Bills Digest No. 137 2001-02
Taxation Laws Amendment Bill (No. 3) 2002
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. 3)
2002
Date Introduced: 21 March 2002
House: House of Representatives
Portfolio: Treasury
Commencement: The provisions containing the
amendments described in this Digest commence on Royal Assent.
However, the measures themselves have various application dates
which are described below.
Purpose
To:
-
- clarify the GST treatment of certain transactions involving a
government body during land development
-
- allow special GST credits for car rental companies in respect
of certain vehicles, and
-
- clarify the amount of deduction allowed by general insurance
companies in respect of future claims.
As there is no central theme to the Bill the
background to the various measures will be discussed below.
The amendments deal with the treatment for GST
purposes of situations where, as part of development approval, a
developer provides infrastructure or other works to a landowner.
Such situations may arise where, for example, a developer provides
roads and sewage for an estate and these are transferred to public
ownership. As the GST rules stand, it is likely that for GST
purposes that the supply of the right to develop the land and the
subsequent return of infrastructure would both be considered to be
a taxable supply and so subject to GST.
While government involvement in the development
of land usually involves State or Territory governments, the
Commonwealth is involved in joint development projects in both
Melbourne and Sydney former Australian Defence Industries (ADI
Limited) sites. The Commonwealth is represented in the joint
developments by ComLand Limited. While the Melbourne developments
at Maribyrnong and Footscray are proceeding smoothly and with
little controversy, that at St Marys in Sydney has had a more
controversial history.
The St Marys site covers approximately 1 545
hectares (ha) and was rezoned for urban and other uses by the NSW
government in January 2001. It was envisaged that approximately 8
000 homes would be constructed on the 867 ha available for urban
development, 630 ha would be set aside for a regional park to
preserve flora and fauna and approximately 42 ha will be used for
regional open space. Not included in the regional park area was
approximately 178 ha of Cumberland Plain woodland which was listed
on the Register of the National Estate (the majority of the listed
area was already contained in the regional park). The initial
rezoning decision was opposed by a number of groups, including
local resident groups, whose arguments ranged from the need to
preserve the entire area to those that the remaining area of
Cumberland Plain woodland should be preserved.(1) The
Commonwealth, as landowner, remained undecided about the inclusion
of additional land in preservation areas. The Annual Report for
ComLand states:
If these additional areas are preserved, this
will mean a significant reassessment of the development activities
on the site, including potentially reopening the NSW rezoning
process, at a significant cost and lengthy delays in commencing the
St Marys project.(2)
On 25 October 2001, during the campaign for the
2001 election, the Minister for the Environment and Heritage
announced that an additional 250 ha, including the remaining listed
Cumberland Plain woodland would be preserved. The Minister s
announcement also included statements from the Member for Lindsay
that the decision protects one of the largest stands of Cumberland
Plain Woodland in Western Sydney .(3) Local resident
groups remained committed to the idea that the entire area should
not be developed. While the cost of the additional preservation
area to the joint development has not been reported, the Minister
for Finance was reported as stating that the preservation of the
additional 178 ha of Cumberland Plain Woodland would result in an
estimated revenue loss of between $80 and $150
million.(4)
The amendments to the GST treatment of land
development, which are not directly related to the operations of
ComLand, are contained in Schedule 1 of the Bill.
Item 4 will insert a new Division
82 into the A New Tax System (Goods and Services Tax)
Act 1999. Proposed section 82-5 provides that
the supply of a right for development by an Australian government
agency is not to be treated as consideration, and therefore giving
rise to a GST liability, for another supply if the other supply is
made under an Australian law. It will not matter if the other
supply is made to the government authority or another entity.
Similarly, proposed section
82-10 provides that the supply of a good or service to an
Australian government agency in exchange for a development right
will not be treated as having been made for consideration.
Application: From 1 July 2000
(item 6).
The introduction of the GST and abolition of the
wholesale tax regime from 1 July 2000 caused a number of problems
for car rental companies. The main problem is that while rental
companies pay the 10% GST when purchasing vehicles (or the 22%
wholesale tax if purchased prior to 1 July 2000) they, like other
businesses, could claim no input tax credits until 1 July 2001 and
only 50% from 1 July 2001 to 1 July 2002. (The restriction on
claiming input tax credits was introduced as a transitional measure
to prevent a buyers strike by business prior to the introduction of
the GST.) While most businesses could avoid the impact of the
transitional input tax credit rules by simply not purchasing
vehicles during this period, or minimising its impact by reducing
purchases in the period, rental companies turn over vehicles every
9 to 12 months and so have been caught by the transitional rules in
respect of a large number of vehicles.
An additional effect of the tax changes for
rental companies is that the change from a 22% wholesale tax
(approximately equivalent to a 17% retail tax) to a 10% retail GST
resulted in downward pressure on the prices of both new and
recently purchased used cars, which due to the short turnover time,
included most stock of rental car companies. As well, rental
companies are required to pay the GST on the sale of used cars
while, as indicated above, not being able to claim input tax
credits for their purchase. The executive director of the Motor
Trades Association of Australia is reported as saying that rental
companies traditionally made most of their profits in buying and
selling vehicles, not in renting them.(5)
While rental car companies and some motor
industry groups have been lobbying for some time for changes to
reduce the impact of the GST and associated transitional
provisions, these views were initially rejected. It has been
reported that the Treasurer s office suggested to rental companies
that they should increase rates or hold cars for longer to address
the difficulties.(6)
The measures contained in the Bill were not
announced prior to the introduction of the Bill and are estimated
in the Explanatory Memorandum to the Bill to cost $36 million over
2 years.
Item 7 of Schedule 1 of the
Bill will insert a new section 19B into the A
New Tax System (Goods and Services Tax Transition) Act 1999 to
allow a credit in respect of the sale, or other eligible supply, of
cars held on 1 July 2000 for rental purposes. An entity which held
the car for rental will be eligible for the credit if:
-
- the supply of the vehicle occurred between 1 July 2000 and 30
June 2002 (ie the vehicle was sold by the entity between these
dates)
-
- the entity held the vehicle at the start of 1 July 2000
-
- it was the first sale of the car after 30 June 2000
-
- during the period between 1 July 2000 and the sale of the
vehicle it was held for rental and it was covered by the required
third party insurance for rental cars, and
-
- the car was subject to sales tax.
The amount of the special credit will be
1/11th of the price of the sale of the vehicle, although
special rules will apply where the vehicle was subject to an
eligible short term lease.
Application: The special
credits will be able to be claimed in a tax period ending on or
after this Bill receives Royal Assent or 7 January 2003, or such
later day as the Commissioner determines.
Where there is an insurance premium paid to a
general insurance company (basically an insurance company other
than a life insurance company) and a claim payment made in respect
of that premium during the same income year, the taxation position
is simple, the premium is included in assessable income and the
payment is allowable as a deduction during the same income year.
However, where the claim is made in respect of an insured risk, or
an event insured against has occurred during the year but a claim
has not been made, and payment is not to be made until later income
years the tax position can become complex. This is particularly
true where payment in respect of the insured event may be delayed
for a number of years, such as may occur in some medical insurance
cases.
Until a relatively recent court decision, the
situation was covered by Taxation Ruling IT 2663 which is dated 20
October 1991. Under IT 2663, a deduction could be claimed in a year
of income in respect of claims communicated to the insurer during
the year but not paid in full and also those which have not been
communicated to the insurer but for which the event giving rise to
the liability occurred during the year. The amount of the deduction
is based on the reasonable and proper estimate of the future
liability, generally based on actuarial and accounting standards.
Under IT 2663, this amount is then discounted to the present value
of the funds needed to be set aside to pay the claims and potential
claims (ie rather than the estimated amount of the claim being
allowable as a deduction, the amount allowable is the amount that
would need to be invested to pay the estimated amount at the
estimated time it becomes due).(7) The present value is
generally determined according to accounting standards. While this
may appear to be a technical issue of little relevance, the amount
of deduction which can be claimed can be very substantial,
particularly in cases where claim payments are made over a
substantial period, such as in workers compensation insurance.
The position as understood under IT 2663 was
overturned by the Federal Court in Commissioner of Taxation v
Mercantile Mutual Insurance (Workers Compensation) Ltd [1999]
FCA 351.(8) The main matter at dispute in the case was
whether only the present value of future claims could be claimed as
a deduction or if the face value of future claims was allowable.
The difference between the two amounts in the case was
approximately $35 million, giving an indication of the considerable
amounts that can be involved. As a lesser matter, the method of
calculating the amount set aside for future claims (the prudential
amount) was also disputed. A single judge of the Federal Court had
ruled that the face value of the future claims could be deducted
and that the method for calculating the prudential amount was
reasonable. The Commissioner appealed to the Full Court against
these decisions.
In relation to the amount of the deduction
available, the Commissioner argued that a distinction should be
drawn between the happening of the event that may give rise to a
claim and the liability to pay the claim, which would arise in the
future, and that the deduction for the contingency should be based
on the present value of the future liability. It was also argued
that in accordance with accounting standards the amount of the
deduction should be that required to be set aside to meet the
liability in the future.
The court rejected these arguments, with Hill J
reasoning that there is no gap between when the insured for event
occurred and the liability arising, even if the actual payment
occurs in the future. It was stated:
Contrary to the Commissioner s submission, there
is no gap in time between the event insured against and the
liability to pay. There is a presently existing liability to pay
monies in the future, which liability, like the event which gives
rise to it, occurs in the year of income.(9)
The Commissioner s arguments regarding
accounting standards was also rejected, on the basis that while the
accounting standards may recognise the concept of future value,
Australian jurisprudence and case law does not.(10)
Submissions relating to the method of calculating the prudential
margin were also dismissed as not relevant once the decision
relating to future value was taken into account.
Following the High Court s refusal to grant
leave to appeal from the decision of the Federal Court, the
Assistant Treasurer announced that the law would be amended to
maintain the effect of IT 2663 and that the amendments would apply
from the 1991-92 income year when IT 2663 first came into
effect.(11)
Item 9 of Schedule 2 of the
Bill will insert a new Schedule 2J into the
Income Tax Assessment Act 1936, which will deal with the
treatment of general insurance companies. The proposed Schedule
will enact the treatment of income and deductions as envisaged in
IT 2663, including that:
-
- where there is a greater amount allowed for outstanding claims
in respect of a year than the actual payments for the year, the
difference is to be included in assessable income for the year, and
where the later claims exceed the claimed amount the balance is an
allowable deduction, and
-
- the value of outstanding claims is to be calculated on the
amount needed to be set aside and invested to meet outstanding
claims (therefore requiring deductions to be based on the present
value of future claims).
Application: For general
insurance companies the amendments will apply for the 1991-92 and
later years of income.
-
- See The Sydney Morning Herald, 20 January 2001.
- ComLand, Annual Report, 30 June 2001, p. 16.
- Minister for Environment and Heritage, 25 October 2001.
- The Sydney Morning Herald, 15 June 2001.
- The Australian Financial Review, 24 April 2001.
- The Australian Financial Review, 28 December 2000.
- IT 2663, para. 104.
- http://www.austlii.edu.au/au/cases/cth/federal_ct/1999/351.html
- ibid., p. 12.
- ibid., p. 13.
- Assistant Treasurer, Press Release, 18 February
2000.
Chris Field
20 May 2002
Bills Digest Service
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ISSN 1328-8091
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