Bills Digest No. 144 2002-03
Taxation Laws
Amendment Bill (No. 8)
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. 8)
2002
Date
Introduced: 5 December
2002
House:
House of Representatives
Portfolio:
Treasury
Commencement:
The formal provisions of the
Bill commence on Royal Assent. The measures contained in the Bill
have various application and commencement dates which are detailed
in the discussions of the various matters dealt with in the
Bill.
To:
- allow for the earlier deduction of closing down costs relating
to certain petroleum projects when the facilities are to be
subsequently used under an infrastructure licence
- ensure that the 50% capital gains tax discount for assets held
for over 12 months extends to rights under an employee share
ownership scheme when the entitlement is held in an employee share
trust
- extend the imputation system to co-operative companies,
and
- remove any taxation consequences from the conversion of AGL
from a statutory corporation to one registered under the Companies
Code.
As there is no central theme to the Bill the
background to the various measures will be discussed below.
The PRRT is a Federal tax on 'economic rent'.
Rent is a payment to a factor of production, such as labour, that
exceeds the amount necessary to keep that factor in its current
occupation. For example, if a person receives a salary of $50 000
but would earn $40 000 in the next best alternative employment, the
person receives rent of $10 000.
As applied to petroleum production, investors
require a certain rate of return to undertake a project. A return
above this threshold rate would result in the investors receiving
rent. The PRRT applies to the return after all costs associated
with exploration, development and production have been deducted.
The PRRT is thus tied directly to the profitability of a project.
In contrast, production-based taxes, such as the crude oil excise,
are not tied directly to profitability.
The PRRT also provides the community-the
ultimate owners of Australia's petroleum resources-with a fair
proportion of the potentially high returns from the exploitation of
scarce and non-renewable resources.
Under section 5 of the Petroleum Resource
Rent Tax Act 1987 (the 87 Act), the rate of tax is 40
per cent. The PRRT is levied before income tax, and is deductible
for income tax purposes. Projects incurring the PRRT are not
subject to excise or royalties.
The 87 Act provides for the assessment and
collection of the PRRT. The PRRT is generally assessed on a project
basis. The tax base is net cash flows after recovery of eligible
exploration expenditure, operating costs, and capital expenditure.
Any excess of expenditure over receipts can be compounded forward
(at the long-term bond rate plus 15 percentage points for
exploration and the long-term bond rate plus five percentage points
for other expenditures provided they are incurred less than five
years before the production licence commenced) for deduction
against future receipts from the project.
Currently,
the 87 Act provides for closing down expenditure to be deductible
when facilities cease to be used in relation to a project. However,
if the facilities are subsequently used for other purposes related
to a petroleum project, or projects, the deduction is not allowed
until after that use has been terminated. Under section 39 of the
87 Act closing down expenditure is defined to include either
capital or income expenditure incurred in ceasing the project,
including expenditure on environmental restoration during the
closing down.
Under
guidelines issued by the Department of Industry Tourism and
Resources, safety and environmental plans must be prepared prior to
the decommissioning of a production facility, pipelines and related
facilities. Such facilities operate under a number of licensing
regimes under the 1987 Act, the production licence being the most
relevant for closing down expenditure. Production licences relate
only to the area covered by the licence.
There is the possibility that once a
production rig has ceased to be used for resources covered by its
production licence that producers, either the current owners or
purchasers of the facility, may find it economical to use that
platform for the processing or transporting of petroleum resources
(including gas) from adjacent licence areas. Such activities would
be undertaken under an infrastructure licence rather than a
production licence. As noted above, the continuing use of such a
facility would preclude a deduction for closing down expenditure as
the use of the facility (or project) had not been terminated. The
Bill proposes that closing down costs be deductible on the
termination of a production licence even if an infrastructure
licence comes into force on the termination of that licence.
Item 1 of Schedule
5 will insert a definition of external petroleum into
section 2 of the 87 Act. This will be petroleum (including gas)
recovered from an area or areas other than that covered by the
production licence for the project.
Future closing down expenditure is defined in
proposed section 2C to be incurred where:
- the project
terminates on the cessation of a production licence or
licences
- on termination, an infrastructure licence comes into force in
respect of the facilities and other property that comprised the
project immediately before termination, and
- if the infrastructure licence had not come into force closing
down expenditure would have been incurred.
The amount of future closing down expenditure
incurred will be the amount of such expenditure which the person
would expect to incur in closing down the project discounted to
give a present value for the future expenditure (this is calculated
by reference to the number of years that the infrastructure licence
is expected to be used for and the long term bond rate)
(item 6).
Section 27 of the 87 Act provides for amounts
received on the disposal or termination of a project to be included
in assessable property receipts and so subject to tax. While
closing down expenditure is allowed as a specific deduction, future
closing down expenditure will be taken into account by item
13 which will amend section 27 to provide that in
calculating assessable property receipts future closing down
expenditure is to be taken into account. If the future closing down
expenditure exceeds the eligible property receipts, the future
closing down expenditure will be deemed to be nil.
However, where the amount has been deemed to
be nil but there is an excess of future closing down expenditure,
the excess will be deemed to be closing down expenditure
(item 20 which will amend section 39 of the 87
Act). (Sections 46 and 47 of the 87 Act provides that if closing
down expenditure exceeds assessable receipts and there are no tax
debts, 40% of the amount is payable by the Commissioner.)
The other amendments contained in
Schedule 5 deal with the inclusion of income from
external petroleum in a projects income and the deductibility of
expenditure associated with such petroleum.
Commencement: Royal Assent
(clause 2).
In their purest form, employee share ownership
schemes (ESOS) aim to encourage participation in the ownership of
an enterprise by the employees of the enterprise, giving rise to a
greater community of interests between the employer and employees.
The theory is that this will give rise to greater communication and
commonality of interests between the parties to secure the greater
success of the enterprise. However, ESOS may be used for other
purposes, such as to defer a pay increase by offering shares in an
enterprise, particularly when both the employer and employees know
that a pay increase cannot be afforded. The effectiveness of an
ESOS is more dependant on the circumstances in which it is offered
and accepted rather than merely because such a scheme exists.
In addition to determining the effectiveness
of an ESOS, which will largely be a subjective matter for
employees, judging their impact is also hampered by an absence of
statistical information on the area. There are no figures available
on the number of ESOS operating or of their value so that much of
the commentary in the area is either of a general nature or based
on a small number of cases.
The area was examined by the House of
Representatives Standing Committee on Employment, Education and
Workplace Relations in its report Shared Endeavours, dated
September 2000. The Committees aims were to foster the use of ESOS
and to curtail their use for aggressive tax planning and it made a
number of recommendations, including:
- the Australian Taxation Office (ATO) collect annual statistics
on a number of aspects of the coverage of ESOS (Recommendations 1)
and that an Agency be established in the ATO under which all ESOS
be registered (Recommendations 18 and 19).
- Public policy be developed to promote ESOS in order to:
- better align the interests of employers and employees
- develop national savings
- facilitate the
development of sunrise enterprises, and
- facilitate
employee buyouts and succession planning (Recommendation 5),
and
- that tax laws be examined to prevent the abuse of ESOS,
particularly in regard to plans available to executives only
(various Recommendations, eg rec 15).
For shares issued under an ESOS after 28 March
1995 at a discount on market price, Division 13A of the Income
Tax Assessment Act 1936 (ITAA36) offers some relatively minor
income tax concessions so long as the share or right issued falls
within the definition of a qualifying share or right. To be
classified as a qualifying share or right a number of conditions
must be met, the most important of which are that the ESOS is open
to at least 75% of permanent employees and that immediately after
the acquisition the taxpayer s interests in the shares of the
company do not exceed 5%. The available concessions are that:
- the amount of the discount can be deferred from inclusion in
assessable income for up to 10 years, or
- if the amount of the discount is included in assessable income
in the year of receipt of the shares or options, the first $1000 of
the discount is excluded.
On disposal of the shares, and restrictions on
when shares may be disposed are a feature of many ESOS, normal
capital gains tax (CGT) rules apply (though there are some
modifications in the calculation of the cost base), including the
50% discount when the asset has been held for at least 12
months.
One of the difficulties in applying the 50%
CGT discount to ESOS is where the scheme requires the shares to be
held in an employee share trust before the employee becomes their
full legal and beneficial owner (for example, shares may have to be
held in the trust until restrictions on their disposal terminate).
In such cases, the employee will only be considered to be the owner
of the shares when they hold full legal and beneficial ownership,
so that the 12 month discount period will only apply from this
date. To address this matter, the then Assistant Treasurer
announced on 27 February 2001 that if the employee has chosen to be
taxed on any discount in the year that the share or right was
provided and it was provided through a trust structure, then:
- the period for the 50% discount will apply from the time that
the trust receives the shares, and
- the cost base of the share or right will be based on the market
value of the instrument on the day it is received by the
trust.
It was also announced that the changes would
apply from the date of announcement.(2)
The above measures will be implemented by
Schedule 2 of the Bill. Section 109-55 of the
Income Tax Assessment Act 1997 (ITAA97) contains a number
of specific rules governing when an asset will be deemed to have
been acquired for CGT purposes. Item 3 will insert
a new item which provides that where the conditions in the proposed
amendments to section 115-30 are satisfied (see below), and a share
or right is received from an employee share trust, the taxpayer
will be deemed to have acquired the asset at the first time that
they acquired a beneficial interest in the share or right (ie
generally when it is placed in the trust).
Division 115 of the ITAA97 deals with discount
capital gains. Amendments to sections 115-30 and 115-80 provide
that the discount will be available where the share or right:
- was acquired under an ESOS
- was acquired
from an employee share trust, and
- the share or right is a qualifying share or right
then the
taxpayer will be deemed to have acquired the share or right when
they first acquire a beneficial interest in the instrument so long
as they have elected to have any discount (less the $1000
exemption) included in assessable income in the year of receipt
(items 5 and 6).
Item 9 will amend section 130-85 to provide that
where the above conditions are met, the cost base and reduced cost
base of the asset will be based on its market value at the time
when a beneficial interest is acquired.
Application: From 5 p.m. on 27 February 2001 (item 12).
Franking
forms part of the imputation system and refers to the situation
where a credit, generally for company tax paid, is passed along
with a dividend to reduce the tax payable by the recipient of the
dividend. Such dividends are referred to as being wholly or partly
franked.
Co-operative companies are companies which
have limits on the maximum number of shares which a single
shareholder can hold, are not listed on a stock exchange and which
are established for carrying on one or more of the purposes listed
in section 117 of the ITAA36. These are:
- the disposal, distribution or acquisition of commodities or
animals to or from it s members
- the storage, marketing, packing or processing of members
commodities
- rendering
services to its members, or
- obtaining funds from members to lend to other members to
acquire residential or business/residential property.
To remain
with the definition, at least 90% of the companies ordinary
business must be conducted with its members.
Co-operative companies are assessable on
all normal assessable income, including that gained from its
members. However, unlike other companies co-operative companies can
claim a deduction for distributions made to members, including any
interest and dividends paid. Their dividends are currently not
subject to franking.
The then
Assistant Treasurer announced on 27 August 2001that the ability to
frank dividends would be extended to co-operative companies
from 1 July
2002. Such companies
would retain the option of paying unfranked dividends and claiming
a deduction for the distribution.(3) The announcement
was expanded on by the current Assistant Treasurer in a Press
Release dated 21 November 2002 which contained the statement that:
This means that the imputation rules will apply to a co-operative
company in the same way as they apply to any other company.
(4)
Section
120 of the ITAA36 deals with the availability of deductions for
distributions made by co-operative companies. Item 1 of
Schedule 3 will add a number of subsections to section 120
providing that:
- no deduction will be available to the extent that a
distribution is franked
- if the franking
percentage is less than 100% and part of the distribution is
attributable to non-assessable income, it is to be assumed that the
franked part of the distribution is attributable to the greatest
extent to the non-assessable income, and
- if a distribution is made within 3 months of the end of an
income year, the co-operative company may elect to have it treated
as if it was made on the last day of the year.
Proposed section 218-5
of the ITAA97 provides that
with two minor modifications the imputation system applies to
co-operative companies in the same way in which it applies to other
companies. The modifications are that distributions subject to a
deduction are to be included in the definition of a distribution
and that the co-operative company which makes an unfranked
frankable distribution to a member need not provide a distribution
statement to the member (item 4).
Application: For distributions made after
1 July 2002 (item 6).
The
Australian Gas Light Company (AGL) was established by NSW
legislation in 1837 as a company of proprietors with a limit on an
individual s maximum interest of 2%. It was originally established
to provide lighting for Sydney streets and was listed on the
Sydney stock exchange in 1871. Since its
beginnings AGL has grown to become a major player in the energy
market, supplying both gas and electricity to NSW and other States
and the ACT. AGL also plays a minor role in electricity generation.
With the introduction of national competition rules, AGL has also
become a major dealer in the energy market, both buying and selling
energy to meet its clients and its own needs. According to a
newspaper report, AGL holds 31% of the total eastern Australian
retail energy market and 37% in Victoria.(5)
As noted,
when established AGL had a maximum individual holding of 2%. This
was increased to 5% in 1986 and, following restructuring and the
deregulation of the NSW gas market in 1994, AGL questioned the need
for the 5% limit and AGLs incorporation under the specific NSW
legislation. Negotiations began with the NSW government to remove
the 5% ownership limit and to have AGL incorporated under the
general corporations law and in 2000 AGL announced that it was
working with the government towards these aims. The result,
incorporating these measures, was announced by the NSW Minister for
Energy on 2 April
2001. The enabling
legislation passed the NSW Parliament on 9 May 2002 and came into force on receiving Assent
on 16 May
2002. As part of the
conversion process a general meeting of the proprietors
(shareholders) of AGL was required and a special general meeting
approved the changes on 3 July 2002.
Without
specific roll-over relief, the conversion would give rise to a CGT
event, with subsequent liability for tax, and other possible tax
liabilities. Roll-over relief has been made available in a number
of situations where there has been a change in structure of an
organisation while the interests of the owners and assets held
remained constant. The Minister for Revenue and Assistant Treasurer
announced on 23 May
2002 that roll-over
relief would be made available on the conversion of AGL and that
this would be achieved by regarding the new body as the old one for
taxation purposes.(6)
Clause 5 of the Bill provides that there is to be no taxation
consequences from the conversion of AGL to a registered company and
that the original AGL and its other identities are to be taken to
be the same entities for taxation purposes. Clause
5 also provides that:
- the legal and beneficial ownership of shares and interests in
shares are taken not to have been altered by the conversion,
and
- actions taken
by the Secretary of the previously structured AGL will be deemed to
have been taken by the new body.
Commencement: 11 October 2002 (the time of conversion) (clause
2).
- The following general information is taken
from Research Note Number 20 of 2000-01 authored by Richard Webb of
the Economics, Commerce and Industrial Relations Group. The endnote
for the above section: (1) Other taxes applied to crude oil
production are royalties and crude oil production excise. Petroleum
production not subject to PRRT is generally subject to either
Commonwealth or State/Territory royalties. Crude oil production
excise applies to on-shore fields producing stabilised crude and
off-shore fields in the North West Shelf. This excise should not be
confused with the excise on refined products such as petrol and
diesel. For a description of the latter, see: http://www.aph.gov.au/library/pubs/rp/2000-01/01RP06.htm
- Assistant Treasurer, Press Release,
27 February 2001.
- Assistant Treasurer, Press Release,
27 August 2001.
- Assistant Treasurer, Press Release,
21 November 2001, Attachment A.
- The Age, 6 July 2002.
- Minister for Revenue and Assistant Treasurer,
Press Release, 23 May 2002.
Chris Field
9 May 2003
Bills Digest Service
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ISSN 1328-8091
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