Tax Laws Amendment (2004 Measures No. 6) Bill 2004

Tax Laws Amendment (2004 Measures No. 6) Bill 2004

Date Introduced: 18 November 2004

House: House of Representatives

Portfolio: Treasury

Commencement: On various dates as explained in the Main Provisions section.

Glossary

The following abbreviations and acronyms are used throughout this Bills Digest

Purpose

There are 12 Schedules to the Tax Laws Amendment (2004 Measures No. 6) Bill 2004 (the Bill) and the main purpose of each Schedule as stated in the General Outline and Financial Impact section of the Explanatory Memorandum to the Bill is set out below.⁽¹⁾

Background

The majority of the measures in this Bill were originally included in Tax Laws Amendment (2004 Measures No. 4) Bill 2004⁽¹⁴⁾ and Tax Laws Amendment (2004 Measures No. 5) Bill 2004.⁽¹⁵⁾ However, with the prorogation of the 40^th Parliament, these Bills lapsed and the measures in these Bills have been reintroduced in this Bill with minor drafting changes. These significant additional measures in this Bill which were not included in the previous Bills will be indicated in the Main Provisions section. These two Bills are referred to as Lapsed Bills No 4 and 5 in this Bills Digest.

As there is no central theme to the Bill, the background to the various measures will be discussed under the Main Provisions section.

Schedule 1 Consolidation: measures to provide greater flexibility

The consolidation regime was introduced with effect from 1 July 2002. The basic concepts underlying the consolidation regime are outlined in the ATO publication Consolidation in brief - taxing wholly owned corporate groups as single entities.⁽¹⁶⁾

On 4 December 2003, the Minister for Revenue and Assistant Treasurer foreshadowed in Press Release No. C116/03 certain measures to provide greater flexibility and clarify certain aspects of the consolidation regime. A brief outline of the measures in relation to the consolidation regime proposed in this Bill is set out below. Readers are referred to the Explanatory Memorandum (pages 15 to 78; paragraphs 1.1 to 1.230) which give the details of the measures with examples of their application.⁽¹⁷⁾

Clarifying beneficial ownership for consolidation membership rules

Item 2 of Part 2 of Schedule 1 inserts proposed subsection 703-30(3) into the ITAA 1997 to provide that entities under external administration, whether under the Corporations Act 2001 or similar foreign law, will not be prevented from being or remaining members of consolidated groups.⁽¹⁸⁾

Modification of tax cost setting in relation to finance leases

Item 5 of Part 3 of Schedule 1 inserts proposed section 705-56 into the ITAA 1997 to provide special rules for setting the tax cost of assets where an entity that becomes, or ceases to be, a member of a consolidated group is subject to a finance lease. These rules take into account the different treatment of finance leases under accounting standards and the income tax law.⁽¹⁹⁾

Application of cost setting rules to certain types of mining or quarrying expenditure

Part 4 of Schedule 1 contains rules to clarify the operation of the cost setting rules and the inherited history rules for assets that have arisen from allowable capital expenditure, transport capital expenditure or exploration and prospecting expenditure.⁽²⁰⁾

Low-value and software development pools

Item 11 of Part 5 of Schedule 1 inserts proposed Subdivision 716-G into the ITAA 1997 to provide that the head company of a consolidated group receives the appropriate allowances for the decline in value of assets in a joining entity s low-value pool. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes the pool upon leaving the consolidated group.⁽²¹⁾

Item 11 also inserts proposed sections 716-340 and 716-345 to the ITAA 1997 to ensure that the head company of a consolidated group receives the appropriate allowances for the decline in value of the joining entity s software development pool. The rules also ensure that the head company and a leaving entity receive the appropriate allowances for the decline in value of the pools where the leaving entity takes part of the pool with it upon leaving the consolidated group.⁽²²⁾

Notice requirements for inter-entity loss multiplication rules

The amendments proposed to the ITAA 1997 by items 13 to 19 of Part 6 of Schedule 1 alleviate the notice requirements under the entity loss multiplication rules during the consolidation transitional period for entities that are in the same consolidation group. ⁽²³⁾The Commissioner of Taxation is given the discretion to extend the time for giving notices under proposed paragraph 165-115ZC(7A) of the ITAA 1997 to be inserted by item 18 or to waive the notice requirements under proposed paragraph 165-115ZC(7B), also inserted by item 18. The matters to be taken into account by the Commissioner in exercising this discretion are set out in proposed paragraph 165-115ZC (7C).

Source of certain distributions for allocable cost amount purposes

On formation or entry to a consolidated group, the tax cost of each asset of a joining subsidiary is based on a share of the allocable cost amount (ACA) of that subsidiary. The ACA consists of the cost of the membership interests in the entity together with its liabilities, which become liabilities of the group. Adjustments are made to reflect certain undistributed profits, distributions and losses of the joining entity and certain deductions to which the head company becomes entitled.

Part of the ACA is allocated to the subsidiary s retained cost base assets (i.e. assets such as cash that retain their cost bases at the joining time). The remainder of the ACA is then apportioned to the subsidiary s reset cost base assets in proportion to their market values, subject to further adjustments for revenue-like assets and over-depreciated assets.

Part 7 of Schedule 1 to this Bill contains rules to simplify the method of working out the ACA. It accepts a last-in-first-out method of accounting for profits where the entity must determine which prior year s profits were used to pay a particular dividend.⁽²⁴⁾ The reader is referred to paragraphs 1.135 to 1.148 on pages 56 to 58 of the Explanatory Memorandum for a detailed explanation of the proposed changes. ⁽²⁵⁾

This is a new measure which was not in the Lapsed Bills No. 4 and 5.

Adjustment to step 3 of allocable cost amount to take account of certain losses

Part 8 of Schedule 1 to this Bill has rules which provide that the full amount of undistributed profits that have accrued to a consolidated group before the joining time is included when calculating the ACA for a joining entity. The reader is referred to paragraphs 1.149 to 1.155 on pages 58 to 61 of the Explanatory Memorandum for a detailed explanation of the proposed changes.⁽²⁶⁾

This is a new measure which was not in the Lapsed Bills No. 4 and 5.

Transitional treatment of tax liabilities for allocable cost amount and CGT purposes

Part 9 of Schedule 1 to this Bill contains rules that reduce compliance costs in applying the consolidation cost setting rules for transitional entities which have a change in the amount of deferred tax liabilities associated with assets that have their tax cost reset.⁽²⁷⁾ The reader is referred to paragraphs 1.156 to 1.162 on pages 61 to 62 of the Explanatory Memorandum for a detailed explanation of the proposed changes.⁽²⁸⁾

This is a new measure which was not in the Lapsed Bills No. 4 and 5.

Entry and exit history rules and choices

Item 26 of Schedule 1 inserts into the ITAA 1997 proposed Subdivision 715-J Entry history rule and choices and also inserts proposed Subdivision 715-K Exit history rule and choices.

Proposed Subdivisions 715-J and 715-K replace Subdivisions 717-F and 717-G respectively which are repealed by item 27.

A comparison of the proposed rules with the existing rules succinctly set out in table in the Explanatory Memorandum is reproduced below.⁽²⁹⁾

The reader is referred to paragraphs 1.183 to 1.230 on pages 66 to 78 of the Explanatory Memorandum for a detailed explanation of the proposed changes and examples of the operation of the new rules to give relief to companies by allowing the head company to modify elections or choices that are irrevocable or not immediately revocable to meet the requirements of the consolidated group.⁽³⁰⁾

This is a new measure which was not in the Lapsed Bills No. 4 and 5.

Trusts

The amendments of a technical nature proposed in Part 11 of Schedule 1 are intended to clarify certain cost setting provisions applying to trusts which become members of a consolidated group. The reader is referred to paragraphs 1.163 to 1.167 on page 63 of the Explanatory Memorandum for a detailed explanation of the proposed changes.⁽³¹⁾

Application

Item 1 of Part 1 of Schedule 1 provides that the amendments made by Schedule 1 apply on and after 1 July 2002, except as otherwise provided. This was the date when the consolidation regime came into effect.

This is a new measure which was not in the lapsed Bills No. 4 &5.

Schedule 2 Copyright collecting societies

Copyright collecting societies are organisations that administer certain rights of copyright on behalf of copyright owners, including authors and composers. Such societies receive income in relation to copyrights pending identification and allocation to the appropriate copyright owners.

Following the recommendations in the Simpson Report into Copyright Collecting Societies (1995),⁽³²⁾ the ATO took the view that a trust relationship exists between the societies as trustees and their members as beneficiaries. The trustee would be liable to tax under section 99A of the ITAA 1936 on income not allocated to members in a financial year at the top personal tax rate of 47% with effect from 1 July 2002. The ATO by Taxation Ruling IT 328 as a matter of administrative practice allows a further two months to identify and allocate income to beneficiaries to minimise the impact of section 99A. However, in practice a substantial part of the income of these societies are taxed at the top marginal tax rate due to the difficulty of identifying beneficiaries within the extended two month period allowed by the ATO.

On 1 August 2002, the Minister for Revenue and Assistant Treasurer announced in Press Release No. C081/02 that the tax law would be amended to ensure that copyright collecting societies are not taxed on income they collect on behalf of copyright owners. The measures in Schedule 2 to the Bill give effect to this proposal.

Exemption of copyright income and non-copyright income of copyright collecting societies under certain conditions

Item 6 of Schedule 2 inserts proposed section 51-43 into the ITAA 1997 and exempts from income tax the following income:

(i) 5% of the total amount of the copyright income and non-copyright income collected and derived by the society in the income year; and

(ii) $5 million or such other amount that is prescribed by regulations (proposed paragraph 51-43(2) (b)).

A definition of copyright collecting society is inserted into subsection 995-1(1) of the ITAA 1997 by item 8 of Schedule 2 and includes both copyright collecting societies declared under the Copyright Act 1968 and non-declared societies, subject to certain conditions.

A definition of copyright income is inserted into subsection 995-1(1) of the ITAA 1997 by item 9 of Schedule 2 and means ordinary or statutory income of the following kinds:

A member of a copyright collecting society means:

Application

Item 14(1) of Schedule 2 provides that the amendments apply from 1 July 2002. However, societies may make an election to defer entry into the new taxation regime until 1 July 2004 to avoid the retrospective operation of the amendments under the transitional provisions in proposed section 410-1 of the Income Tax (Transitional Provisions) Act 1997 (item 12 of Schedule 2).

Schedule 3 Simplified imputation system

The simplified imputation system (SIS) which applied from 1 July 2002 was introduced by the New Business Tax System (Imputation) Act 2002. The background to the introduction of SIS following the Review of Business Taxation is set out in Bills Digest No. 165 2001-02 to the New Business Tax System (Imputation) Bill 2002. The SIS replaced the former imputation system in Part IIIAA of the ITAA 1936. An overview of the SIS can be ascertained from the document Simplified imputation snapshot view on the ATO website.

The Explanatory Memorandum to the Bill states at paragraph 3.6 on page 88 that as a result of the introduction of SIS a number of consequential amendments are required to the following income tax laws:

The amendments proposed in Schedule 3 to these tax laws will:

The reader is referred to pages 87 to 96 (paragraphs 3.1 to 3.33) of the Explanatory Memorandum for a detailed explanation of the new law. ⁽³⁴⁾

Application

Item 111 of Schedule 3 provides that the consequential amendments and the anti-avoidance provisions will generally apply to events on or after 1 July 2002 when the SIS commenced operations.

Schedule 4 Deductible gift recipients

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 and be endorsed by the ATO, or be specifically listed under that Division. The amendments in Schedule 4 will include the funds and organisations specified in the table below as DGRs.

Establishing a new category of DGRs for special schools for students with a disability

On 11 May 2004, the Treasurer announced that the Government will legislate to provide a new category of deductible gift recipient, to allow certain special schools to receive tax deductible donations.⁽³⁵⁾ The background to this announcement was that some not for profit special schools, government bodies as well as non-government, had previously been endorsed by the Commissioner of Taxation as DGRs because they were all considered by the Commissioner to be public benevolent institutions (PBIs). However, the Commissioner subsequently determined that the special government schools were government bodies. Under common law a government body cannot be a PBI and hence the special government schools being government bodies cannot be PBIs. The purpose of the announcement was to ensure that special government schools would receive DGR status.

The table in subsection 30-25(1) of the ITAA 1997 sets out the general categories of education DGRs. Item 1 of Schedule 4 inserts at the end of that table proposed item 2.1.12 to include a government school that:

(a)    provides special education for students who have a disability that is permanent or is likely to be permanent, and

(b)   does not provide education for other students.

Application

Item 2 of Schedule 4 provides that this amendment to subsection 30-25(1) applies to gifts made on or after 1 April 2004. The Explanatory Memorandum to the Bill states that the amendments will ensure that special schools that previously had PBI status can continue to receive tax deductible gifts.⁽³⁶⁾

Non-government special schools which operate on a not-for profit basis may continue to qualify for DGR status both before and after 1 April 2004 if they are endorsed as PBIs.

Fire and emergency services bodies listed as DGRs

Item 13 of Schedule 4 inserts proposed section 30-102 to make the following fire and emergency services as DGRs with effect from the dates shown in the following table.

 Source: Table in proposed section 30-102 inserted by item 13 of Schedule 4 modified by the author.

The Government s decision to list fire and emergency services bodies as DGRs was announced by the Treasurer in Press Release No. 114 of 23 December 2003.

Other specific gift recipients listed as DGRs

The following funds are also listed as DGRs in the items specified in Schedule 4.

Extending the period for which deductions are allowed for gifts to certain DGRs

Items 5 to 9 and 14 to 15 of Schedule 4 extend the period for which deductions are allowed for gifts to the following funds and organisations.

Schedule 5 Debt and equity interests at call loans

At call loans are typically loans by small business owners to their business with no fixed term and are repayable on demand. Division 974 of the ITAA 1997 sets out the debt/equity rules to determine what is debt and what is equity for various income tax purposes applicable from 1 July 2001. A transitional rule under section 974-75 of the ITAA 1997 provides that certain on call loans entered into on or after 21 February 2001 and on or before 31 December 2002 to be a debt interest.

On 16 December 2002, the Minister for Revenue and Assistant Treasurer announced in Press Release No. C131/02 that the Government would extend this transitional period to 30 June 2004. A further extension to 30 June 2005 was announced by the Minister for Revenue and Assistant Treasurer by Press Release No. C045/04 of 24 May 2004 to give taxpayers extra time to assess existing loans and make adjusting arrangements on the classification of their loans as debt or equity for income tax purposes. The amendments proposed by items 1 to 3 of Schedule 5 to subsection 974-75(4) will provide that at call loans entered into on or before 30 June 2005 are treated as debt interests.

Application

Item 7 of the table in clause 2 of the Bill provides that the amendments in Schedule 5 commence on the day on which the Act receives the Royal Assent.

Schedule 6 Irrigation water providers

On 11 May 2004, the former Minister for Revenue and Assistant Treasurer, Senator the Hon Helen Coonan, and the Minister for Agriculture, Fisheries and Forestry, the Hon Warren Truss, in a Joint Press Release announced that the Government will provide eligible irrigation water providers with access to the water facilities and landcare tax concessions which are currently available to primary producers.⁽³⁷⁾

The proposal was to provide water facilities and landcare tax concessions to those irrigation water providers whose main business is supplying water to primary producers. The landcare tax concession was to be made available to irrigation water providers supplying water to businesses using rural land.

The policy objectives were:

Water facility tax concession for irrigation water providers

The tax concession available for water facilities are set out in Subdivision 40-F of the ITAA 1997. This subdivision provides that you can deduct amounts for capital expenditure on depreciating assets that are water facilities equal to the asset s decline in value during an income year. Section 40-540 states that the decline in value of a water facility is equal to one-third of the expenditure in the year in which the expenditure was incurred and one-third the expenditure for each of the two following years.

Item 2 of Schedule 6 to the Bill inserts proposed subsections 40-515(5) and (6) to extend the water facility tax concession to irrigation water providers. Paragraph 40-515(4)(a) provides that you must reduce the deduction for the decline in value of an asset when it was not wholly used on primary production business on land in Australia. Proposed subsection 40-515(5) provides that paragraph 40-515(4)(a) does not apply to a water facility if the expenditure incurred on the construction, manufacture, installation or acquisition of the water facility was incurred by an irrigation water provider .

Proposed subsection 40-515(6) defines irrigation water provider to mean an entity whose business primarily and principally is the supply of water to entities for use in primary production businesses in Australia, otherwise than by using a motor vehicle.

Landcare tax concession for rural land irrigation water providers

Subdivision 40-G of the ITAA 1997 provides that you can deduct amounts for capital expenditure on landcare operations as defined in section 40-635.

Item 7 of Schedule 6 inserts proposed subsection 40-630(1A) to enable a rural land irrigation water provider to deduct capital expenditure it incurs at any time in an income year on land care operations for:

(a)    land in Australia that other entities use at the time for carrying on a primary production business, or

(b)   rural land in Australia that other entities use at the time for carrying on businesses for taxable purpose from the use of that land except a business of mining operations.

Proposed subsection 40-630(1B) also inserted by item 7 of Schedule 6, defines rural land irrigation water provider to mean:

(a)    an irrigation water provider as defined in proposed subsection 40-515(6), or

(b)   an entity whose business is primarily and principally the supply (otherwise than by using a motor vehicle) of water to entities for use in carrying on businesses using rural land, except businesses of mining operations.

Item 8 of Schedule 6 inserts proposed subsection 40-630(2B) into Subdivision 40-G to ensure that a rural land irrigation water provider cannot deduct an amount under Subdivision 40-G for capital expenditure if the entity can deduct an amount for that expenditure under Subdivision 40-F.

Application

Item 14 of Schedule 6 provides that the amendments made by this Schedule apply to expenditure incurred on or after 1 July 2004.

Schedule 7 FBT - Extension of exemption on sale or acquisition of dwelling as a result of relocation of an employee at the request of an employer

Under the present law, costs incidental to the sale or acquisition of a dwelling by an employee relocating for employment purposes are exempt from fringe benefits tax (FBT) under section 58C of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986), subject to certain conditions. The pre-conditions for the application of the exemption are set out in subsection 58C(1). Paragraph 58C(1)(b) requires that the sale of the dwelling in the former locality of employment takes place within two years as a pre-condition before the exempt benefits are accessed by the employer. Paragraph 58C(3)(c) also requires that the employee purchase a dwelling at the new locality within four years of the commencement date of the new employment position. The exemption will not apply if the employer pays the incidental costs of purchasing a new dwelling before the old dwelling is sold as the sale of the old dwelling is a pre-condition under paragraph 58C(1)(b).

On 11 May 2004, the Minister for Revenue and Assistant Treasurer announced that the Government will effect changes to the conditions for the FBT exemption for benefits provided to employees who are relocated by their employer, with effect from 1 April 2004. It was indicated that the changes will retain the existing two and four-year limits, but will not require that the sale of the old dwelling occur before the employer accesses the exemption.⁽³⁸⁾

The amendments proposed by items 1 and 2 of Schedule 7 have the effect of removing the requirement that the old dwelling be sold before the employer is able to access the exemption for incidentals in connection with the acquisition of the new dwelling. However the amendments proposed by items 3, 4 and 5 of Schedule 7 ensure that this is contingent on the old dwelling being sold within 2 years of commencing the new employment position.

Application

Item 6 of Schedule 7 provides that the amendments made by this Schedule apply to benefits provided on or after 1 April 2004.

Schedule 8 CGT event G3 Liquidator or administrator declares interests worthless

Under section 104-5 of the ITAA 1997, capital gains tax (CGT) event G3 takes place when the liquidator of a company declares shares in a company worthless. A shareholder can choose to make a capital loss under section 104-145. The time of the event is when the liquidator makes the declaration and the capital loss is the shares reduced cost base under section 104-145. If the declaration is made by an external administrator other than a liquidator, a CGT event does not occur and, consequently, shareholders cannot choose to make a capital loss while the company continues to exist. Instead, they must create a trust over the shares if they wish to utilise their capital losses and incur any associated costs.

On 11 May 2004, the former Minister for Revenue and Assistant Treasurer announced that it was proposed to improve and simplify the capital gains tax rules by allowing any insolvency practitioner to declare shares and other securities in a company to be worthless for CGT purposes. Such a declaration will cause a CGT event to occur and will permit the holders of securities to choose to make a capital loss in respect of their shares. It was indicated that the measure will apply to declarations made by insolvency practitioners after the date of Royal Assent of the enabling legislation.⁽³⁹⁾

Item 2 of Schedule 8 proposes to repeal section 104-145 and substitute proposed new section 104-145 to cover declarations made by a liquidator or administrator of a company that interests of a kind in the company described in proposed subsection 104-145(3) are worthless. The kinds of interests described in proposed subsection 104-145(3) include:

(a)    shares issued by the company,

(b)   notes or convertible notes issued by the company,

(c)    other similar financial assets issued by the company, and

(d)   rights or options to acquire interests of a kind referred to in a preceding paragraph.

Application

Item 8 of Schedule 8 provides that the amendments made by this Schedule apply to declarations by liquidators or administrators made after the day when this Bill receives the Royal Assent.

Schedule 9 GST: Supplies to offshore owners of Australian real property

The policy intent of the GST legislation is to tax the supply of goods and services and other things that are consumed in Australia. In the general scheme of the GST legislation the rental or sale of residential property and certain commercial accommodation in Australia owned by residents is input taxed. This means that no GST is payable on the supply of residential premises and the owners are not entitled to input taxed credits for acquisitions relating to supply, such as advertising, trade and property maintenance services. However, non-resident owners and certain resident owners, who are not in Australia when the supply takes place, can acquire some or all of these services GST-free.

The measures in items 1 and 2 of Schedule 9 of the Bill amend section 38-190 of the GST Act to remove this anomaly. Thus the same GST treatment will apply to both non-resident and resident entities whether or not they are in Australia at the supply time.

This proposal had not been announced prior to the introduction of this Bill.

The reader is referred to paragraphs 9.5 to 9.8 on pages 139 to 140 of the Explanatory Memorandum for a detailed explanation of the changes and examples of the operation of the new law.⁽⁴⁰⁾

Application

Item 3 of Schedule 9 states that the amendments will apply to supplies made on or after the first day of the first quarterly tax period that commences after the day on which this Bill receives the Royal Assent.

This is a new measure which was not in the lapsed Bills No. 4 &5.

Schedule 10 Baby bonus adoption amendments

The eligibility criteria for the first child tax offset in section 61-355 of the ITAA 1997 or the Baby Bonus as it is commonly referred to includes the requirement that the taxpayer must be legally responsible for the child. Adoptive parents are legally responsible for the child only when an adoption order is issued. In practice, the adoption order will be issued only between six to twelve months after the child has been in the care of the adoptive parents. Currently, adoptive parents are not entitled to claim the Baby Bonus for the period between commencing care and the grant of the adoption order.⁽⁴¹⁾

In the 2003-04 Mid-Year Fiscal and Economic Outlook statement it was indicated that the Government will amend the application of the Baby Bonus in relation to adoptive parents.⁽⁴²⁾ Adoptive parents will be able to claim the Baby Bonus for the period between commencing care for the child and being granted legal responsibility via an adoption order. This measure will be given effect from 1 July 2001, which was the date on which the Baby Bonus came into effect.

Item 20 of Schedule 10 inserts proposed section 61-440 to provide for an additional tax offset if a child is in your care before you legally adopt the child under the following conditions:

Application

Item 23 of Schedule 10 provides that the amendments made by this Schedule apply to assessments for income years that commence on or after 1 July 2001.

Schedule 11 Technical correction to the Taxation Laws Amendment Act (No. 8) 2003

Item 1 of Schedule 11 of this Bill amends an error in subsection 2(1) (table item 5) of the Taxation Laws Amendment Act (No. 8) 2003. The error relates to a reference in table item 5 to the commencement of Schedule 7 to the Taxation Laws Amendment Act (No. 7) 2003 instead of to Schedule 7 to the Taxation Laws Amendment Act (No. 1) 2004.

This error arose because the franking deficit tax (FDT) offset rules that applied to life insurance companies commenced immediately after the commencement of Schedule 7 to the Taxation Laws Amendment Act (No. 1) 2004.

These FDT offset rules were originally in Taxation Laws Amendment Bill (No. 7) 2003 which on enactment became the Taxation Laws Amendment Act (No. 1) 2004.

Application

The Taxation Laws Amendment Act (No. 8) 2003 received Royal Assent on 21 October 2003 and hence the amendment proposed by item 1 of Schedule 8 will commence on 21 October 2003.

Schedule 12 Transfer of life insurance business

Division 320 of the ITAA 1997 contains special rules for taxing life insurance companies. The life insurance industry had raised concerns about the tax consequences that arise when life insurance business is transferred to another life insurance company under Part 9 of the Life Insurance Act 1995 or under the Financial Sector (Transfers of Business) Act 1999.

The measures in Schedule 12 briefly outlined below are intended to meet the concerns of industry and implement the proposal announced in the former Minister of Financial Services and Regulation s Media Release No. FSR/069 of 12 October 2000.

Proposed Subdivision 320-I and the new CGT roll-over will apply under proposed section 320-305 and proposed section 126-150 respectively, if all or part of the life insurance business of a life insurance company is transferred to another life insurance company:

The reader is referred to paragraphs 12.1 to 12.60 on pages 149 to 164 of the Explanatory Memorandum for a detailed explanation of the changes. ⁽⁴⁴⁾

Application

Item 11 provides that the majority of the amendments made by Schedule 12 apply to transfers of life insurance business that take place on or after 1 July 2000.

This is a new measure which was not in the Lapsed Bills No. 4 and 5.

Concluding Comments

Financial impact of measures in the Bill

The thrust of the comments made in the Explanatory Memorandum on pages 3 to 13 as to the financial impact of the measures in the Bill are set out in the following table.

Relief for groups in the consolidation regime

The consolidation regime came into operation from 1 July 2002 and since then there have been numerous changes which have not made it easy for businesses to make the various irrevocable elections under that regime. The consolidation regime was set in place by the New Business Tax System (Consolidation) Act (No.1) 2002 which received the Royal Assent on 22 August 2002. The ATO website lists nine Acts of Parliament which received the Royal Assent between 22 August 2002 and 30 June 2004 to give effect to various changes and clarification of the initial legislation. Apart from this Bill, the Taxation Laws Amendment (2004 Measures No. 7) Bill, which was introduced on 8 December 2004, also includes measures to provide greater flexibility to the consolidation regime.

Against this background of changes effected and proposed, it is welcome relief for consolidated groups that the measures in this Bill in Schedule 1 allow entities to revoke irrevocable choices or elections when they consolidate, join consolidated groups and/or leave consolidated groups.

In addition, further relief for consolidated groups was announced by the Hon Mal Brough, MP, the Minister for Revenue and Assistant Treasurer in his Press Release of 20 December 2004. He indicated that the Government will extend the time for making or revoking certain elections to 31 December 2005:

The Government s decision to extend the deadline comes after discussions between the Government and a number of affected stakeholders - providing consolidated groups an extra 12 months to make, revoke or change, certain elections. Specifically:

However, the election to form a consolidated or Multiple Entry Consolidated group will remain irrevocable.⁽⁴⁷⁾

The extension of time granted may allow small and medium enterprises to reconsider their earlier elections which have impact on taxable income and their tax liability.

Endnotes

1. Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 6) Bill 2004. This Bills Digest draws extensively from the Explanatory Memorandum.

2. ibid., p.3.

3. ibid., p.4.

4. ibid., p. 5.

5. ibid., p. 6.

6. ibid., p. 9.

7. ibid., p. 9.

8. ibid., p. 10.

9. ibid., p. 11.

10. ibid., p. 12.

11. ibid., p. 12.

12. ibid., p. 13

13. ibid., p. 13.

14. The reader is referred to the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 4) Bill 2004 and the Correction to the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 4) Bill 2004 for explanations of the various measures in the Tax Laws Amendment (2004 Measures No. 4) Bill 2004. This Bills Digest also draws from the Bills Digest no. 8 on the Tax Laws Amendment (2004 Measures No. 4) Bill 2004 by Bernard Pulle and Thomas John.

15. The reader is referred to the Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 5) Bill 2004 for explanations of the various measures in the Tax Laws Amendment (2004 Measures No. 5) Bill 2004.

16. Consolidation in brief- taxing wholly owned corporate groups as single entities - NAT 6081-02.2004

17. Explanatory Memorandum to the Tax Laws Amendment (2004 Measures No. 6) Bill 2004, pp. 15 to 78; paragraphs 1.1 to 1.230.

18. ibid., p. 16, paragraph 1.5 and p. 25, paragraph 1.17.

19. ibid., p.16, paragraph 1.6.

20. ibid., p. 17, paragraph 1.7.

21. Bernard Pulle and Thomas John, Tax Laws Amendment (2004 Measures No. 4) Bill 2004, Bills Digest, no. 8, Parliamentary Library, Canberra, 2004-05.

22. Explanatory Memorandum, op. cit. p. 17, paragraph 1.9.

23. ibid., p. 18, paragraph 1.14.

24. ibid., p. 17, paragraph 1.10.

25. ibid., pp 56 to 58; paragraphs 1.135 to 1.148.

26. ibid., pp. 58 to 61; paragraphs 1.149 to 1.155.

27. ibid., p. 61, paragraph 1.156.

28. ibid., pp. 61 to 62; paragraphs 1.156 to 1.162.

29. ibid., pp. 24 and 25, paragraph 1.16.

30. ibid., pp. 66 to 78; paragraphs 1.183 to 1.230.

31. ibid., p. 63, paragraphs 1.163 to 1.167.

32. Department of Communications and the Arts, Review of Australian Copyright Collecting Societies - A report to the Minister for Communications and the Arts and the Minister for Justice by Shane Simpson, Department for Communications and the Arts, Canberra, 1995.

33. Explanatory Memorandum, op.cit. p. 88, paragraph 3.6.

34. ibid., pp. 87 to 96, paragraphs 3.1 to 3.33.

35. The Hon P. Costello, Treasurer, Support for Organisations affected by eligibility changes to fringe benefits tax concessions , Press Release No. 32 of 11 May 2004.

36. Explanatory Memorandum, op. cit. p. 98, paragraph 4.8.

37. Senator the Hon Helen Coonan, the former Minister for Revenue and Assistant Treasurer, and the Hon Warren Truss, Minister for Agriculture, Fisheries and Forestry, Taxation Concessions for Irrigation Water Providers , Joint Press Release No. C040/04 of 11 May 2004.

38. Senator the Hon Helen Coonan, the former Minister for Revenue and Assistant Treasurer, Fringe Benefits Tax Exemptions and Reporting Exclusions , Press Release No. C031/04 of 11 May 2004.

39. Senator the Hon Helen Coonan, the former Minister for Revenue and Assistant Treasurer, Capital Gains Tax Improvements , Press Release No. C029/04 of 11 May 2004.

40. Explanatory Memorandum, op.cit., pp. 139 to 140, paragraphs 9.5 to 9.8.

41. ibid., p. 141, paragraph 10.2.

42. The Hon. Peter Costello, MP, Treasurer and Senator the Hon. Nick Minchin, Minister for Finance and Administration, Mid-Year Economic and Fiscal Outlook 2003-04 (8 December 2003), p. 123.

43. ibid., p.151, paragraph 12.5.

44. ibid., pp. 149 to 164, paragraphs 12.1 to 12.60.

45. 2003 Tax Expenditures Statement., p. 67, TES Code A56.

46. ibid., p. 87, TES Code B36.

47. The Hon Mal Brough MP, the Minister for Revenue and Assistant Treasurer, More Time for Consolidated Groups to Make Elections , Press Release No. 022 of 20 December 2004 .