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.
Contact Officer & Copyright Details
Taxation Laws Amendment Bill (No. 7) 2000
Date Introduced: 29 June 2000
House: House of Representatives
Commencement: Upon Royal Assent. However, the measures contained in the Bill have different application dates, which will be considered in the Main Provisions section of this Digest.
The amendments contained in this Bill are:
- Measures to amend the income tax deductions for gifts (Schedule 1)
- Measures to amend the PAYG instalments legislation for certain beneficiaries of trusts (Schedule 2)
- Measures to correct errors in the capital gains tax small business concessions (Schedule 3)
- Measures to correct the capital gains tax provisions rewritten as part of the Taxation Law Improvement Project (Schedule 4)
- Measures to make a minor technical amendment to the income tax law (Schedule 5), and
- Measures to improve the integrity measures contained in the income tax law (Schedule 6).
As the Bill contains no central theme the background to the various measures is included in the discussion of the main provisions.
Income tax deductions for gifts
The measures in Schedule 1 will amend the income tax law to allow income tax deductions for gifts of $2 or more made to certain funds and organisations and to extend the period of time within which deductible gifts to the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund may be made.
Division 3 of the Income Tax Assessment Act 1997 (the 1997 Act) provides taxpayers with a deduction for gifts of $2 or more to certain funds or entities. There are two alternative methods by which a fund or organisation can qualify for tax deductible gifts. Firstly, the fund or organisation may qualify under one of the general categories listed in Division 30 of the 1997 Act and secondly, the fund or organisation may be expressly listed in Division 30 of the 1997 Act. The period in which deductible donations may be made to certain funds may be limited.
Foundation for Gambling Studies
This foundation was established to support independent research on gambling. The Assistant Treasurer announced by Press Release No. 10 of 8 March 2000 that the Government would allow income tax deductions for gifts of $2 or more to this foundation. The Assistant Treasurer stated in his Press Release that:
Tax deductible gift status will assist the Foundation to attract public support for its activities which include funding scholarships and commissioning research. Reliable and independent research will assist the Government and the community to develop policies relating to gambling.
Gifts made to the foundation after 8 March 2000 are deductible (Item 1).
Community Disaster Relief (Sydney Hailstorm Assistance) Fund
This fund was established to raise money for those affected by the severe storm that caused damage to parts of Sydney in April 1999. The Assistant Treasurer announced by Press Release No. 24 of 27 May 1999 that the Government would allow income tax deductions for gifts of $2 or more to this fund. Gifts made to the fund after 14 April 1999 and before 15 April 2001 are deductible (Item 2).
The Australian Ex-Prisoners of War Memorial Fund
This fund was established to raise funds for a national memorial to be built in Ballarat. The aim of the memorial is to promote the recognition of the service and sacrifice made by Australian prisoners of war. The Assistant Treasurer announced by Press Release No. 27 of 28 June 1999 that the Government would allow income tax deductions for gifts of $2 or more to this fund. Gifts made to the fund after 19 October 1999 and before 20 October 2001 will be deductible (Item 4).
The RSL and 6th Division Australian-Hellenic Educational Memorial Fund
This fund was established to raise money to assist Greek citizens, under the age of 25 years of age, residing on the island of Crete, to undertake tertiary education. The Assistant Treasurer announced by Press Release No. 25 of 14 June 2000 that the Government would allow income tax deductions for gifts of $2 or more to this fund. Gifts made to the fund after 13 June 2000 and before 14 June 2002 will be deductible (Item 5).
The Global Foundation
This foundation is a non-profit organisation set up to promote Australia's national development and international orientation, including Australia's Centenary of Federation. The Assistant Treasurer announced by Press Release No. 50 of 3 November 1999 that the Government would allow income tax deductions for gifts of $2 or more to this foundation. Gifts made to the foundation after 2 November 1999 will be deductible (Item 5).
The United Hellenic Earthquake Appeal
The fund was established to raise money for the victims of the earthquake that struck Athens in September 1999. The Assistant Treasurer announced by Press Release No. 59 of 8 December 1999 that the Government would allow income tax deductions for gifts of $2 or more to this fund. Gifts made to the foundation after 6 September 1999 and before 7 September 2000 will be deductible (Item 5).
The Foundation for Rural and Regional Renewal Public Fund
This fund was established to raise money for the purpose of providing a social and economic future for Australia's rural and regional communities. The Assistant Treasurer and Deputy Prime Minister announced by joint Media Release No. 11 of 29 March 2000 that the Government would allow income tax deductions for gifts of $2 or more to this fund. Gifts made to the foundation after 28 March 2000 are deductible (Item 6).
The Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund
This fund was established to raise money for the ongoing maintenance of the Mount Macedon Memorial Cross. The Cross, which is located in Victoria, was built to commemorate the memory of those who served in World War I. Under the existing provision deductible gifts to this fund could be made between 8 February 1998 and before 9 February 1999. Under the proposed amendment, gifts of more than $2 to this fund made after 30 June 2000 and before 1 July 2001 will be deductible (Item 3).
The application dates for the measures in Schedule 1 are stated above.
Pay as you go (PAYG) instalments for certain beneficiaries of trusts
The measures in Schedule 2 will amend the PAYG instalment legislation in the Taxation Administration Act 1953 (the Administration Act) to require a beneficiary of a trust who has a fixed interest in the assets and income of a trust, to include in the beneficiary's instalment income his or her share of the income of the trust for the period.
The PAYG instalment system replaced, among other collection systems, the existing provisional tax system. The aim of the PAYG system is: to get business entities to pay their tax liabilities at the same time; to allow taxpayers with fluctuating incomes to make payments more closely aligned with their income receipts; and to collect instalments after the end of each quarter based on the income earned in the quarter. For most taxpayers their instalment income is generally their ordinary income under section 6-5 of the 1997 Act. There are special rules that require certain taxpayers, such as beneficiaries of trusts, to include other amounts in their instalment income,.
Under the existing PAYG instalment system, a beneficiary of a trust is required to include in his or her instalment income, the income the beneficiary is entitled to from the trust (section 45-280(1) of Schedule 1 of the Administration Act). The beneficiary's portion of the trust's income is determined by the beneficiary's proportion of the trust's instalment income for the previous income year and the trust's instalment income of the period under consideration. This places significant reporting requirements on trustees as they have to give beneficiaries the trust's instalment income for an instalment period and the trust's instalment income for the previous year.
The Explanatory Memorandum states that the aim of the proposed amendments is to simplify the way beneficiaries who have a fixed interest in the assets and income of a trust and beneficiaries of investment trusts, work out their instalment income for the PAYG system.(1) Another aim of the measure is to reduce the PAYG compliance burden on the trustees of trusts.(2) The measures are exceptions to section 45-280(1) of Schedule 1 of the Administration Act.
Instalment income of beneficiaries who have fixed interests in the assets of a trust
Item 1 provides an exception from the requirements of section 45-280(1) of Schedule 1 of the Administration Act for certain beneficiaries of trusts. To be eligible for this exception the following requirements must be satisfied:
- the trustee of the trust does not actively manage the trust, apart from the duty to deal with trust capital and income as directed by a beneficiary (proposed paragraph 45-280(6)(a)), and
- the beneficiary must have a fixed interest in all of the capital and income of the trust (proposed paragraph 45-280(6)(b)), or
- if there is more than one beneficiary, each beneficiary must have a fixed interest in the capital and income of the trust (proposed paragraph 45-280(6)(c)).
If a beneficiary satisfies the above requirements, the beneficiary's instalment income for PAYG will be the beneficiary's proportion of the fixed interest in the capital and income of the trust (proposed subsection 45-280(6)). If the beneficiary is a sole beneficiary, the beneficiary's instalment income is the instalment income of the trust for the period. If there is more than one beneficiary, the beneficiary's instalment income will be his or her share of the instalment income of the trust for the period.
Instalment income includes distributions by certain unit trusts
Item 2 provides an exception from the requirements of section 45-280(1) of the Administration Act for beneficiaries of certain resident unit trusts. Under this measure, a beneficiary's instalment income for a period includes trust income or trust capital that a unit trust distributes to the beneficiary or applies for the beneficiary's benefit during the period (proposed section 45-285). A beneficiary's instalment income includes all amounts received by the beneficiary from the trust during the PAYG instalment period. There are 4 requirements for a beneficiary to qualify for this option:
- the unit trust is a 'resident unit trust' for the income year that covers the PAYG period (proposed paragraph 45-285(1)(a))(3)
- during the PAYG period, any of the following tests were satisfied
- any of the trust units were listed for quotation on the official list of a stock exchange in Australia or overseas (proposed subparagraph 45-285(1)(b)(i))
- any of the trust units were offered to the public (proposed subparagraph
- the units were held by at least 50 persons (proposed subparagraph
- proposed section 45-287 of Schedule 1 of the Administration Act did not apply to the trust at any time during the PAYG period (proposed paragraph 45-285(1)(c))(4), and
- during the whole PAYG period, the trust's activities consisted only of activities listed in the definition of 'eligible investment business' in section 102M of the Income Tax Assessment Act 1936 (the 1936 Act) (proposed paragraph 45-285(1)(d))(5).
Under this measure a taxpayer's assessable income may include either trust income or trust capital (proposed subsection 45-285(1)). The Explanatory Memorandum states that there are two reasons for this rule.(6) Firstly, it is argued that this measure is necessary to protect the PAYG instalment base. Without this measure only the distributed trust income would be included in the instalment income of beneficiaries. As trusts generally make a quarterly distribution of trust income to beneficiaries after the end of the income year in which it was derived by the trust, such amounts would not be instalment amounts for an income year. It was argued that if this approach was not taken there would be a cost to the revenue. Secondly, it is asserted that when trustees make distributions of trust funds they are not aware until after the income year what component of the distribution is assessable income.
Disqualification of trusts in which ownership is concentrated
One of the requirements of proposed subsection 45-287(1) is that proposed section 45-287 does not apply to a trust. Proposed section 45-287 is designed to determine if 20 or fewer individuals have an entitlement to at least 75 per cent of the income, capital or votes of the trust. This proposed provision contains tracing tests for determining if a trust is owned by 20 or fewer individuals.(7)
Instalment income of beneficiaries of narrowly held resident investment unit trusts
Another exception to section 45-280 of Schedule 1 of the Administration Act is provided for beneficiaries of certain narrowly held trusts (proposed subsection 45-285(2)). These beneficiaries are ineligible for the exception provided in proposed subsection 45-285(1) because of the concentrated ownership of the trust. Under this measure beneficiaries of narrowly held trusts must include in their instalment income for a PAYG period the trust income and trust capital distributed to them.
The amendments contained in Schedule 2 apply to the 2000-2001 and later income years (Item 5).
Capital gains tax small business provisions
The measures in Schedule 3 will make minor amendments to the small business capital gains tax (CGT) concessions of the income tax law. The purpose of the measures is to remove unintended consequences arising from the small business CGT amendments contained in the New Business Tax System (Capital Gains Tax) Act 1999.
Some of the amendments will expand access to the CGT small business concessions. Other amendments will make technical corrections to the CGT small business provisions.
The amendments made by Schedule 3 apply to assessments for the income year including 21 September 1999 and all later income years but only for CGT events that happen after 11.45 am (legal time in the Australian Capital Territory) on 21 September 1999 (Item 17).
Minor CGT changes
The measures in Schedule 4 will make corrections to the capital gains tax provisions of the following legislation: the 1997 Act, the Income Tax Assessment Act 1936 (the 1936 Act) and the Income Tax (Transitional Provisions) Act 1997.
The CGT provisions of the 1936 Act were redrafted as part of the Taxation Law Improvement Project. The amendments were contained in the Tax Law Improvement Act (No. 1) 1998. The redrafted CGT provisions apply to the 1998-99 and following income years. According to the Explanatory Memorandum, since the enactment of the provisions unintended consequences have been identified.(8) The purpose of the amendments is to remove these unintended consequences.
The amendments contained in Schedule 4 are the third instalment of CGT rewrite corrections. The first instalment was contained in Taxation Laws Amendment Act (No. 4) 1999 and the second instalment, contained in Taxation Laws Amendment Bill (No. 11) 1999 is currently before the Parliament.
The amendments made by Schedule 4 generally apply to assessments for the 1998-99 income year and later income years (Item 65(1)). Some of the amendments have another commencement date (Item 65(2) and (3)).
Schedule 5 contains a technical correction to paragraph 26-53(2)(c). It removes an incorrect reference to "foreign public official' in this paragraph (Item 1).
Discount capital gains: integrity measures
Individuals, complying superannuation funds and trusts are entitled to a capital gains tax concession called a discount capital gain provided certain requirements are satisfied.(9) The measures in Schedule 6 will make corrections to certain aspects of the discount capital gains provisions of the 1997 Act.
On 21 September 1999 the Government announced a number of measures in response to the Ralph Committee's Review of Business Taxation. The measures were limited to the following categories of taxpayer: individuals, complying superannuation entities and trusts (trusts will be treated differently after the proposed commencement of entity taxation on 1 July 2001).
Under the discount capital gains tax provisions a taxpayer is entitled to include in the taxpayer's assessable income half the capital gain derived by the taxpayer. The main requirement to be satisfied to qualify for this concession is that the taxpayer disposed of CGT assets more than 12 months after acquiring the assets. The existing provisions do not allow a taxpayer the benefit of the discount capital gain provisions in the following circumstances:
- a capital gain arising from a CGT event involving the sale of an equity interest in a company or trust in which more than half of the assets of the company or trust were acquired within 12 months of the sale, or
- the capital gain for a CGT event is worked out using a cost base that is indexed.
The Explanatory Memorandum states that the existing provisions may produce inappropriate results in the above two situations.(10)
Capital gains that are not entitled to the discount capital gain concession
Section 115-45 of the 1997 Act is a specific anti-avoidance provision and operates to deny a CGT discount for a CGT event involving shares in a company or units in a trust. This anti-avoidance provision applies if the CGT discount would not have been allowed if the taxpayer directly owned the underlying assets. This provision only applies to a company with less than 300 members and a trust with less than 300 beneficiaries.
Item 3 of Schedule 6 repeals existing section 115-45 and replaces it with proposed section 115-45. The new provision contains two additional requirements to prevent the unintended application of the provision. The first condition is a de minimus ownership threshold of 10 per cent. Under this test the taxpayer and the taxpayer's associates must beneficially own at least 10 per cent of the value of the shares in a company or at least 10 per cent of the trust voting interests, issued units or other fixed interests in a trust (new subsection 115-45(3)). The second condition is that the sum of the cost bases of CGT assets that the company or trust owned just before the CGT event (and acquired less than 12 months before) must be more than half of the total of the cost bases of the CGT assets the company or trust owned at the time of the event (new subsection 115-45(4)). In other words, the cost bases of new assets acquired by a taxpayer must be more than 50 per cent of all the cost bases of all the taxpayer's CGT assets before this requirement is satisfied.
Indexation and discount capital gains
Under section 115-20 a capital gain cannot be a discount capital gain if any element of the asset's cost base is indexed. If a taxpayer's asset is destroyed and the taxpayer acquires a replacement asset under the replacement asset roll-over, the destruction of the original asset is ignored for capital gains tax purposes. The cost base for the replacement asset includes the cost base of the original asset. The original cost base may have included an indexation amount. Existing section 115-20 would prevent such a taxpayer from making a discount capital gain because the taxpayer is not able to recalculate its original cost base to exclude the indexation amount. This result is considered to be inequitable.
Item 1 of Schedule 6 repeals section 115-20 and replaces it with a new provision. Proposed subsection 115-20(2) provides taxpayers with the opportunity to recalculate the cost base of an asset to exclude indexation. A taxpayer is only allowed to recalculate the cost base of an asset if indexation arose because of the operation of another provision of the income tax law.
The amendments of Division 115 of the 1997 Act made by Schedule 6 apply to assessments for the income year including 21 September 1999 and subsequent income years for CGT events taking place after 11.45 am (legal time in the Australian Capital Territory) on 21 September 1999. (Item 6)
Explanatory Memorandum to Taxation Laws Amendment Bill (No. 7) 2000, para 2.9.
The meaning of 'resident unit trust' is defined in section 102Q of the Income Tax Assessment 1936 which contains two cumulative tests. The first test is that the trust must have property which is located in Australia or the trustee carries on business in Australia. The second test is that the central management and control of the trust must be in Australia or Australian residents hold more than 50 per cent of the beneficial interests in the income or capital of the trust.
See p 6 of this Digest.
Under section 102M of the 1936 Act 'eligible investment business' includes investing in loans, bonds, shares, units in a unit trust and life insurance products.
Explanatory Memorandum to Taxation Laws Amendment Bill (No. 7) 2000, para 2.29.
If proposed section 45-287 does not apply to a trust, the trust will satisfy the requirement in proposed paragraph 45-285(1)(d).
Explanatory Memorandum to Taxation Laws Amendment Bill (No. 7) 2000, para 4.3.
A 'discount capital gain' is defined in s 995-1(1) as having the meaning given by Subdivision 115-A.
Explanatory Memorandum to Taxation Laws Amendment Bill (No. 7) 2000, para 6.3.
Michael Kobetsky, Consultant
14 August 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.
© 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