Bills Digest no. 46 2009–10
Tax Laws Amendment (2009 Measure No. 5) Bill
2009
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
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Date
introduced: 16
September 2006
House: Representatives
Portfolio: Treasury
Commencement:
Schedule 1 Part 1
commences on 1 July 2000, Schedule 1 Part 2 commences on 1 July
2006,[1] Schedule
1 Parts 3 and 4, Schedule 2 Part 1, Schedule 3, Schedule 6 Part 1
and item 5 commence on Royal Assent, Schedule 4 commences on 1 July
2010, Schedule 5 commences the day after Royal Assent, and Schedule
6 items 6 and commence 30 June 2016.
Links: The
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
at http://www.comlaw.gov.au/.
The Tax Laws Amendment (2009
Measures No. 5) Bill 2009 (the Bill) has six main purposes. It
will:
- amend the A New Tax System (Goods and Services Tax) Act
1999 (the GST Act) to respond to a decision of the Federal
Court of Australia (Schedule 1)
- amend the Taxation Administration Act 1953 (TAA 1953)
to address unintended consequences of recent amendments to that Act
by the Tax Laws Amendment (Taxation of Financial Arrangements)
Act 2009 (the TOFA Act) in the area of PAYG instalment income
(Schedule 2)
- exempt from income tax the Outer Regional and Remote payment
made under the Helping the Children with Autism package (Schedule
3)
- exempt from income tax, payments made under the Continence Aids
Payment Scheme (Schedule 4)
- amend the Income Tax Assessment Act 1936 (the ITAA
1936) to ensure that Commonwealth issued debt will be exempt from
interest withholding tax (IWT) (Schedule 5)
- allow the Victorian Bushfire Appeal Fund Independent Advisory
Panel to use donations for a broader range of purposes currently
considered charitable in tax law, and without jeopardising the
charitable status of the Australian Red Cross Society (Schedule
6).
Schedule 1 amends the A New Tax System
(Goods and Services Tax) Act 1999 (the GST Act) to counter the
Federal Court decision in Deputy Commissioner of Taxation v PM
Developments Pty Ltd (the PMD decision).[2] The measure was announced in a Media
Release by the then Assistant Treasurer on
6 February 2009[3].
In the PMD decision, Logan J held against the Deputy
Commissioner of Taxation and declared that the liquidator of a
company being wound up (an incapacitated entity ) was not
personally liable to the Deputy Commissioner for GST or any related
general interest charge on the sale of a property. According to the
Parliamentary Secretary s second reading speech:
The decision is contrary to the stated policy
intention that the representative of an incapacitated entity is
liable for GST on transactions with the scope of its appointment.
It is also contrary to the Commissioner s administration of the law
since the introduction of the GST[4].
Generally, under the Corporations Act 2001, all debts
and claims proved in a winding up are to be ranked equally, and if
there are insufficient funds, to be paid proportionally.[5] Section 556 then goes on
to provide an order that certain creditors will be paid ahead of
others. In the PMD decision, Logan J also declared that as the GST
was a post- liquidation debt of the company (PMD), it enjoys the
payment priority set out in the Corporations Act 2001 for
post- liquidation debts. That is, as a revenue debt, it does
not get separate or special priority over other
(secured) creditors.
In commenting on the Government s draft legislation,[6] lawyers Allens Arthur
Robinson explain the situation:
It would seem that the practical effect of the
proposed legislation is to give the Commissioner priority in
relation to GST arising from transactions following the appointment
of a representative to an incapacitated entity. This is at odds
with the general position of the Commissioner in relation to other
GST liabilities and income tax law.[7]
In the course of his judgment in PMD decision, Logan J was
critical of the Explanatory Memorandum to the GST Act in its
explanation of the provisions relating to representatives for
incapacitated entities. The Commissioner s submission was that the
court could look to the Explanatory Memorandum[8] (relying on the Acts
Interpretation Act 1901(Cth)) to see that the Act intended to
make the representative personally liable for the GST payable. The
Explanatory Memorandum stated:
6.271 If you are registered and you become
bankrupt, or go into receivership or liquidation, the person who
conducts your enterprise on your behalf is, generally, personally
carrying on the enterprise.[9]
In commenting on this Logan J said:
The statement in para 6.271 of the explanatory
memorandum as to who carries on an enterprise after bankruptcy,
receivership or liquidation is true only of bankruptcy. It is not
true of corporations who are placed in liquidation. Neither is it
true of a privately appointed receiver. Such errors hardly, with
respect, inspire confidence in the utility of the explanatory
memorandum. The description in the explanatory memorandum is not
matched by the language employed within Div 147 as enacted.[10]
In a recent decision of the High Court, Bruton Holdings Pty
Limited (in liquidation) v Commissioner of Taxation[11]
the High Court unanimously ruled against the Commissioner of
Taxation and held he could not issue notices that had the effect of
giving the ATO priority over other unsecured creditors such as
employees, insolvency practitioners and liquidators in the event of
a company being wound up. The High Court held that the ATO could
not issue such a notice once a company had gone into liquidation.
This means that the ATO will rank equally with other unsecured
creditors. In a report in the Australian Financial Review
about the High Court decision, the following comparison was
noted:
While the Bruton case dealt with the ATO s
ability to access income-tax debts, the situation could soon be
different in relation to GST.
The federal government is to introduce a bill
into parliament in the spring sitting, which starts on September 7,
that will give the ATO priority over other creditors when it comes
to GST.
Mr Wolfers [KMPG tax partner] said it was
anomalous that while the High Court is confirming the abolition of
the ATO s priority in income tax, the parliament is seeking to
reinforce the tax commissioner s priority for GST .[12]
Schedule 2 amends the Taxation
Administration Act 1953 (TAA 1953) to change the basis on
which a pay as you go (PAYG) instalment liability is calculated.
The amendments were announced in the Assistant Treasurer s Media
Release No. 043 of 4 September 2009.[13] If a person or entity has business or
investment income, the income tax liability must be paid by
instalments. Division 45 of the TAA 1953 governs PAYG instalments.
The amendments in this Bill are necessary to address previous
amendments made to the TAA 1953 contained in the recent Tax
Laws Amendment (Taxation of Financial Arrangements) Act 2009
(the TOFA Act). According to the Explanatory Memorandum:
The effect of the PAYG amendments in the TOFA
Act is arguably to substantially change the basis on which a PAYG
instalment liability is calculated. The result of this change may
be to decrease PAYG instalment payments. Any decrease will result
in a deferral of revenue, which will be recouped after the relevant
taxpayer lodges their income tax return.[14]
The amendments seek to reverse the changes made by the TOFA Act
in order to prevent the potential decrease in the amount of PAYG
instalments paid. Currently the net result of gains and losses is
included in an entity s instalment income for PAYG instalments
purposes, and according to the Parliamentary Secretary this could
unintentionally lead to a reduction in the PAYG instalments paid,
because the net basis of calculation can produce a reduction in
PAYG instalment income [15].
The PAYG instalments system facilitates the collection of income
tax on business and investment income in anticipation of a taxpayer
s final income tax liability on assessment. Generally, instalment
income is calculated on a gross basis. The amendments made in the
TOFA Act recognised the gain or loss, or the part of the gain or
loss on a financial arrangement, meaning the net result of gains
and losses is included in an entity s instalment income for PAYG
instalment purposes.
In summary, Schedule 2 makes three
amendments:
- it repeals the version of subsection 45-120(2B) that was
inserted by the TOFA Act
- it provides for a catch-up payment where an instalment is
underpaid as a result of subsection 45-120(2B) applying, and
- it reinserts the previous version of subsection 45-120(2B) that
was unintentionally repealed by the TOFA Act.
Schedule 3 is a beneficial measure which has
not been previously announced.[16] Its effect is to ensure that the remote and
regional payment made under the
Helping Children with Autism package is not subject to income
tax. In an answer to questions in Estimates,[17] the Department of Families, Housing,
Community Services and Indigenous Affairs said that as at 30 April
2009 there were 262 children nationally that received the
payment.
Schedule 4 will ensure that payments made under
the Continence Aids Payment Scheme will be exempt from income tax.
The Scheme is a payment to assist persons with incontinence to meet
some of the costs of their products. It is by way of direct payment
and will commence from 1 July 2010. It is replacing the current
Continence Aids Assistance Scheme, but the Department of Health and
Ageing Fact
Sheet dated 1 June 2009 states that there will be a transition
from the existing scheme to the new one, and there will be no
disadvantage.
Schedule 5 concerns interest paid under a
debenture being exempt from interest withholding tax (IWT) if the
issue of the debenture satisfies a public offer test (section 128F
ITAA36). Subsection 128F(2) states that tax is not payable in
respect of interest to which the section applies, but debentures or
debt interest issued by the Commonwealth or a Commonwealth
authority will not be exempt. The amendments will make the
Commonwealth-issued debt exempt from the interest withholding tax.
According to the Parliamentary Secretary s second reading
speech:
This important measure will mean that
Commonwealth debt, state government debt and private sector debt
will be afforded the same treatment for interest withholding tax
purposes. This will help improve the neutrality of the tax system,
and bring Australia s tax treatment of Commonwealth Government
Securities into line with most other countries, including the
United States and the United Kingdom.[18]
This measure was announced in the Treasurer s Media Release No.
092 of 21 August 2009 where it was stated:
This will address the anomaly that has existed
since IWT was removed from publicly issued corporate bonds in 1999
and state government securities in 2008.
Schedule 6 amends the Income Tax Assessment
Act 1997 (the ITAA 1997) to allow donations received by the
2009 Victorian Bushfire Appeal Trust Account to be used for a
broader range of purposes to assist communities and individuals
affected by the bushfires in 2009. The Victorian Bushfire Appeal
Trust Account has been established under section 19 of the
Financial Management Act 1994 (Victoria). An independent
advisory panel oversights the expenditure of funds from the Trust
Account. The amendments expand the allowable purposes to target
sections of the community which have been specifically identified
as in need of support as a result of the bushfires.[19] Schedule
6 also will provide that when looking at the status of the
Red Cross Society (the charity that collected the donations) as a
benevolent or charitable institution, payments to the Trust Account
are to be disregarded. This will protect the charitable status of
the Red Cross so long as the funds are used for the allowable
purposes.
The Bill has not been referred to Committee.
According to the Explanatory Memorandum:[20]
The main operative provisions of this Schedule will take effect
from 1 July 2000, which is the date of the introduction of the GST.
The consequential amendment to the Fuel Tax Act 2006 will
take effect from 1 July 2006, which is the date of commencement of
that Act. In commenting on this retrospectivity, the Explanatory
Memorandum gives a detailed explanation:
1.9 Retrospective amendment of the GST law is
considered appropriate as the proposed amendments will give effect
to the stated policy intention as at the commencement of the GST
law on 1 July 2000. The proposed amendments are also generally
consistent with the way the law has been administered by the
Commissioner.
1.10 Consequently, retrospective application of
the law is not expected to adversely impact taxpayers with one
exception. Supplies by representatives to associates of
incapacitated entities[21] for no consideration or inadequate consideration may
have a different GST outcome as a result of the retrospective
amendments. A transitional provision will apply to ensure that the
amendments will not adversely impact those taxpayers affected.
Schedule 1 Part 1 item 8 inserts new
Division 58, Representatives of incapacitated entities ,
into the A New Tax System (Goods and Services Tax) Act
1999 and inserts new subsections 58-5, 58-10, 58-15
and 58-40. New subsection 58-1 summarises that the
Division has the following effect:
This Division sets out how to ascribe
activities of a representative of an incapacitated entity between
the representative and the incapacitated entity for GST
purposes.
In particular, supplies, acquisitions and
importations, and associated acts and omissions, by the
representative are, in most cases treated as having been by the
incapacitated entity. This ensures that a transaction by the
representative has the same consequences under the GST law as if
the incapacitated entity had no representative.
However, in most cases, GST-related liabilities
and entitlements are allocated to the representative for
transactions that are within the scope of the representative s
responsibility or authority.
The new Division 58 replaces Division 147 of
the GST Act which currently contains the provisions relating to
representatives of incapacitated entities. (Division 147 is
repealed by item 30.)
Part 1 item 10 repeals and substitutes
subsection 147-20(1) to ensure that the subsection
will apply only to increasing adjustments for the period between 1
July 2000 and the date of Royal Assent, and also to adjustments by
the incapacitated entity. As to this latter aspect, the Explanatory
Memorandum states:
In addition, current section 147-20 is
predicated on the basis that the relevant adjustments are
adjustments of the representative. However due to the operation of
new section 58-5 the adjustments to which this section relates will
always be adjustments that the incapacitated entity has. Therefore,
this section, as currently worded, would have no
application.[22]
Full details of the other measures in this Schedule of the Bill
are contained in the Explanatory Memorandum.
Schedule 2 Part 1 item 1 repeals subsection
45-120(2B) of the Taxation Administration Act 1953 to
clarify that the TOFA Act was not intended to reduce the amount of
instalments an entity is liable to pay.
Part 1 item 3 addresses the possibility of a
decreased payment of PAYG instalments in the first and second
instalment quarters, and provides a catch-up payment in the event
of this occurring.[23] The amendment is explained the following way in the
Explanatory Memorandum:
2.26 This catch-up payment provision only
applies in a very specific scenario. The amendment requires
all of the below to occur in order to apply:
The
entity must make or have made an election under item 103 of the
TOFA Act to apply TOFA early (that is, from income years starting
on or after 1 July 2009) [Schedule 2, Part 1,
sub-subitem 3(1)(b)].
- Schedule 2 to this Bill commences after 30 September 2009
[Schedule 2, Part 1, sub-subitem
3(1)(b)].
- The entity must be part of the PAYG instalments system, and be
a quarterly payer of instalments that pays on the basis of
instalment income [Schedule 2, Part 1, sub-subitem
3(1)(a)].
- The entity s first instalment quarter for the income year
starting on or after 1 July 2009 must end before the commencement
of this Schedule. For example, assume that an entity has an income
year starting on 1 October 2009 and this Schedule commences on 15
December 2009. In that case, the amendment will not apply to the
entity because its
first
instalment quarter ends on 31 December 2009, which is after the
commencement of Schedule 2 in December 2009 [Schedule
2, Part 1, sub-subitem 3(1)(b)].
Part 2 item 4 reinserts subsection
45-120(2B) in its original form to provide for the working
out the instalment income of entities that have financial
arrangements subject to Subdivision 250-E[24] of the ITAA 1997.[25]
Schedule 3 amends the Income Tax Assessment
Act 1997 to insert the
Helping Children with Autism package, as part of the Outer
Regional and Remote payment, into the table of social security or
like payments. It will insert new section 52-170
into that Act to provide that such payments are exempt from income
tax. The amendments are to apply to payments made in the 2008-09
and later income years (item 3).
Schedule 4 similarly amends the Income Tax
Assessment Act 1997 to insert new section
52-175 to exempt the Continence Aids Payment Scheme
payments from income tax. The amendments will apply from the
2010-11 and later income years (item 3). However
the Explanatory Memorandum says the measure applies to amounts
received in the 2009-10 income and later years:[26]
As clients do not pay any income tax on the
value of benefits received under the current subsidised products
scheme and will not pay any income tax on receiving the replacement
income tax exempt cash payments, there is no impact on the forward
estimates.
Item 1 of Schedule 5 repeals
subsection 128F(5A) of the Income Tax
Assessment Act 1936 which currently has the effect that the
Commonwealth is liable to income withholding tax. The repeal of the
provision will mean that the Commonwealth issued debt will be
eligible for exemption. Currently subsection 128F(5B) states that
State and Territory bonds are exempt from interest withholding tax.
This subsection is also being repealed.
Item 2 repeals and substitutes
subsection 128F(7) to clarify that the section
applies not only to an authority of the Commonwealth but also to
the Commonwealth in its own right.
Schedule 6, item 2 expands the
purposes for the benefit of communities and individuals affected by
the Victorian bushfires to include matters such as broad public
benefits that are consistent with the purposes of one or more
exempt entities, reimbursing certain payments that have been made,
providing long-term assistance to child orphans, assisting
individuals whose houses were destroyed or who had to live in
transitional housing and the like. Item 3 ensures
that the Red Cross Society does not lose its charitable status as a
consequence of the broadening of the purposes that may or may not
normally come within the meaning of what the tax law would consider
charitable. It provides that when determining whether the Red Cross
Society is a public benevolent or charitable institution, payments
from the Red Cross Society to the 2009 Victorian Bushfire Appeal
Trust Account are disregarded.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 62772526.
Diane Spooner
23 October 2009
Bills Digest Service
Parliamentary Library
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