Bills Digest no. 126 2007–08
Tax Laws Amendment (2008 Measures No. 3) Bill
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
Schedule 1 Shareholder and unitholder
Schedule 2 Restriction on GST refunds and
time limits for recovery and refund of indirect tax
Contact officer & copyright details
Tax Laws Amendment (2008 Measures
No. 3) Bill 2008
introduced: 29 May
House: House of Representatives
Schedules 1, Royal Assent.
Schedule 1 has a retrospective effect from 1 July 2001.
Schedule 2, 1 July 2008
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
This Bill makes several
amendments to the following Acts:
- Income Tax Assessment Act 1997 (ITAA97), and
- Taxation Administration Act 1953 (TAA).
This Bill makes a number of changes to taxation legislation. As
each Schedule contains a separate set of amendments they will be
outlined in separate following sections.
Schedule 1 amends taxation law to overcome the
impact of the High Court of Australia s decision in the
Commissioner of Taxation v McNeil 2007 (the McNeil
Attachment 1 contains a summary of the McNeil case. Briefly,
this particular case revolved around the correct assessment of a
payment received by a shareholder in respect of share sell-back
rights that were not exercised. The question was whether the
payment received for these unexercised rights was ordinary tax
assessable income or assessable as a capital amount and therefore
subject to the Capital Gain Tax (CGT) provisions.
On appeal to the High Court, a majority ruled that the value of
the sell-back rights was assessable income of the taxpayer
according to ordinary concepts, and the amount was derived by the
taxpayer on the listing date of those rights.
The McNeil decision has caused
considerable uncertainty as to the future tax assessability of
company distributions. It has particular relevance for companies
and their shareholders, especially in regard to the tax treatment
of rights issued to shareholders as a result of their existing
shareholdings. Under the influence of the McNeil case the rights
issued would be assessable income on the date those rights were
The long standing approach is that shareholders issued with
rights by companies seeking to raise capital will not have an
income tax liability at the time of issue. Instead, rights issues
are treated as issues on capital account and subject to the CGT
Further, subject to certain exceptions, a dividend paid out of a
companies share premium account is not a dividend, and hence not
income for taxation purposes. The High Court s decision in
McNeil also cast doubt on that long-standing approach, and
raised considerable uncertainty as to the characterisation of
rights and distributions arising from or related to an asset (such
as shares) held by a taxpayer.
This had significant implications for the taxation of derivative
securities, in particular share options. Briefly, a derivative
security is one that derives its value from the financial
performance of another security or group of securities.
An option is a derivative security. Briefly, an option is the
right, but not the obligation, to either buy or sell a security
(such as a share).
The right to buy a security is called a call option. That is the
person holding the option has the right to call the security away
from another party for a pre determined price. The other party must
sell the security to the holder of the option for that price.
The right to sell a security is called a put option. That is the
holder of a put option has the right to put (or sell) the security
to another party at a pre determined price. The other party is
obligated to buy the security put to them at that price.
Companies routinely issue options to their shareholders or other
parties to either reward and retain staff or raise capital.
A right is a type of call option to purchase a security. A
rights issue is an offer made to a holder of an existing security
(say a share) to purchase additional securities issued by the same
company. The offer is usually at a discount price to the existing
publicly quoted market price for these securities.
The government s intention to amend the law to overcome the
effect of the McNeil case was announced in the Treasurer s media
release of 8 April 2008.
The former government had also intended to take similar
Both the government and the opposition support referring this
Bill to the Senate Standing Committee on Economics.
The implications of the High Court s decision in McNeil s case
generally alarmed business and taxpayer groups. The announcements
in 2007 and 2008 that the government would change legislation to
overcome these implications were widely and warmly
The proposed amendments restore certainty to the tax treatment
of the issue of rights and options to individual shareholders and
However, the receipt of income from this source is deferred
until the security arising from the issue of this right or option
is sold. This may not occur for some years.
The Explanatory Memoranda notes that this particular measure
will not have a financial impact.
The key issues behind this particular measure is maintaining the
consistency to the tax treatment of the issue of rights and options
by a company.
Item 2 of Schedule 1 inserts
new section 59-40 into the
Income Tax Assessment Act 1997 (ITAA97). The effect of
this new section is that the issue of a right, or a call option, by
a company is not assessable income and is not exempt income for
taxation purposes, provided that:
- at the time of issue the taxpayer must already own shares in a
company or units in a trust and the issues rights derive from these
units or shares
- the shares or units owned cannot be trading stock ; that is
they cannot be shares or units owned for the purposes of gaining an
income through trading on a stock exchange or other securities
- they are not shares or units acquired through an employee share
- the shares or units cannot be a convertible interest. That is
the shares or units are not securities that can be converted into
another class of security, say a bond.
The classification of income arising from such
transactions as non-assessable, non-exempt income does not mean
that receiving a right or a call option is tax free. Rather, the
income arising from the eventual sale of this security is not taxed
as ordinary personal income.
Item 7 inserts
new section 112-37 into the
ITAA97. The effect of this new section is to prevent double
taxation from occurring where a company issues a put option.
Under the proposed law the market value of any
put option issued is included in the taxpayers assessable income at
the time the put option is issued.
To prevent this amount from being subject to
further taxation under the CGT regime, under the proposed
amendments in Item 7 the market value of the put
option is also included in the cost base of the put option for CGT
purposes. It is only the difference between the cost base and the
eventual selling price of the security that is subject to CGT.
Item 9 applies these amendments to rights or
call options issues on or after 1 July 2001. This retrospective
date was the start of the financial year immediately after the
original Administrative Appeals Tribunal review of McNeil s case
was concluded. This retrospective effect was sought by
representative stakeholders in the interests of, and for, the
benefit of taxpayers and is explained in the Explanatory
Schedule 2 amends the Taxation
Administration Act 1953 (TAA) so that:
- problems with the scope of Goods and Services Tax (GST) refunds
caused by the decision in KAP Motors v The
Commissioner of Taxation are overcome, and
- problems with the four year time limit on the refund of
indirect taxes are dealt with
- briefly, the changes to time limits ensure that the four-year
time limit on recovery applies where a GST refund is overpaid to a
taxpayer. In addition it ensures that the four-year time limit
applies where a refund is payable by the Commissioner due to a
reduction in the GST liability of a taxpayer.
Briefly, GST is levied when a supply of goods and
services is made. For example, if a vehicle retail operation sells
a motor vehicle to a taxpayer a supply of that motor vehicle is
made. The sale price of that motor vehicle will include the GST
payable. The vehicle retailer will claim an input tax credit for
the GST paid as a result of the supply of that motor vehicle.
KAP Motors v The
Commissioner of Taxation
A summary of this case is at Attachment 2. This case centred on
whether the Commissioner of Taxation had to refund GST mistakenly
paid to him by two car dealerships, before they had reimbursed the
end customers for the mistakenly paid tax. These car dealerships
(the taxpayers) had mistakenly paid the GST in respect of a number
of transactions where the goods and services were not actually
supplied to the end customers by them.
Briefly, the decision in this case
held that two taxpayers were entitled to a refund of GST mistakenly
remitted to the Commissioner before they had reimbursed the end
customer. The Court decided that, in this particular case, as no
actual goods or services had been supplied to the end customers
that no GST was payable. The particular wording of section
105-65 of Schedule 1 of the TAA allows a
refund of mistakenly paid GST to be made, where no actual supply of
goods or services to a customer has occurred, before a refund of an
equal amount of the GST paid is made to the end customer.
The general approach to refunds of overpaid GST is that that the
benefit of the refund goes to the person who has borne the tax.
Generally those who have borne the tax are the persons who
purchased the goods (in this case motor vehicles) from the
taxpayers. Hence, a business that has overpaid GST to the
Commissioner must refund that amount to the customer before
obtaining a refund. Obviously, that was not the outcome of the KAP Motors
This approach is intended to prevent a windfall gain to
businesses that have not borne the GST, but have passed that impost
on the customer. In these circumstances a windfall could occur if
the business obtained the GST refund without immediately refunding
that amount to the end customer.
The measures in Schedule 2 of this Bill were
announced in the Treasurer s media release of 6 May 2008.
There has been comparatively little comment on the proposed
change to the refund of GST provisions. However, it has been noted
that business that would claim a refund of overpaid GST would first
have to make a payment to affected customers.
In respect to the time limits issue it has been noted that the
proposed changes puts the Australian Taxation Office (ATO) and the
taxpayer on an equal footing. The ATO can only go back 4 years
while many taxpayers can claim refunds from 8 years ago (i.e. 2000
and the commencement of the GST regime).
The proposed changes seek to reinforce the original intention of
the GST refunds policy namely that a refund of overpaid GST will
only be made where the customer is first reimbursed.
However, the refund of GST is likely to be slow in coming and
businesses who first refunded the overpaid GST to their customers
may be out of pocket for some time before the ATO pays the relevant
It is possible that if these particular amendments are not
passed then the GST system would provide an avenue for business to
claim an undue refund of GST already paid.
The Explanatory Memoranda notes that this measure will have a
small but unquantifiable impact on GST, the wine equalisation tax,
luxury car tax revenue and fuel tax credit entitlements.
The key issue in relation to this amendment is the maintenance
the integrity of the GST system. There are some indications that
companies may be rapidly moving to take advantage of the KAP Motors
decision to seek a refund of GST from the ATO where they would not
previously been entitled to do so. The possible impact on revenue has
been reported to be between $300 and $500 million.
Item 5 inserts new subsection
105-50(2) in Schedule 1 of the TAA. The
effect of this amendment is to limit the period during which the
Commission of Taxation may recover any refunds of indirect tax
(including fuel tax) to which the taxpayer was not entitled to, to
four years from the date that refund first become payable.
This amendment does not apply if during that four year period
the Commissioner has given notice that he or she requires a
repayment of an excess refund, or that fraud or evasion was
involved in the initial payment of the refund or granting of an
indirect tax credit.
Items 7 to 15 amend
section 105-55 in Schedule 1 of
the TAA so that the four year limit for claiming refunds and
credits in relation of overpaid indirect tax of fuel tax apples.
This means that a taxpayer generally has only four years in which
to claim a refund of overpaid GST, fuel tax or other indirect
Item 16 apples these amendment to amounts that
remain to be paid, by either the taxpayer, or the Commissioner,
before or after the commencement of Schedule 2 of
this Bill (1 July 2008), unless the Commissioner has notified the
taxpayer in writing that amounts were payable before that date, or
the taxpayer or Commissioner had notified the other of an
entitlement to a refund etc before that date.
In effect, although these amendments, if passed, will come into
effect on 1 July 2008, they will still apply to obligations and
entitlements created prior to that date.
Item 17 repeals section 105-65
of Schedule 1 of the TAA and replaces it with a
new section. The impact of the new section is that the Commissioner
need not refund an overpaid GST amount where no supply of goods
occurred and either:
- the Commissioner is not satisfied that the taxpayer has first
reimbursed the person to whom the supply was made, or
- the recipient of the goods or services was registered for GST
purposes or required to be registered for GST purposes.
Item 18 requires the amendment made by
Item 17 above applies on or after 1 July 2008.
Schedules 3 and 4 of the
original Bill have been removed by government amendment and will be
re-presented in a new Bill to allow for speedy passage. This is due
to the likelihood that Schedules 1 and
2 in this Bill will be referred to the Senate
Standing Committee on Economics for consideration.
FC of T v McNEIL
2007 ATC 4223
High Court citation:  HCA 5
High Court of Australia,
22 February 2007
Income tax Assessable income Taxpayer held shares in bank
Taxpayer acquired an interest in sell back rights entitling her to
sell shares back to bank Sell back rights listed for trading on ASX
Taxpayer did not exercise her entitlement to trade in her sell back
rights on ASX Taxpayer subsequently received an amount for her sell
back rights according to a pre-determined formula Whether sell back
rights or proceeds from disposal of sell back rights income
according to ordinary concepts Whether a return of capital to
taxpayer Whether sell back rights severed or detached from
shareholder's shares Whether provisions dealing with dividends a
code restricting general taxing provision Income Tax Assessment Act
1997, s 6-5 Income Tax Assessment Act 1936, s 44.
This was an appeal from a decision of the Full Federal Court
reported at 2005 ATC 4658.
The taxpayer was a retiree who had a portfolio of shares in
listed public companies. She held 5,450 shares in St George Bank
Limited ("SGL") for the purpose of deriving dividend income on
which she relied for part of her living expenses. The taxpayer
acquired the shares between 1987 and 1997 and had never traded in
shares or securities.
In January 2001 SGL announced its intention to buy back about 5%
of its issued share capital. The buy back price was fixed at $16.50
per share, which represented a premium of 18.9% over the price of
SGL shares on the Stock Exchange ("ASX") at that time.
A number of documents ("the transaction documents") were
executed by SGL, a corporate trustee ("Custodial") and a merchant
bank ("CSFB") to give effect to the share buy back. In accordance
with those documents, SGL granted Custodial, for the absolute
benefit of the taxpayer, 272 sell back rights, being one sell back
right for each parcel of 20 shares she held in SGL. Each sell back
right obliged SGL to purchase one of its shares out of each such
At the same time, the sell back rights themselves were listed
for trading on the ASX and their value at that time was $1.89 each.
The taxpayer did not give a direction to realise her sell back
rights by that time so she became a "remaining shareholder". In
accordance with the transaction documents, Custodial transferred
the taxpayer's sell back rights to CSFB. It then sold them to SGL
for an amount calculated in accordance with a formula stipulated in
the transaction documents. CSFB then paid the taxpayer $2.12 for
each sell back right so that she received a total of $576.64.
The Commissioner assessed the taxpayer to tax for the year of
income ended 30 June 2001 ("the relevant year") on the basis of the
tax return lodged by her. The return included an amount of $576,
comprised of $514 of ordinary income in respect of the value of the
sell back rights granted to Custodial plus a capital gain of $62.
The capital gain was calculated by subtracting the value of each
sell back right granted to Custodial ($1.89) from the amount the
taxpayer received for each sell back right from CSFB ($2.12).
The taxpayer objected to the inclusion in her assessable income
of the $514 on the basis that it was not assessable either as
ordinary income or as a capital gain. The taxpayer's objection was
disallowed and, as part of the test case program, she appealed.
The Commissioner argued before the trial judge that the sum of
$514, representing the market value of the sell back rights when
they were granted, was income according to ordinary concepts.
Alternatively, the sum of $576.64 received by the taxpayer from
CSFB was the same kind of income. The Commissioner also submitted
that the grant of the sell back rights was an "act, transaction or
event" that occurred in relation to the SGL shares already owned by
the taxpayer. As a result, the taxpayer made a capital gain
pursuant to s 104-155 of the Income Tax Assessment Act 1997 ("the
Act") of not less than $514 on the day the sell back rights were
listed on the ASX.
The taxpayer contended that amounts received by a shareholder
from a company in which he or she held shares did not constitute
income unless it was a dividend or the product of employment or
other services rendered by the shareholder. She also argued that
there was no relevant connection that permitted the Commissioner to
rely on s 104-155 to establish a capital gain. By the time the sell
back rights were listed for trading on the ASX, the taxpayer's
ownership of SGL shares was irrelevant to any subsequent
realisation of her sell back rights.
The Federal Court allowed the taxpayer's appeal. It held that
the derivation by the taxpayer of the sum of either $514 or $576
was referable entirely to the taxpayer's existing shareholding in
SGL and, as there was no fund or source of profits in SGL out of
which either sum originated, neither amount was ordinary income.
The court also held that it was commercially unrealistic to
describe the imputed figure of $514 as "capital proceeds" within s
104-155. That sum was only based on the initial trading day's
average trading transactions in the sell back rights on the ASX.
The taxpayer was merely a shareholder who had not exercised her
entitlement to trade in the sell back rights. Therefore, there was
no justification for saying that trading in sell back rights on the
ASX on the first listing day was an act, transaction or event
occurring in relation to the taxpayer's sell back rights within s
The Commissioner's appeal to the Full Federal Court was
dismissed by majority. It held that neither the entitlement created
in favour of the taxpayer under the buy back scheme nor the
proceeds of that entitlement was income according to ordinary
concepts. The sell back rights and the moneys received from their
sale were not derived from the taxpayer's shares but from the
scheme that varied the entitlements attached to those shares. The
Full Federal Court also held that no taxable capital gain was
derived by the taxpayer. French J held the relevant entitlement and
the proceeds did not occur in relation to a CGT asset owned by the
taxpayer. Dowsett J held that no relevant capital proceeds were
derived from the "act, transaction or event" identified by the
Commissioner, namely the issue of the sell back rights.
In dissent, Emmett J held that the payment of $576.54 was
something that proceeded from the taxpayer's shares in SGL because
the benefit of the sell back rights was derived from the taxpayer's
shares. It was therefore income according to ordinary concepts.
The Commissioner appealed, primarily contending that the grant
of the 272 sell back rights in respect of the taxpayer's
shareholding and held for absolute benefit by Custodial was the
derivation of income by her in an amount of $514.
The taxpayer contended that the Commissioner's primary
contention erred by treating the sell back rights as being severed
or detached from the taxpayer's shares. The taxpayer had a "general
right" to returns of capital, this being part of the variety of
rights making up each share, and the grant by SGL of the sell back
rights in effectuation of the foregoing general right. Secondly,
the provisions in the ITAA 1997 and where relevant the Income Tax
Assessment Act 1936 dealing with dividends constituted a complete
"code" that restricted the operation of the general taxing
provision (s 6-5) in the circumstances under consideration.
Held: appeal allowed (Callinan J
1. The majority of the Full Court erred in application of the
principles respecting the derivation of income according to
ordinary concepts. The Commissioner's primary submission should be
2. It was insufficient to say that SGL issued the sell back
rights to Custodial on behalf of shareholders "in partial
satisfaction of the shareholders' right to participate in
reductions of capital", this being "within the congeries of rights
comprising the shares". It was the character of the grant of rights
to the shareholders that was decisive. It was not the reduction of
capital effected by SGL pursuant to the new statutory processes
provided by the Corporations Law. The gain made by the taxpayer
upon grant of the sell back rights and the subsequent receipt of
the proceeds of sale on her behalf was not the receipt of a
distribution of any form of the assets of SGL. Nor was the sell
back scheme provided "in satisfaction" of the rights of
shareholders under the constitution of SGL. The scheme took its
life from the deeds poll executed on the record date.
3. Both sides agreed that the taxpayer's sell back rights were
not "dividends" in the statutory sense. It might be assumed for
present purposes that the rights otherwise would give rise to
income according to ordinary concepts. Nevertheless, if the "code"
argument was correct, they could not do so. It would be a heroic
exercise, and certainly not one previously undertaken in the cases
to which the taxpayer referred, to construe the dividend
provisions, which bring in gains, some of which would otherwise be
of a capital nature, as implicitly excluding from the general
income provision what otherwise would fall within it. The exercise
[Headnote by Anthony Smyth]
Source: CCH Australian Tax Cases 2008
KAP Motors Vs Commissioner for
KAP MOTORS PTY LTD & ANOR v FC of T
2008 ATC Media neutral citation:  FCA 159
Federal Court, Sydney,
28 February 2008
Goods and services tax (GST) Refund of GST GST remitted to
Commissioner by mistake Whether s 105-65 of Sch 1 of Taxation
Administration Act applied to preclude taxpayers' entitlement to
refund Whether s 105-65 applied to transactions involving no supply
Whether taxpayers required under general law to have reimbursed
persons who made the payments to them A New Tax System (Goods and
Services Tax) Act 1999, s 7-1, 9-5, 9-10, 9-15, 11-5, 11-15
Taxation Administration Act 1953, Sch 1, s 105-65.
The two taxpayers were retail dealers of new motor vehicles.
During the relevant period, there were arrangements in place
between the taxpayers and various motor vehicle distributors under
which the distributor would pay a rebate, known as a holdback
payment, to the appropriate taxpayer in relation to each new motor
vehicle ordered from the distributor and acquired and sold pursuant
to a floor plan arrangement. These arrangements, however, did not
form part of the dealership agreements between the distributors and
Once a motor vehicle had been dispatched pursuant to the floor
plan arrangements, the distributor would issue a Recipient Created
Tax Invoice to the taxpayer, which included details of the holdback
payment relating to that particular motor vehicle. During the
period 1 July 2000 to 30 April 2005, the taxpayers collectively
remitted GST totalling $407,187 to the Commissioner in respect of
the holdback payments.
The present proceeding was conducted on the basis that it was
common ground between the parties that the holdback payments
received by the taxpayers were not consideration for any goods or
services supplied by the taxpayers to the distributors. Therefore,
there was no taxable supply by the taxpayers and the taxpayers were
not liable to pay GST in respect of the holdback payments that they
The taxpayers claimed that they acted under the mistaken belief
that the holdback payments were taxable supplies and that they were
liable to GST in respect of them. The taxpayers had neither
reimbursed the distributors for amounts corresponding to the GST
they had remitted to the Commissioner nor had they agreed to do
The Commissioner claimed that s 105-65 of Sch 1 of the
Taxation Administration Act 1953 applied and that he was
not required to refund the remitted GST to the taxpayers. The
Commissioner contended that s 105-65(1) should be construed as
though the word "supply" included a purported supply or a putative
supply such that it referred non-technically to any transaction
that was incorrectly treated as a taxable supply. Alternatively,
the Commissioner contended that he was not required to refund the
GST because the taxpayers had not reimbursed, or agreed to
reimburse, the amount of the remitted GST to the distributors.
Held: taxpayers entitled to refund of
1. Section 105-65 did not operate to preclude the entitlement of
the taxpayers to a refund of the GST remitted by them in respect of
the holdback payments.
2. In its terms, s 105-65 was limited to circumstances where
there was a supply that was not a taxable supply. It did not in its
terms extend to some transaction that did not involve a supply
within the meaning of the GST Act.
3. It was not difficult to postulate examples of a supply within
the meaning of that word when used in the GST Act that was not a
taxable supply. Thus, there was considerable scope for the
operation of the provision construed literally as referring only to
a supply as defined and not extending to cover a purported or
4. The taxpayers' entitlement to a refund was not precluded by
the general law in the absence of their refunding or undertaking to
refund a corresponding amount to the distributors.
5. It was difficult to understand why, as between the taxpayers,
on the one hand, and the Commissioner, on the other, the failure to
pass on refunded GST to the relevant distributors should constitute
conduct that would disentitle the taxpayers from recovering from
the Commissioner moneys that should never have been paid to the
6. The concept of impoverishment as a co-relative of enrichment
was foreign to Australian law. Even if there were any equity in
favour of the distributors attaching to the fruits of any judgment
that taxpayers might recover against the Commissioner, that
circumstance was quite irrelevant to this proceeding.
Headnote by Bill Page
Before: Emmett J.
Source: CCH Australian Tax Cases 2008
10 June 2008
Bills Digest Service
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