Bills Digest No. 117 2003-04
Tax Laws Amendment (2004 Measures No. 1) Bill
2004
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
Concluding Comments
Endnotes
Contact Officer & Copyright Details
The following
abbreviations and acronyms are used in this Bills
Digest.
|
Abbreviation
|
Definition
|
|
ABN
|
Australian Business
Number
|
|
ABN Act
|
A New Tax System
(Australian Business Number) Act 1999
|
|
ABN
Regulations
|
A New Tax System
(Australian Business Number) Regulations 1999
|
|
ABR
|
Australian Business
Register
|
|
ATO
|
Australian Taxation
Office
|
|
CBP
|
Prime Minister s
Community Business Partnership
|
|
CGT
|
capital gains
tax
|
|
Commissioner
|
Commissioner of
Taxation
|
|
DAFGS
|
Diesel and Alternative
Fuels Grants Scheme
|
|
DGR
|
deductible gift
recipient
|
|
DFRS
|
Diesel Fuel Rebates
Scheme
|
|
EGCS
|
Energy Grants (Credits)
Scheme
|
|
EGCS Act
|
Energy Grants (Credits)
Scheme Act 2003
|
|
EGCS(CA) Act
|
Energy Grants (Credits)
Scheme (Consequential Amendments) Act 2003
|
|
FBT
|
fringe benefits
tax
|
|
FBT Act
|
Fringe Benefits Tax
Assessment Act 1986
|
|
GST
|
goods and services
tax
|
|
GST Act
|
A New Tax System
(Goods and Services Tax) Act 1999
|
|
ITAA 1997
|
Income Tax
Assessment Act 1997
|
|
ITAA 1936
|
Income Tax
Assessment Act 1936
|
|
Myer Report
|
Report of the
Contemporary Visual Arts and Craft Inquiry
|
|
Registrar
|
Registrar of the
Australian Business Register
|
|
TAA 1953
|
Taxation
Administration Act 1953
|
Passage History
Tax Laws Amendment (2004 Measures
No. 1) Bill 2004
Date Introduced:
19 February 2004
House: House of Representatives
Portfolio: Treasury
Commencement:
Formal provisions of
the Bill commence on Royal Assent. The various measures
contained in the Bill have various application dates, which are
detailed in the Main Provisions section.
There are 11 Schedules to this Bill and the
main purpose of each Schedule is set out below.
- Schedule 1 will amend
the ITAA 1936 to broaden the list of eligible medical expenses
under the medical expenses tax offset to include payments made in
maintaining properly trained dogs for guiding or assisting people
with a disability.
- Schedule 2 will amend
the income tax law to provide an income tax deduction for certain
expenses incurred in travel between workplaces.
- Schedule 3 will amend
the ITAA 1997 to improve the operation of the test that
is used to determine when an entity controls a discretionary trust
for the purpose of applying the small business CGT
concessions.
- Schedule 4 will amend
the transitional arrangements of the Energy Grants (Credits) Scheme
(EGCS), which deal with the treatment of claims for fuel purchased
in the three years preceding the introduction of the scheme. The
changes will rectify an anomaly that may result in an unintended
entitlement to concessional treatment in certain circumstances
under the EGCS that did not previously exist in the schemes that it
replaces.
- Schedule 5 will amend
the ITAA 1997 to ensure that GST net input tax credits are excluded
from the cost base, reduced cost base and other relevant amounts
used for the purposes of working out the amount of a capital gain
or capital loss.
- Schedule 6 will amend
the A New Tax System (Australian Business Number) Act 1999
(ABN Act) to put beyond doubt the scope of the purposes for which
protected Australian Business Number (ABN) information is able to
be disclosed to Commonwealth agency heads and States and
Territories department heads.
- Schedule 7 will amend
the income tax law to provide an income tax deduction for
contributions of cash or property to a deductible gift recipient
(DGR), where a minor benefit is received in return.
- Schedule 8 will amend
the ITAA 1936 to ensure that a trustee cannot shelter trust income
at the prevailing company tax rate by creating a present
entitlement to a private company without paying it and then
distributing the underlying cash to a shareholder of the company.
The rules replace the former section 109UB of the ITAA 1936 that
had a similar, but more limited, application.
- Schedule 9 will amend
Part III of the ITAA 1936 to ensure a deduction available to
certain resident companies for on-payments of certain unfranked or
partly franked non-portfolio dividends to their wholly-owned
foreign parents, continues to be available to taxpayers. This
deduction was inadvertently made inoperative with the removal of
the inter-corporate dividend rebate within wholly owned companies
in connection with the introduction of the consolidated regime
applying generally after 30 June 2003.
- Schedule 10 will amend
the ITAA 1997 to require charities, including public benevolent
institutions and health promotion charities to be endorsed by the
Commissioner in order to access all relevant taxation concessions.
The amendments in Schedule 10 will also require
any charity so endorsed to display their charitable status on the
Australian Business Register (ABR).
- Schedule 11 will amend
the ITAA 1997 to update the lists of specifically listed deductible
gift recipients (DGRs).
As there is no central theme to the Bill, the
background to the various measures will be discussed under the Main
Provisions section.
Section 159P of the
ITAA 1936 allows a tax offset at the rate of 20% of any net
qualifying medical expenses (i.e. qualifying medical expenses less
any reimbursements such as Medicare and private health insurance
refunds) above $1500 in an income year.
Payments for maintaining properly trained dogs
for people who are blind can now be claimed as medical expenses for
this tax offset under paragraph 159P(4)(i). Item 1
of Schedule 1 of the Bill will repeal paragraph
159P(4)(i) and substitute proposed paragraph
159(4)(i) to extend the eligibility to payments for
maintaining trained dogs to disabled persons generally.
Item 2 of Schedule
1 provides that this amendment is taken to have applied in
relation to the 2002-03 income year and later income years.
The general deduction provisions in section
8-1 of the ITAA 1997 allow deductions for expenses incurred in
gaining or producing assessable income or necessarily incurred in
carrying on a business for the purpose of gaining or producing
assessable income.
Expenses incurred in travelling between two
places of unrelated income-earning activity are not deductible
under section 8-1 of the ITAA 1997 as decided by the High Court in
Payne s case(1). The High Court held
that the expenses were not incurred in the course of earning income
from either activity but rather incurred in the interval between
the two activities.
Item 3 of Schedule
2 inserts proposed section 25-100 to the
ITAA 1997 to allow a deduction for transport expenses incurred in
travel between workplaces where:
-
an individual incurs transport expenses in travelling directly
between workplaces
-
the purpose of the travel between workplaces is to earn
assessable income at the second workplace, and
-
the individual does not reside at either place.
Transport expenses deductible under this
provision include transport expenses incurred in travel
between:
Item 11 of Schedule
2 provides that these amendments apply to assessments for
the income year 2001-2002 and each later income year as announced
in the
Treasurer s Press Release No 78 of 8 October
2001.
A small business
entity can access the small business CGT concessions in Division
152 of the ITAA 1997 only if it satisfies the maximum net asset
value test in section 152-15. To pass the maximum net asset value
test, the entity (together with its small business CGT affiliates
and any connected entities) must not own assets with a total net
value of more than $5 million.
Broadly, an entity
is connected with another entity if either entity controls the
other, or both entities are controlled by the same third
entity.
The practical effect
of the control test for a small business entity that operates
through a discretionary trust is that the assets of all
beneficiaries of the trust, whether potential or actual, are
counted as assets of the entity for the purposes of applying the
maximum net asset value test. The total net value of assets held by
these actual and potential beneficiaries often exceeds
$5 million. Consequentially, many small businesses that
operate through a discretionary trust are technically unable to
access the small business CGT concessions.
Item
4 of Schedule
3 repeals the existing subsections 152-30(5) and (6) of
the ITAA 1997 and substitutes proposed subsections
152-30(5) and (6) for the purpose of
modifying the control test to ensure that an entity will be taken
to control a discretionary trust only if, for any of the four
income years before the income year for which access to the small
business tax concession is sought:
-
the trustee paid to, or applied for the benefit of, the entity
and/or its small business CGT affiliates any income or capital of
the trust, and
-
the amount paid or applied to the entity and/or its small
business CGT affiliates is at least 40% (the control percentage) of
the total amount of income or capital paid or applied by the
trustee for that income year.
As is the case with the control test for
other entities, such as companies and fixed trusts, where the
control percentage is between 40% and 50%, the Commissioner will
have discretion to determine that the entity does not control the
discretionary trust under amendments proposed by item
3 of Schedule 3.
Under Item 7 of
Schedule 3 these amendments apply to CGT events
happening after 11.45 am, by legal time in the Australian Capital
Territory, on 21 September 1999. The maximum net asset value test
in section 152-15 took effect from 21 September 1999 and the
amendments will benefit discretionary trusts retrospectively.
On 1 July 2003, the Energy Grants (Credits)
Scheme (EGCS) came into effect. It replaced the Diesel and
Alternative Fuels Grants Scheme (DAFGS) and the Diesel Fuel Rebate
Scheme (DFRS) and largely adopted their provisions with some
changes (see the Bills
Digest for the Energy Grants (Credits) Scheme Bill
2003)(2). The purpose of DAFGS was to reduce
transport costs to business and particularly to benefit regional
Australia. It provided grants for diesel and reduced the cost of
alternative fuels such as ethanol, compressed natural gas and
liquefied petroleum gas to maintain previous price relativities
with diesel. The DFRS which was also called the off-road scheme
provided a rebate of the excise on diesel and like fuels used in
certain eligible activities. The
commitment to introduce an EGCS was part of the Government s
Measures for a Better Environment statement in May 1999.
The Government undertook to introduce an energy credit scheme that
would provide price incentives and funding for conversion from the
dirtiest to the most appropriate and cleanest fuels.
The Schedules to the Energy Grants
(Credits) Scheme (Consequential Amendments) Act 2003 (EGCS
(CA) Act) contain transitional provisions for the DAFGS and DFRS.
For example, under the DAFGS transitional provisions of Schedule 2,
DAFGS claims made under section 15 of the Diesel and
Alternative Fuels Grants Scheme Act 1999 before 1 July 2003 in
respect of diesel or alternative fuel used during a grant period
ending before 1 July 2003, remain subject to the Diesel and
Alternative Fuels Grants Scheme Act 1999 as if it had not been
amended by the EGCS (CA) Act.
An unintended consequence of these
arrangements has been the possible creation of entitlements under
the EGCS that did not exist under the previous schemes.
Item 4 of Schedule
4 inserts a new subitem 1(1A) into
Schedule 7 to the EGCS(CA) Act to exclude from the scope of the
transitional arrangements:
-
the on-road alternative fuels liquefied natural gas and
biodiesel, and
-
off-road diesel fuel purchased prior to 1 July 2002 for use in
generating electricity in a retail or hospitality business without
access to grid power.
As the amendments rectify an
anomaly in the law, they will apply from
1 July 2003, the date when
the existing provisions first applied. This is provided in Item 3
in the table in proposed subsection 2(1) of
the
Bill.
At present taxpayers who make a
capital gain on the disposal of a CGT asset in many circumstances
can include GST net input tax credits in the cost base of the asset
even though the relevant GST expenditure is effectively recouped.
Consequently, the amount of capital gain on disposal of the asset
is reduced by the amount of the GST net input tax
credits.
Similarly, taxpayers who make a
capital loss on the disposal of a CGT asset can include GST input
tax credits in the reduced cost base of the asset even though the
relevant GST expenditure is effectively recouped.
The measures in Item
3 of Schedule 5 of the
Bill will provide that in
working out the amount of any capital gain or capital
loss:
-
GST net input tax credits will be
excluded from the cost base and reduced cost base,
and
-
if the capital
gain or capital loss is worked out by reference to an amount other
than the cost base or reduced cost base, GST net input tax credits
will be excluded from that other amount.
Item 9 of
Schedule 5 provides that the amendments apply to
CGT events that happen after the end of the day this Bill was
introduced in Parliament (i.e. after 19 February
2004).
Section 30 of the A New Tax
System (Australian Business Number) Act 1999 (ABN Act)
protects the confidentiality of ABN information.
In particular, paragraphs 30(3)(c) and (d) authorise
the disclosure of information to particular persons for specific
purposes:
-
subparagraphs 30(3)(c)(i) and
30(3)(d)(i) allow the disclosure of information to a Commonwealth
Public Service Agency Head for the purposes of legislation
administered by the Agency Minister, and
-
subparagraphs 30(3)(c)(vi) and
30(3)(d)(iv) allow disclosure to State and Territory Department
heads for the purposes of legislation administered by the Minister
responsible for that department.
The A New Tax System
(Australian Business Number) Regulations 1999
(ABN Regulations) were amended with effect from 15 October
2001 to extend the disclosure of protected ABN information to
Commonwealth agency heads and State and Territory department heads
in respect of all agency or department functions and not restricted
to matters covered by legislation administered. The
Explanatory Memorandum to the
Bill(3) takes the view
that there is a risk that a Court may find the amendment to the
Regulations invalid on the basis that the regulation alters the
scope of the ABN Act.
Items 1 and
3 of Schedule 6 will amend
subparagraphs 30(3)(c)(i) and 30(3)(d)(i)
of the ABN Act respectively to provide that ABN information could
be disclosed to Commonwealth agency heads for the purpose of
carrying out functions of the agencies. Items 2
and 4 will amend subparagraphs 30(3)(c)(vi) and
30(3)(d)(iv) respectively to provide that ABN information could be
disclosed to State and Territory Departments for the purpose of
carrying out functions of those Departments.
Item 5 of
Schedule 6 provides that the amendments will apply
from 15 October
2001. This will ensure that the ABN Act
and ABN Regulations are aligned and that any disclosure made in
accordance with ABN Regulations on or after
15 October 2001 does not give
rise to an offence if the amendment to the ABN Regulations is held
by a Court to be invalid.
Section 78A of the ITAA 1936
provides that a deduction is not allowable for gifts made
to a deductible gift recipient (DGR) in
working out taxable income of an individual under Division 30 of
the ITAA 1997, if the gift is made under an arrangement whereby the
true value of the gift does not equal the amount or value claimed
as a deduction. That is, a deduction will be denied where inter
alia, the donor receives a collateral benefit in connection
with the gift.
In consequence, if a DGR holds a
fundraising dinner, under current tax law none of the cost of
attending the dinner is deductible even if some of the payment is
intended as a donation.
The Prime Minister s Community
Business Partnership (CBP) had raised concerns with the Government
that section 78A was an impediment to fund raising by DGRs. The
Prime Minister in a
Press Release of 9 September 2003
announced that the income tax law will be amended to
provide with effect from 1 July
2004 an income tax deduction for
contributions of cash or property to a DGR, where a minor benefit
is received in return. The
Report of the Contemporary Visual Arts and Craft
Inquiry (Myer
Report) had also recommended that the
tax law should be amended to clearly state that an advantage or
benefit received by donors should not preclude donors from claiming
tax deductions provided the benefit did not exceed a specified
limit.
Under the measures proposed in
Schedule 7 of the
Bill people will receive a
tax deduction for the donation component of any payments to a
deductible gift recipient. The amendment applies to specific
one-off fundraising events of DGRs which may include both
attendance at charitable events or sale of goods and services at
charitable auctions. Fundraising events held by political parties
are ineligible for a deduction under the proposed
amendments.
The amendments that are proposed to be made to
section 30-15 of the ITAA 1997 by Item 2 of
Schedule 7:
-
will allow an individual to receive
a deduction for eligible contributions to DGRs where the value of
the contributions is more than $250, and the minor benefit received
in return is no more than $100 or 10% of the value of the
contribution, whichever is the less, and
-
apply to contributions of money and
property and where the contribution is property, it must be valued
at more than $250 and either purchased within 12 months of making
the contribution; or owned by the contributor and valued by the
Commissioner at more than $5000.
The deductions are limited to individuals and cannot
be claimed by companies using the fund-raising events of DGRs to
entertain clients. Companies may be able to claim their
contributions as an ordinary business deduction.
Item 13 of
Schedule 7 provides that the amendments will apply
to contributions made on or after 1 July
2004.
In its August 1998
statement A New Tax
System
(ANTS)(4),
the Government outlined a proposal to tax all trusts like
companies. The case for this proposal was stated succinctly as
follows:
Achieving consistency of treatment
across companies and trusts under these redesigned company tax
arrangements would provide simplicity, clarity and fairness in
treatment. It would also address techniques that have come to light
through the High Wealth Individuals Project which take advantage of
highly complex structures(5).
The proposal was later narrowed
down to cover only discretionary trusts and the Government
released
exposure draft legislation
in October 2000. However, in a
Press Release of 27 February
2001, the Treasurer stated
that the Government received a great
number of submissions which raised technical problems particularly
in relation to distinguishing the source of different
distributions, and valuation and compliance issues that meant that
the draft legislation was not workable.
The Treasurer added that the
Government had also taken advice from the Board of Taxation which
recommended that the Bill
not proceed and suggested looking at alternative
approaches.
The Treasurer announced that the
Government was withdrawing the draft legislation and would not be
legislating it. It would begin a new round of consultations on
principles which can protect legitimate small business and farming
arrangements whilst addressing any tax abuse in the trust area. The
Board would be part of consultation.
In a report titled
Taxation of Discretionary Trusts
(November 2002), the Board of Taxation concluded in
recommendation 1 that there were no compelling arguments for broad
based reform to more closely align the tax treatment of
discretionary trusts and companies and that the Government should
retain the current flow‑through treatment of distributions of
non‑assessable amounts by discretionary
trusts.
However, the Board of Taxation
considered ways in which the tax treatment of trusts could be
improved and in particular the operation of section 109UB of the
ITAA 1936. In a
Press Release dated 12 December
2002, the Treasurer whilst releasing
the report of the Board of Taxation on the Taxation of
Discretionary Trusts announced that the Government would
legislate with effect from 12 December 2002 to introduce new
provisions in place of Section 109UB of the Income Tax
Assessment Act 1936 dealing with distributions from trusts to
give effect to the recommendations of the Board.
Division 7A of Part III of the
ITAA 1936 treats 3 kinds of amounts as dividends paid by a private
company:
-
amounts paid by the company to a
shareholder or shareholder s associate under section
109C
-
amounts lent by the company to a
shareholder or shareholder s associate under sections 109 and 109E,
and
-
amounts of debts owed by a
shareholder or shareholder s associate to the company that the
company forgives under section 109F.
Subdivision E of Division 7A
allows a private company to be taken to pay a dividend to an entity
(the target entity), if an entity interposed between the private
company and the target entity makes a payment or loan to the target
entity under an arrangement involving the private
company.
Section 109UB in Subdivision E
deals with the case of a private company treated by the trustee as
a beneficiary of the trust with present entitlement to trust income
in any particular year. However, without making the payment of that
income to the private company the trustee makes a loan to a
shareholder of the private company or an associate of that
shareholder. Section 109UB deems the loan to have been made to the
shareholder at the time the trustee made the loan. This loan is
then a dividend paid by the private company to the shareholder
under Division 7A.
The report
of the Board of Taxation identified two aspects of the operation of
section 109UB which required amending legislation to make it
operate effectively as well as remove any unintended
consequences.
The report of the Board of
Taxation indicated (at paragraphs 74 to 76) an instance when
section 109UB is ineffective:
Section 109UB, however, does not cover
a case in which:
-
the trustee
makes a private company presently entitled to trust income, but
does not pay the income to the company, and
-
the trustee then distributes the
underlying cash to trust beneficiaries, but not as a
loan.
In such circumstances, the individuals
are able to access, without further tax liability, trust income
that has been taxed only at the company tax rate.
One way of
distributing the underlying cash other than as a loan is for the
trustee to re‑value assets of the trust and then to use the
cash to make a (tax free) distribution of the corpus to a
beneficiary. The beneficiary then lends the corpus distribution
back to the trust, thus setting up a loan account reflecting the
trustee s indebtedness to the beneficiary. When the trust then
repays that loan to the beneficiary, section 109UB does not operate
to deem the repayment to be a loan made by the company, and so the
deemed dividend rules do not apply.
Item 2 of
Schedule 8 of the
Bill repeals section 109UB
and Item 3 will insert new Subdivision EA
Unpaid present entitlements to Division 7A of Part III of
the ITAA 1936. Broadly, a deemed division will arise under
new Subdivision EA where a private company is
presently entitled to income of the trust but that income has not
been paid and the trustee shifts value from the trust to a
shareholder of a private company in the form of a payment, loan or
a forgiven debt. The reader is referred to paragraphs 8.6 to 8.23
of the Explanatory Memorandum to the
Bill for details of the
operation of proposed sections 109XA and
109XB of proposed Subdivision EA
which are intended to achieve this result.
The broad scheme of the provisions
in proposed Subdivision EA is to treat the trust
as a private company for the purposes of determining whether a
deemed dividend arises in circumstances where the trustee has made
a payment, loan, or forgiven a debt.
The report of the Board of
Taxation indicated that section 109UB acts unfairly when certain
transactions would be treated as loans when in fact they are not
loans. In such cases there is no mechanism in section 109UB (as
there is in section 109C) to reverse the impact of the section by
repaying such amounts. Extracts from paragraphs 77 and 78 of the
report which describe this anomaly are set out
below.
The effect of section 109UB is to
treat certain transactions as creating loans that are then affected
by the deemed dividend rules. Once the section operates to deem a
loan to exist, there is no scope for reversing the operation of the
section, such as by repaying the loan (opportunities that are
available under similar provisions in other parts of the tax laws.)
That is, section 109UB has a finality not found in other
provisions of the deemed dividend rules.
The inability to avoid the operation
of section 109UB by regularising the arrangements that created the
deemed loan may have particularly adverse or unintended
consequences in cases where a trust operates a small or
medium‑sized business. The Board has been advised that
arrangements that are caught by section 109UB are, typically,
temporary accounting balances that would usually be extinguished at
year end through trust distributions. In other cases, the loans
arise where the operators of the business, in the course of running
the business, inadvertently fail to distinguish between the trust s
cash and their own cash. In other words, these are accidental loans
, but section 109UB has no mechanism for reversing the initial
deeming of the loans to be dividends.
The provisions in proposed
subsection 109XC (3) in new Subdivision
EA provide the mechanism for repayment of such amounts
which are in fact not loans. This subsection provides that a loan
is taken to have been repaid at the end of the year if it is repaid
by the earlier of the due date for lodgement and the date of
lodgement of the trust s return for the income year of the
trust.
Item 8 of
Schedule 8 provides that the amendments generally
apply to payments, loans and debts forgiven on or
after 12 December
2002.
However, if a private company
becomes presently entitled to an amount from the net income of the
trust, after the actual transaction takes place, as opposed to
before, and the other requirements of section 109XA are met, the
amendments will have effect as from the date the Bill is introduced
into Parliament (i.e. from 19 February 2004).
The income tax law was amended,
with effect from 1 July
2000, to generally deny the
inter-corporate dividend rebate under sections 46 and 46A of the
ITAA 1936 on unfranked dividends received by all resident
companies, except for dividends paid within a wholly-owned
group.
Section 46FA of the ITAA 1936
allows certain resident companies, subject to certain conditions, a
deduction for payments of unfranked or partly franked non-portfolio
dividends on-paid to a wholly-owned foreign
parent.
One of the conditions for the
deduction is that the resident company would be entitled to the
rebate under section 46 in respect of the unfranked amount of the
dividend but for the rebate being denied.
On the introduction of the
consolidation regime, the inter-corporate dividend rebate under
sections 46 and 46A for unfranked dividends paid within company
groups has been removed. As a result, the above condition that the
resident company would otherwise be entitled to the rebate can no
longer be satisfied. Thus the deduction under section 46FA has been
inadvertently denied.
The amendments proposed in
Schedule 9 will ensure that the deduction under
section 46A continues to be available to
taxpayers.
Under item 9 of
Schedule 9 the amendments will generally apply to
dividends paid after 30 June 2003, subject to the transitional rule
allowing groups to consolidate either before 30 June 2003 or on the
first day of the first income year after 30 June 2003 and before 1
July 2004.
-
Under Subdivision 50-B of the ITAA
1997 an entity must be endorsed by the Commissioner in order to
access the income tax exemption for charities.
-
Under Subdivision 30-BA of the ITAA
1997 an entity may be endorsed for deductible gift recipient (DGR)
status to receive donations that are tax deductible to
donees.
-
Endorsed charities and DGRs can
receive refundable imputation credits
-
Charities and public benevolent
institutions and health promotion charities self-assess for the
purposes of claiming the FBT rebate, the $30 000 capped FBT
exemption and GST concession for charities.
One of the recommendations in
the Report of the Inquiry into
the Definition of Charities and Related
Organisations was that
commercial purposes should not deny charitable status where such
purposes further, or are in aid of, the dominant charitable
purposes or where they are incidental or ancillary to the dominant
charitable purposes.
The Treasurer announced in
a
Press Release on 29 August 2002
that the Government agreed with this recommendation,
but was concerned to ensure that the taxation concessions provided
to charities were not abused. The Treasurer added that the
Government had therefore decided that from
1 July 2004, charities,
public benevolent institutions and health promotion charities will
be required to be endorsed by the ATO in order to access all
relevant taxation concessions. Depending on the character of the
charity, these concessions are the income tax exemption as a
charity, refundable imputation credits, deductible gift recipient
status, the FBT rebate, the $30 000 capped FBT exemption and
GST concessions.
The amendments proposed in
Schedule 10 extend the endorsement processes
currently undertaken by the ATO to all the taxation concessions to
which charities, public benevolent institutions and health
promotion charities are entitled. Where a charity can currently
self-assess its eligibility for a taxation concession, it will be
required from 1 July 2004
to satisfy the Commissioner that it is eligible for the
taxation concession.
There are five new categories
under which an entity may be endorsed:
-
a charitable
institution under proposed subsection 176-1(1) of the GST Act
(Item 15 of Schedule
10)
-
a trustee of a charitable fund under
subsection 176-5(1) of the GST Act (Item 15 of
Schedule 10)
- a public
benevolent institution under subsection 123C(1) of the
Fringe Benefits Tax Assessment Act 1986 (FBT Act) or for
the operation of a public benevolent institution under
subsection 123C(3) of the FBT Act (Item 23 of
Schedule 10)
-
a health promotion charity under
subsection 123D(1) of the FBT Act (Item 23 of
Schedule 10), and
-
a charitable institution covered by
paragraph 65J(1)(baa) of the FBT Act under subsection 123E(1) of
that Act (Item 22 of Schedule
22).
There is no change to the
requirements that charities, public benevolent institutions and
health promotion charities have to fulfil to qualify for taxation
concessions. The process for endorsement for each taxation
concession will now be contained in the proposed Division
426 to be inserted into the Taxation Administration
Act 1953 (TAA 1953) (Item 41 of
Schedule 10).
To be endorsed, entities must
identify themselves to the Commissioner by applying for an ABN and
applying for endorsement for tax concessions. The Commissioner
could approve a form that is part of an application form for an ABN
under proposed section 426-15 of the TAA
1953.
Income tax law allows taxpayers to
claim income tax deductions for certain gifts to the value of $2 or
more to deductible gift recipients (DGRs). To be a DGR, an
organisation must fall within a category of organisations set out
in Division 30 of the ITAA 1997, or be specifically listed
under that Division. The amendments in Schedule 11
will include the funds and organisations specified in the table
below as DGRs.
|
Name of
fund
|
Amendments proposed by Schedule
11
|
Minister for Revenue and Assistant
Treasurer s Press Release No.
|
Date of
effect
|
|
Country Education Foundation of Australia
Limited
|
Item
1 will amend the table at
end of subsection 30-25(2) (Education) to include this fund as item
2.2.31.
|
C081/03
|
|
|
Crime Stoppers South
Australia Incorporated
|
Item
2 will amend the table in
subsection 30-45(2) (Welfare and rights) by including this fund as
item 4.2.27
|
C090/03
|
The gift must be made on or after
19 September 2003.
|
|
Dunn and Lewis Youth
Development Foundation Limited
|
Item
4 will amend the table in
section 30-105 (Other recipients) by including this fund as item
13.2.6
|
C102/03
|
The gift must be made on or after
10 November 2003 and
before 10 November
2005.
|
It was noted above in considering the
amendments in Schedule 8, that the Board of Taxation in its report
titled Taxation of Discretionary Trusts came to the
conclusion in Recommendation 1 that there are no compelling
arguments for broad‑based reform to more closely align the
tax treatment of discretionary trusts and companies and that the
Government should retain the current flow‑through treatment
of distributions of non‑assessable amounts by discretionary
trusts.
The report also
noted (in paragraph 62) that since the 1990s a number of amendments
have been made to the taxation treatment of trusts, to address
specific tax planning opportunities. It adds that indications from
the ATO are that this legislation appears to have modified
behaviour and that non‑compliance with the new provisions is
not a significant concern (although extensive compliance reviews
have not been completed on some measures) .
However, in paragraph 63 the report
records the reservations of the ATO in enforcing specific
provisions to prevent tax abuse:
The ATO has also advised that targeted
anti‑abuse rules are difficult to apply in some circumstances
where taxpayers have very complex arrangements. In these cases, it
can be almost impossible to trace the ultimate source of funds;
consequently, it can be very difficult to identify tax abuse
techniques and enforce the rules.
The entity tax regime would have ensured
that a minimum tax will be collected on business income derived by
discretionary trusts. The flow-through method of taxing trusts is
dependent upon ultimate beneficiaries returning shares of trust
income which may have passed through a number of interposed
entities without changing its character to capital. Thus from the
revenue collection point of view it is clear that the entity tax
regime coupled with an imputation regime is about the most
effective and efficient way to handle tax abuse using trusts and
complex arrangements. An illustration of the use of interposed
entities to avoid tax being paid at the top marginal rates was
given in relation to section 109UB. Hence the need to replace
section 109UB by inserting an entire new Subdivision
EA to Division 7A of Part 111 of the ITAA 1936.
In addition the integrity of the tax
system is under a cloud when there are avoidance possibilities open
to one sector of taxpayers who have the resources to enter into
complex arrangements to avoid targeted anti-abuse rules which the
ATO has acknowledged are difficult to enforce. Targeted anti-abuse
rules also add to the complexity and length of tax legislation as
seen by the amendments in Schedule 8 where a
single section 109UB is being replaced by an entire new Subdivision
EA to address a specific type of tax abuse.
1.
Commissioner of Taxation v Payne [2001] HCA 3.
2.
Bills Digest No. 119, 2002 03.
3.
Explanatory Memorandum to the Bill; paragraph 6.5, page 42.
4.
Tax Reform not a new tax a new tax system: The Howard
Government s Plan for a New Tax System (AGPS August 1998).
5.
ibid., p. 115.
Bernard Pulle
31 March 2004
Bills Digest Service
Information and Research Services
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ISSN 1328-8091
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