tax rules apply for any subsequent disposal of the shares, with the cost base of the shares/rights being based on the market value of the share at the time of acquisition.

Extent of ESOS

As with many other areas involving tax concessions, it is impossible to give a costing of the concessions available to ESOS, nor to quantify the extent to which they operate.

Australian Bureau of Statistics (ABS) figures estimate that, as of August 1999, approximately 400 000 employees receive share benefits, which represents approximately 5.5% of the total number of employees. The ABS figures show high amounts of share benefits in communication services (30.2%) and finance and insurance (29.24%) and a much higher incidence amongst full-time employees compared to part-time employees. The figures also show that the highest rate of share benefits are for managers and administrators (12.6%), advanced clerical and service workers (9.5%) and associate professionals (7.6%). The lowest rate is amongst labourers and related workers (1.7%).⁽¹⁾ These figures tend to support the view that while ESOS have to be aimed at all employees, the rate of take up of general share benefits, which may be provided under schemes other than ESOS, is much higher among managers and other senior officers of service industry employers and their impact among lower paid, 'blue collar' workers is relatively minor.

While the above figures give an indication of the numbers involved in receiving share benefits, they do not indicate the value of benefits received and so a conclusion cannot be reached on whether this increases the bias indicated above. In regard to the lack of statistical information on the extent and distribution of share benefits which gain a tax concession (ie ESOS), in recent submissions to the House of Representatives Standing Committee on Employment, Education and Workplace Relations, Inquiry Into Share Ownership in Australian Enterprises, the following statements were made in response to a request for information regarding, amongst other matters, the extent of ESOS:

Australian Taxation Office:

(The submission provided no estimates of these matters.)

Australian Securities and Investment Commission:

....ASIC has no statistical information on the Inquiry's terms of reference.⁽³⁾

The absence of meaningful statistical data in this area precludes any judgement being made on the effectiveness of ESOS from a policy point of view as while benefits from the schemes in matters such as productivity can also be hard to judge, there is no reliable estimate of the cost of the scheme to compare the benefits to.

While not necessarily part of an ESOS, the shares/rights made available to senior executives have received considerable recent comment and while comprehensive overall statistics are not available, individual entitlements for senior officers of public companies are publicly available. The Australian Financial Review recently published a list of the top 100 remuneration and equity packages. In relation to equity ownership, some examples from that list include:

Source: The Australian Financial Review, 1 November 1999.

The House of Representatives Standing Committee on Employment, Education and Workplace Relations, Inquiry Into Share Ownership in Australian Enterprises, is anticipated to report in April or May 2000.

When determining the value of a share or right listed on the market, section 139FA provides that the market value is to be determined by the weighted average of the share price during the week, including the day under consideration, leading to the time in respect of which the assessment is made or, if there was no such trading, the market value is to be determined as if the stock were an unlisted stock. (Market value is important in determining the amount of the discount received.). On 2 September 1999 the Treasurer announced that where a public offer of shares is made by a listed company and at the same time such shares are offered to employees, the value of the shares for the employees will be the public offer price, rather than the weighted average price. This was explained as overcoming 'an anomaly in the existing law that produces unintended consequences'.⁽⁴⁾

Schedule 2 will insert a new section 139FAA into the ITAA36. The proposed section will apply to calculate market value where a number of conditions are satisfied, including:

• the share is acquired within 7 days before, and 7 days after, the time when shares were first acquired under the public offer
• the voting, dividend and distribution rights of the share acquired are the same as those for the public offer shares
• there is at least one price at which shares were sold under the public offer to at least
  1 000 Australian residents and the cost of acquiring those shares was at least $1 million, and
• the company has been a listed public company for at least 6 months.

If these conditions are satisfied, the market value of the shares will be the lowest price that the shares were sold in the public offer that satisfies the criteria referred to in the third point above.

Application: To shares and rights acquired after 1 September 1999.

Closely Held Trusts

A closely held trust is defined in section 102UC of the ITAA36 to be:

• a trust where up to 20 individuals have a fixed entitlement to 75% or more of the income or capital of the trust, or
• a discretionary trust

other than a complying superannuation fund, approved deposit fund or a pooled superannuation trust; a trust of a deceased estate; a fixed trust where all the beneficiaries are tax exempt; or a unit trust listed on the Australian Stock Exchange.

Division 6D of Part III of the ITAA36 provides for the trustee of a closely held trust to report to the Commissioner on the ultimate beneficiaries of the trust so that the Commissioner can check that tax is paid on the distributions. The statement outlining the distributions is known as the UB Statement. A UB Statement is to include details of any tax preferred amount paid to a beneficiary (eg amounts not required to be included in assessable income), other amounts paid and identification details of the ultimate beneficiary.

Currently, section 102UH provides that a UB Statement must be made to the Commissioner by the end of the period in which the trust is required to provide its income tax return. Item 3 of Schedule 3 will substitute a new section 102UH which will provide the Commissioner with power to allow a further period for the provision of the UB Statement.

If a UB Statement is not provided or is incorrect, tax is payable by the trustee at the highest marginal rate plus Medicare levy in respect of the beneficiary for whom a UB Statement has not been provided or is incorrect. Item 5 will insert a new subsection 102UK(2A) which will allow a trustee to correct a UB Statement, and not be liable for tax, where:

• the trustee believed on reasonable grounds that the original UB Statement was correct
• the trustee could not reasonably have foreseen the event that caused the UB Statement to be incorrect, and
• the correction is made either before the trustee becomes liable to pay the tax or within 4 years of the tax becoming payable.

If a trustee becomes liable for, and has paid, tax under Division 6D proposed section 102USA will allow the trustee to sue to recover the amount paid in certain circumstances. Action may be taken against:

• an ultimate beneficiary
• a trustee beneficiary, or
• the trustee of an interposed trust or a partner of an interposed partnership

where:

• the person has been requested to provide information in relation to the UB Statement and has failed to do so, or
• the person has supplied incorrect information that the trustee has reasonable grounds to honestly believe was correct.

Application: Subject to the Commissioner's discretion (see below), the amendments will apply from the same time as Division 6D, ie. for amounts entitled to be received after 4pm on 13 August 1998 (subitem 9(1)). The Commissioner will have power to delay the commencement of the changes by up to 1 year (subitem 9(2)).

Motor Vehicles for Transporting Disabled Persons

The current sales tax regime contains a number of exemptions in respect of motor vehicles used to transport disabled people, including:

• motor vehicles for disabled veterans
• motor vehicles used by disabled persons for transportation to and from gainful employment, and
• goods used to modify motor vehicles to adapt them for driving by a disabled person or for transporting a disabled person.

On 5 November 1999, the Assistant Treasurer announced that, with regard to modified vehicles, the part of the cost of the vehicle attributable to making the vehicle suitable to be driven by, or used to transport, a disabled person would be exempt from sales tax. The main difference between the proposal and current provisions is that the proposal will apply to the manufacture, rather than modification, of vehicles.

The measure was announced to have effect from 26 June 1998, the date that the NSW government announced the release of 400 additional wheelchair accessible taxi licences.⁽⁵⁾

The changes will be introduced by item 1 of Schedule 1 of the Bill, which will insert a new section 49A into the Sales Tax Assessment Act 1992. The proposed section will apply to motor vehicles designed or adapted for driving by, or for the transportation of, people with a physical impairment. The additional cost of manufacturing the vehicle for either of these purposes will be exempt.

Application: For dealings in goods on or after 26 June 1998.

Endnotes

1. Australian Bureau of Statistics, Employee Earnings, Benefits and Trade Union membership, August 1999, 6310.0.
2. Submission to the Committee Secretary, 30 April 1999, p.1.
3. ASIC, 30 April 1999, p 3.
4. Treasurer, Press Release, 2 September 1999.
5. Assistant Treasurer, Press Release, 5 November 1999.

Contact Officer and Copyright Details

Chris Field
13 March 2000
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 2000

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, 2000.

Back to top