Bills Digest No. 168 2004–05
Tax Laws Amendment (2005
Measures No. 3) Bill 2005
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
Passage History
Tax Laws
Amendment (2005 Measures No. 3) Bill
2005
Date
Introduced: 12 May
2005
House: House of Representatives
Portfolio: Treasury
Commencement:
The measures contained in
Schedule 1, 2 3 and 5 of the Tax Laws Amendment (2005 Measures No.
3) Bill 2005 (Bill) will commence on Royal Assent. The measures
in Schedule 4 of the Bill will commence on 1 July 2005, immediately
after the commencement of the measures contained in Schedule 10 of
the Tax Laws Amendment (2004 Measures No. 1) Act
2004.
The Bill contains a variety of
measures which aim to make changes to:
-
the tax concessions available for philanthropy
-
the tax treatment of profits derived from international shipping
and airline operations
-
the secrecy provisions contained in the Taxation
Administration Act 1953
-
the availability of fringe benefit tax concessions for
government institutions endorsed as charitable institutions,
and
-
the dependent child age criteria for certain tax offsets,
including offsets for housekeepers, Medicare levy or Medicare Levy
Surcharge.
The proposed measures have different backgrounds which are
briefly discussed in relation to each individual measure below.
In the Bills Digest prepared in
relation to the Extension of Charitable Purpose Bill 2004, a
previous digest, it has been noted that:
Charities are important aspects of modern
societies and they often provide essential services to the
community such as looking after those in need. By assuming roles
that have been Government responsibility, charities provide
financial relief to governments. By providing various tax
exemptions for charities as a form of subsidy, the Government has
acknowledged this particular function charities
assume.(1)
Continuing this trend, the Bill proposes amendments to the tax
law which are the result of
submissions received by the Prime Minister s Community Business
Partnership (PMCBP). The changes were announced by the former
Minister for Revenue and Assistant Treasurer, Senator Coonan, in
Press Release No 37 of 2004, dated 11 May 2004. These changes
are outlined below.
Under the current law, gifts and other contributions to
deductible gift recipients (DGRs) can be, in certain circumstances,
tax deductible.(2) However, under section 30-15(2)
testamentary gifts and bequests, that is gifts made under a will,
are not tax deductible, unless the gift would qualify as cultural
or heritage gift under the Government s Cultural Bequest
Program.(3) Further, under section 118-60 of the
Income Tax Amendment Act 1997 (ITAA 1997), testamentary
gifts may be exempt from capital gains tax (CGT) if certain
requirements set out in section 30-15 ITAA 1997 are met. However,
by virtue of section 30-15(2) of the ITAA 1997, a CGT exemption
will only be available to testamentary gifts which were valued by
the Commissioner for Taxation (Commissioner) at more than
$5000.
Item 20 of Schedule 1 proposes
to introduce a new subsection 118-60(1A) into the
ITAA 1997 which will deem any property with a value less than $5000
as having been valued by the Commissioner at a value of more than
$5000 for the purposes of the CGT exemption. By virtue of this
deeming provision, property with a value of less then $5000 will
trigger the CGT exemption for testamentary gifts and bequests.
Currently, the income of certain charitable funds maybe exempt
from income tax if they provide money, property and/or other
benefits either solely to:
-
charities located in Australia which pursue their purposes in
Australia, or
-
charities which have been accepted and registered by the
Australian Tax Office (ATO) as DGRs.(4)
However, under the current regime it is not possible to claim an
income tax exemption if the charity distributes funds to a
combination of both types of charities.
The proposed changes will remove this problem. Item
13 of Schedule 1 will repeal the current
subsections 50-60(c) and (d) of the ITAA 1997 in order to
substitute new subsections 50-60(c) and
(d). These proposed new subsections will have the
effect that the income tax exemption will become available to
charitable funds which make distributions to a combination of
funds, regardless of whether they are charities or
not.(5)
Entities which are accepted and registered by the ATO as DGRs
may not be endorsed as charities within the meaning of the law.
Good examples for DGRs which are not considered to be charitable
are public ambulance services. However, under the current tax
regime, ancillary funds and prescribed private funds, which are
expressly prescribed in the Income Tax Assessment Regulations 1997,
are not able to claim an income tax exemption if they distribute
funds to DGRs which are not endorsed as charities. The proposed
changes aim at removing this anomaly.(6)
Item 7 of Schedule 1 will
insert proposed new section 50-20 of the ITAA 1997
which, in effect, will permit ancillary and prescribed private
funds to have access to the income tax exemption regardless of
whether they distribute funds to DGRs which are endorsed as
charities or not.
Unlike prescribed charitable prescribed funds which are endorsed
by the ATO as an income-tax exempt charity, non-charitable
prescribed private funds are not automatically entitled to a refund
of franking credits. Items 21 and
22 of Schedule 1 will make
changes to the ITAA 1997 which will entitle non-charitable
prescribed private funds to the refund on the same basis as
charitable prescribed private funds.
The financial impact and the compliance costs anticipated for
this measure will be, according to the
Explanatory Memorandum, insignificant.
The amendments will take effect with Royal Assent and become
applicable to the income year in which the Bill receives Royal
Assent and each later income year.
The proposed changes are technical amendments to the Income
Tax Assessment Act 1936 (ITAA 1936) which became necessary as
the result of certain tax measures enacted under the New
International Tax Measures (Participation Exemption and Other
Measures) Act 2004.(7) These measures had the
unwanted effect that Australian companies which were involved in
the international operation of ships and aircraft escaped taxation:
these companies would neither be taxed in Australia nor in the
country in which the company operated.
The proposed measure was announced in the Minister for Revenue
and Assistant Treasurer s
Press Release No. 4 of 2005. In this press release, the
Minister was cited saying:
Generally, under its tax treaties with other
countries, Australia has exclusive taxing rights over Australian
companies in respect of their profits from the operation of ships
or aircraft in international traffic. If such profits are not taxed
in Australia, neither treaty partner country would tax this
income.
A change will be made to the tax law to ensure
that the expanded exemption for foreign branch income does not
apply to companies operating ships or aircraft in international
traffic [ ] This will ensure those amounts continue to be taxed in
Australia, consistently with Australia s policy in negotiating its
tax treaties.(8)
Most income and capital gains derived by a foreign branch of a
resident company after 1 July 2004 are exempt from income tax as
they are treated as non-assessable non-exempt income under section
23AH of the ITAA 1936.(9) Item 2 of
Schedule 2 will insert new subsections
23AH(14A) and (14B) which will stipulate
that this exemption will not apply to income and capital gain or
losses which were derived from the operation of ships or aircraft
in international traffic (proposed new paragraph
23AH(14A)(a)) or things ancillary to the operation of such
aircraft and ships (proposed new paragraph
23AH(14A)(b)).
According to the
Explanatory Memorandum, the measure s financial impact and
anticipated compliance costs will be nil.
The measure will come into force with Royal Assent given to the
Bill, but will have a retrospective application to transactions
falling into the income years starting on 1 July 2004. This is
necessary to align this measure with the measures implemented
through the New International Tax Measures (Participation
Exemption and Other Measures) Act 2004.(10)
The proposed amendments are changes necessary to permit the
disclosure of information collected by the Commissioner to the
newly established Corruption and Crime Commission of Western
Australia (WA Commission). The WA Commission was established under
the Western Australian Corruption and Crime Commission Act
2003. According to the
Explanatory Memorandum, the WA Commission has all the powers
and functions as its predecessor, the Anti-Corruption Commission,
plus the powers of the Police Royal Commission.
This change in Western Australian law requires the amendment to
existing taxation legislation on Commonwealth level to allow the
Commissioner under section 3E of the Taxation Administration
Act 1953 (TAA) to provide the new WA Commission with relevant
information where the Commissioner is satisfied that the
information is relevant to:
-
establishing whether a serious offence has been, or is being,
committed; or
-
the making, or proposed or possible making, of a proceeds of
crime order.
The proposed changes have not been announced previously.
Items 1 and 2 of
Schedule 3 will make the relevant changes to
section 2(1) of the TAA by including the WA Commission as eligible
recipient of relevant information collected by the
Commissioner.
It is anticipated that the measure s financial impact as well as
its compliance costs will be nil.(11)
The provisions will become effective with the Bill receiving
Royal Assent. The measure will not apply retrospectively:
item 3 of Schedule 3 expressly
provides that the changes will only apply to disclosures after the
day the changes commence.
The amendments proposed in this Schedule aim at curtailing the
scope of a tax measure introduced in the Tax Laws Amendment
(2004 Measures No. 1) Act 2004.(12) With this Act,
Parliament introduced measures allowing the Commissioner to
endorse, under certain circumstances, charities, public benevolent
institutions and health promotion charities to gain fringe benefits
tax rebatable employer status under subsection 65J(1) of the
Fringe Benefits Tax Assessment Act 1986 (FBTAA). Endorsed
employers are currently able to claim a tax rebate of 48 cents per
dollar.
However, when introduced, the provisions were broad enough to
allow Government bodies of the Commonwealth, the states or
territories to become eligible for the rebate from 1 July 2005
onwards if they were accepted as a charity at law.
The proposed measure will align the changes made by the Tax
Laws Amendment (2004 Measures No. 1) Act 2004 with established
legal principle, namely that institutions which can be
characterised as an emanation of government cannot fall within the
established meaning of charity at law and will continue to be
unable to claim the rebate.(13)
The proposed measure has not been announced previously.
Item 1 of Schedule 4 will
insert an express clarification that charitable institution within
the meaning of the FBTAA will not include institutions of the
Commonwealth, a state or a territory.
The Explanatory Memorandum notes that whilst the implementation
of this measure will have a financial impact of nil, the failure to
implement this measure would cost an estimated $80 to $90 million
per annum over the forward estimates period. Also, it is expected
that there are no compliance costs associated with this
proposal.
The measure will become effective immediately after the
commencement of Schedule 10 of the Tax Laws Amendment (2004
Measures No. 1) Act 2004, that is on 1 July 2005.
The measure aims at harmonising the age criteria for dependent
children. This measure has been announced by the then Minister for
Revenue and Assistant Treasurer, The Hon. Senator Helen Coonan, in
Press Release C36 of 2004, dated 11 May 2004. In this release, the
Minister explained that:
The Government will standardise the dependent
child age criteria used to determine a taxpayer s entitlement to
the housekeeper, child-housekeeper, medical expenses and zone tax
offsets, as well as the Medicare levy and Medicare levy surcharge,
[ and further:] Currently, the dependent child age criteria vary
across these entitlements. For example, a taxpayer may be able to
take a child into account when claiming a medical expenses tax
offset but not being [sic] able to take the same child into account
for the purposes of the Medicare levy and Medicare levy surcharge,
[ ].
The following table contains the currently applicable age
criteria (white) and the age criteria proposed in the Bill (light
grey):
|
Off sets for:
|
Age criteria (not being a
student)
|
Age criteria (full time
student)
|
Age criteria (not being a
student)
|
Age criteria (full time
student)
|
|
Housekeeper, child house
keeper, zone and overseas defence forces
|
16 years
|
25 years
|
21 years
|
25 years
|
|
Medicare levy and Medicare
levy surcharge
|
16 years
|
25 years
|
21 years
|
25 years
|
|
Medical expenses tax
offset
|
Child of taxpayer: 21
years
|
21 years
|
25 years
|
|
Child:
16 years
|
25 years
|
|
Family tax benefit Part
A
|
21 years
|
25 years
|
21 years
|
25 years
|
The Bill proposes to make changes to the ITAA 1936. Items 1 to 3
of Schedule 5 propose to omit the age 16 and to replace it with the
age 21 where necessary to reflect the proposed changes.
According to the explanatory notes, the anticipated financial
impact of this measure will be:
|
Financial year:
|
2005-2006
|
2006-2007
|
2007-2008
|
|
Financial impact
|
Insignificant
|
$3million
|
$3million
|
The compliance costs in relation to this measure are expected to
be minimal.
The proposed amendments will commence applying to income tax
assessments for the 2005-2006 income year.
Overall, the financial impact of, and the compliance costs for,
all proposed measures is said to be minimal.
The proposed amendments contained in this Bill do not appear to
be controversial. Schedules 2, 3 and 4 will make amendments which
clarify the law or rectify unwanted results caused by previous
amendments. Schedule 1 inserts a number of measures which aim at
providing more flexibility to the charitable sector. Schedule 5
will provide more transparency for taxpayers in that it is aimed at
providing uniform age criteria for dependent children.
-
T. John, Extension of Charitable Purpose Bill 2004 , Bills
Digest, No. 164, Department of Parliamentary Services,
Canberra, 2003-2004, p. 1.
-
See generally R. L. Deutsch, M. L. Friezer, I. G. Fullerton, M.
M. Gibson, P. J. Hanley, T. J. Snape, Australian Tax
Handbook, Thomson ATP, Sydney, 2005, pp. 521 522.
-
For details, especially the requirements for such gifts, see
Deutsch et al, ibid., p. 532.
-
The exemption can be invoked by funds to property was added to a
pre-1 July 1997 by will or gift on or after 1 July 1997, and by
funds established in Australia for public charitable purposes by
will or instrument of trust. Section 50-5, items 1.5A and 1.5B of
the ITAA 1997.
-
Deutsch et al., op. cit., p. 259, which includes an overview of
further requirements before an income tax exemption may be
available to a fund referred to in footnote 4.
-
Explanatory Memorandum to the Tax Laws Amendment (2005 Measures
No. 3) Bill 2005, p. 10.
-
B. Pulle, New International Tax Measures (Participation
Exemption and Other Measures) Bill 2004 , Bills
Digest, No. 133, Department of Parliamentary Services,
Canberra, 2003-2004.
-
The Hon. M. Brough, Minister for Revenue and Assistant
Treasurer, Taxation of foreign branch amounts,
press release, 19 January 2005.
-
Deutsch et al., op. cit., p. 1390. The measures introduced with
the New International Tax Measures (Participation Exemption and
Other Measures) Act 2004 became effective on 1 July
2004.
-
Pulle, op. cit., p. 13.
-
Explanatory Memorandum, op. cit., p. 4.
-
B. Pulle, Tax Laws Amendment (2004 Measures No. 1) Bill 2004 ,
Bills
Digest, No. 117, Department of Parliamentary Services,
Canberra, 2003-2004, pp. 13 14.
-
For an instructive discussion of this issue see: Ambulance
Service of NSW v Federal Commission of Taxation [2003] FCAFC
161.
Thomas John
1 June 2005
Bills Digest Service
Information and Research Services
This paper has been prepared to support the work of the
Australian Parliament using information available at the time of
production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
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ISSN 1328-8091
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Published by the Parliamentary Library, 2005.
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