WARNING:
This Digest was prepared for debate. It reflects the legislation as
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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment Bill (No. 2)
1998
Date Introduced: 12 November 1998
House: House of Representatives
Portfolio: Treasury
Commencement: The various measures contained
in this Bill have differing application dates, which will be dealt
with in the Main Provisions section of this Digest
The main
amendments contained in the Bill relate to:
-
- Measures to remove schemes that allow higher capital losses
through the artificial creation of capital losses
-
- Alteration of Fringe benefits Tax relating to car parking, taxi
travel and record keeping and retention
-
- Clarification of calculation of dividend imputation credits for
life insurance companies to ensure similar treatment for all RSA
providers
-
- Minor changes to the calculation of capital gains tax to
prevent the double inclusion of certain expenditure in the cost
base, and
-
- To prevent taxpayers from receiving a depreciation advantages
on the change of an entity's tax status from exempt to
non-exempt.
As the Bill contains no central theme the
background to the various measures will be discussed below.
Artificially Created Capital
Losses
These measures were announced by the Treasurer
in a Press Release dated 29 April 1997 and aim to deny capital
losses where transfers between members of a company group give rise
to multiple claims for capital losses. The provisions are linked to
the roll-over relief available under the capital gains tax for,
amongst other items, transfers between related companies. Under the
roll-over rules, if an asset is disposed of to a related company,
the transaction is exempt from capital gains tax (CGT) so long as
certain conditions are met. Where roll-over relief is allowed, the
acquiring company is deemed to have acquired the asset for the
disposing company's relevant cost/ indexed cost base for post
September 1985 assets. Assets originally acquired before this date
maintain their CGT exempt status [section 160ZZO of the Income
Tax Assessment Act 1936 (ITAA)].
The Australian Taxation Office has identified
problems with section 160ZZN which allow larger capital losses to
be generated through the passing of assets that have a capital loss
through related companies. The generation of artificial losses is
achieved where the cost base in the shares in a related company is
less than the value of the assets held by that related company. In
the example given by the ATO, one related company sells its shares
in another related company to the related 'parent' company. The
'parent' also acquires the assets of the company that has been sold
to it. The cost base of the shares, which section 160ZZN deems to
be the acquisition price, is $1 billion while the assets of the
company sold are $300m. On disposal of those assets for $300
million the 'parent' company achieves a capital loss of $700
million, the difference between the cost value of the shares it
acquired and the value of the shares when the company is
liquidated.
The next step is for the process to be repeated
with other related companies which have acquired each other for $1
billion prior to the commencement of the 'scheme'. Each company
will use the same $1 billion in the acquisition of the related
company and so have a $1 billion cost base and the assets remain
valued at $300 million, so the $700 million capital loss arises in
each occasion. In the ATO example, with five related companies, the
total amount of capital loss generated is $3.5 billion (ie. five
times the $700 million actual loss).
It was announced in the Treasurer's Press
Release that such losses would not be able to be used after 29
April 1997 unless by that date they where already included in a
return submitted for the 1996-97 year of income.
While similar measures were contained in the
Taxation Laws Amendment Bill (No. 5) 1997, which failed to pass
Parliament before it was prorogued for the 1998 General Election,
the delay between the announcement and the (presumed) passage of
this legislation gives weight to arguments concerned about
'legislation by press release. Without seeing the actual
legislation passed by Parliament at least one tax return (1997-98)
will have had to have been completed with regard to the proposed
rules.
Item 1 of Schedule 1 will
insert proposed section 160ZPA into the ITAA for
capital losses incurred before 1995-96 which are carried forward to
the 1995-96 tax year. In such a case, if there remains an unused
loss (ie. a loss that has not been claimed as an offset to a
capital gain) the amount of capital loss available to the company
will be reduced by the unused amount. If the loss was incurred in
1996-97 or a later tax year, the roll-over amount is to be reduced
as if the roll-over relief provisions did not apply. In relation to
losses incurred in 1996-97 or earlier years and claimed before the
announcement of the new rules at 3 pm 29 April 1997, the company
will be to use 1996-97 or earlier carried forward losses for the
1996-97 year of income. In later years, the losses will be reduced
or denied as described above.
Proposed subsection 160ZPA(3)
allows the Commissioner a discretion to allow part or all of the
losses that would otherwise be disallowed under the above
provisions. There must be an application from the company and the
Commissioner is to have regard to a number of matters,
including:
-
- Whether the company had an interest in the company transferring
the losses, was owed a debt by that company or had a right in a
company to which the transferring company owed a debt and the value
of such interests or debts, and
-
- The content and timing of the supply of information to the
Commissioner.
In conjunction with the specific provisions
referred to above, Part 2 of Schedule 1 contains
amendments to the general anti-avoidance provisions contained in
Part IVA of the ITAA. Section 177C of the ITAA, which deals with
what constitutes a tax benefit, will be amended to include benefits
gained from capital loses between companies within a group, as
defined in the UTAA. While certain activities of the company will
be excluded from the definition of a tax benefit, such as making a
valid election under the ITAA, are not to be taken be tax benefits
and where a tax benefit has arisen, the Commissioner may cancel the
benefits (item 9). The Commissioner will have
power to determine if all or part of the loss should be allowable
where the Commissioner is of the opinion that this would be fair
and reasonable. (item 13).
Application: From 3 pm on 29
April 1997.
Fringe Benefits Tax
(FBT)
Car Parking
FBT is payable where a number of conditions are
met including:
-
- an employer provides car parking to an employee where the
parking is provided on the business premises, or associated
premises
-
- there is a commercial car parking station within 1 kilometre of
the premises
-
- the car is on the premises for more than 4 hours between 7am
and 7 pm, and
-
- the car is used on that day to travel between the employee's
place of residence and principal place of employment.
In March 1997 the Prime Minister released a
statement titled More Time for Business which aimed to
'reduce the burden of regulation and red tape carried by
business'.(1) As part of the statement it was announced that, for
small business, car parking at the employer's premises would be
exempt from FBT from 1 July 1997.(2)
-
- Part 1 of Schedule 3 will amend the Fringe
Benefits Tax Assessment Act 1986 (FBT Act) to insert a
new section 58GA which will exempt small business
from car parking FBT. The proposed section will apply where:
-
- The car is not parked at a commercial parking station
-
- The employer is not a public company, a subsidiary of a public
company or a government body, and
-
- The income of the business in the year previous to the FBT year
was less than $10 million (therefore restricting the concession to
'small business').
Where the business commences during the year,
the business is to make an estimate of yearly income of the
business and if this is below $10 million the exemption will also
apply. Proposed section 115B will make it an
offence to make an unreasonable estimate of income if the
underestimate results in the exemption applying. The penalty for a
breach will be penalty tax equal to twice the tax payable on the
benefit
Taxi Travel
Currently, section 58Z of the FBT Act exempts
employer provided taxi travel between an employees address and
place of employment if the travel commences between 7am and 7 pm.
Such travel is also exempt if it is due to the sickness or injury
of the employee. Item 2 of Schedule 3 will remove
the requirement in the first category that the travel must be
between 7 am and 7 pm. Under proposed subsection
58Z(1) the taxi travel will be exempt if it is a single
trip beginning or ending at the employee's place of work. This
measure was announced in the statement More Time for
Business.
Application: From 1 April
1997
Record Keeping
The record keeping requirements for FBT are
substantially the same as for other taxes, such as income tax and
capital gains tax, ie. records must be kept that identify and
explain all relevant transactions to ascertain tax liability. Such
records must be retained for 7 years for transactions in years
beginning before 1 April 1995. For years after that date, records
need only be maintained for 5 years.
In More Time for Business it was
announced that businesses with a FBT liability of $5 000 or less a
year would no longer be required to keep records for FBT purposes.
If liability changes by 20% from the base year in which the value
of benefits was calculated, or by $100 if this is greater than the
20% amount, the change must be reported to the ATO.
Changes to the record keeping requirements are
contained in Schedule 12 of the Bill which will
insert a new Part XIA into the FBT Act. To be eligible for the
record keeping exemption an employer must:
-
- Establish a base year. This can be the previous year if the
employer carried on business throughout the year, lodged a FBT
return, retained the record for that year and the amount of FBT
does not exceed the threshold ($5 000 for the year commencing on 1
April 1996 and this amount indexed for later years). A previous
year can be used if there has not been a change in the amount of
FBT payable between that year and the assessment year that would
have required the ATO to be notified of the change in amount of FBT
payable, and
-
- Not have received notification under proposed section
135E (see below) requiring the employer to resume record
keeping (proposed sections 135A to 135C).
If both the above conditions are met, the
employer generally will not be required to keep or retain FBT
records for the year in which the conditions are met. This will not
apply to records of an associate of the employer given to the
employer; benefits supplied when the employer was a government body
or exempt from income tax (proposed section
135E).
However, records relating to the base year are
to be retained for 5 years after the end of the year to which they
relate (proposed section 135F).
If the above conditions are satisfied, the FBT
liability for the current year will be calculated according to the
base year figures (proposed section 135G) unless
the employer choses to make a calculation for the current year
(proposed section 135H).
An employer will not be able to use the base
year calculation if their FBT liability increases by more than 20%
over base year unless this increase is less than $100. In relation
to the calculation of car fringe benefits, which may be calculated
on an actual use or statutory formula basis, were the amount of
distance travelled in the current year is at least 80% of that in
the base year, the base year calculation may continue to be used
(proposed section 135K).
Where an employer does not carry on business for
the whole year, a pro-rata amount of the base year liability may be
used to calculate FBT liability (proposed section
135L).
Application: From the FBT year
commencing on 1 April 1998.
Dividend Imputation and
Retirement Savings Accounts (RSA)
Dividend imputation refers to the scheme whereby
the owner of a share is given a tax credit for tax paid by a
company. The amount of the franking credit will depend on the
amount of tax paid by the company. However, differing rules apply
to most RSA providers, such as banks, building societies and credit
unions, where franking credits or debits are not taken into account
in so far as they relate to income from a RSA. Currently, there is
no similar restriction applying to the income of life insurance
companies which are also allowed to offer RSAs.
This has resulted from the calculation of
franking credits for life insurance companies is partly based on
their 'general fund' component while for others it is based on
their 'standard' component. The general fund component is the
standard component plus amounts attributable to RSAs. In order to
place all RSA providers in the same position it is proposed to
change the component used for life insurance companies from the
general fund to standard component. This will be achieved by
Schedule 6 of the Bill that will replace relevant
references in the ITAA from general fund to standard component.
Application: For franking credits or debits
arising after the introduction of the Bill (ie. 12 November 1998)
(item 28 of Schedule 6).
Capital Gains
Tax
Cost Base
The cost base is used in calculating if there is
a capital gain that is subject to CGT. Simply, whether there is a
gain is determined by deducting from the sale price of the good the
cost base, or if the good has been held for over 12 months, the
indexed cost base (ie. the cost base increased by the change in the
consumer price index). The cost base consists of the following
components:
-
- Consideration paid in respect of the acquisition of the
asset
-
- Incidental costs of acquisition
-
- For non-personal use assets, non-capital costs of
ownership
-
- Capital expenditure on enhancing the value of the asset if this
is reflected in the asset when disposed of
-
- Capital expenditure to establish, preserve or defend the right
to ownership of the asset, and
-
- Incidental costs of disposal.
In relation to the incidental costs of
acquisition, where these are deductible they are not included in
the calculation of the cost base (section 160ZH of the ITAA).
Deductible costs can still be added to the other categories used to
calculate the cost base.
In the 1997-98 Budget, it was announced that the
exclusion of deductible amounts from the calculation of the cost
base would be extended to all components of the cost base, so that
if a deduction is allowed for expenditure that would otherwise be
included in the cost base it is now to be disregarded to the extent
of the deduction. This is seen as preventing a double benefit in
respect of the expenditure, ie. the initial deduction and an
increased cost base that will result in a lower capital gain or
increased capital loss.
Proposed section 160ZJA, which
will be inserted into the ITAA by Schedule 7,
provides that in calculating the cost base is to be: the
consideration paid for the asset - reduced by any amount that has
been allowed, or is allowable, as a deduction (ie. there is no need
for the deduction to have been claimed, if it an allowable
deduction that is sufficient to lead to the reduction in the cost
base).
The proposed section also provides that where
deductions are allowable while the owner holds the asset, these are
also to be taken into account in determining any reduction in the
cost base. Proposed section 160ZJB provides for
similar amendments in the calculation of the indexed cost base.
Part 2 of Schedule 7 will make
similar amendments to the Income Tax Assessment Act 1997
(ITAA97).
Application: generally from
7.30 pm on 13 May 1997. Minor changes in application dates relate
to assets associated with land or buildings and heritage and land
conservation expenditure. Amendments to ITAA97 will apply from the
1998-99 year of income.
Life Insurance
Companies
The taxation of the income of life insurance
companies is relatively complex which reflects the width of
products offered by such companies. For example, premiums from life
insurance policies are exempt as is income relating to immediate
annuities which qualify as exempt policies. When a policy is
defined as exempt is determined by reference to Part IX of the
ITAA. The amendments contained in the Bill relate to income from
exempt policies that involve immediate annuities.
Currently, section 112A of the ITAA provides
that the amount of exempt income will be in the same proportion as
exempt policies are to all policies and this is calculated at the
end of a financial year. According to the Treasurer's Press
Release dated 29 April 1997 which announced this move, the
calculation of the various proportions on one day of the year can
lead to distortions when compared with the average holdings during
the year. This will be achieved by item 2 of Schedule
9 which will amend the formula contained in section 112A
to base the calculations on average liabilities in both
categories.
The average liability is calculated by reference
to proposed section 114A which will exclude
'significant events' from the calculation of the liability attached
to each class of policy. The inclusion of significant events has
the possibility to distort the normal business liability borne by
an insurance company and so distort the amount of exempt income
that may result from the application of changes to section 112A.
'Significant event' is defined as an event that causes abnormal
changes in the amount of liability held in the fund.
Application: Generally from 29
April 1997. However, if the company's year of income ends on or
after 29 April 1997 and a significant event occurs between that
date and the company's balancing date, the amendments will apply to
the year of the company's previous financial year (item 10
of Schedule 9).
Depreciation of Assets
Previously held by Tax Exempt Entities
In July 1995 the government announced amendments
to the ITAA to ensure standardised treatment of assets that become
taxable, for example through a tax exempt entity becoming taxable
or disposing of an exempt asset to a non-exempt entity. The general
rule is that income, deductions and other matters are treated
separately from when the asset or entity becomes taxable. In
effect, the two periods of when the assets was held as tax exempt
and when it became taxable,. are treated as separate so that there
is a clean 'line in the sand' to determine into which category
income, deductions etc. belong. As noted above, depreciation is
treated differently and the calculation of its value for future
depreciation is determined by assuming that the asset was never
exempt. This should mean that the value of the asset is deemed to
have been depreciated and that the purchaser receives the asset at
its 'notional written down value' (NWDV).
However, in a Press Release dated 4 August 1997,
the Treasurer announced that the rules were being used to 'gain
significant taxation advantages'. This is achieved by an asset
being sold separately from the entity that owns it. The purchaser
and seller negotiate a higher price for the asset than it would
represent as part of the entity and depreciation is calculated on
the agreed purchase price, rather than the NWDV. With an adjustment
to compensate for the lower price of the asset the seller will
receive the same sale price, the purchaser will pay the same amount
and higher depreciation may be claimed. The government's position,
as outlined in the Press Release, is that there should be no
differing tax effects between the sale of an asset of an exempt
entity and the sale of the entity. To achieve this, the purchaser
will be able to chose, as the depreciated value of the asset, the
greater of the NWDV and the value of the asset as registered in the
entities audited books.
Proposed section 61A, which
will be inserted into the ITAA by Schedule 10,
deals with the treatment of tax exempt entities. Major assumption
applying when calculating the taxable value of an asset are:
-
- The method to be used in calculating depreciated value (prime
cost or diminishing value) is to be that chosen during the
transitional year (ie. the year during which the entity losses it
exempt status) or, if such a choice has not been made, the method
chosen when the new owner first claims depreciation. It is also
assumed that this method was also used until the sale of the entity
or asset, and
-
- The asset had been used for income production between the time
it was acquired or constructed until the time of transition to a
non-exempt body.
If the amount paid for the asset is less than
its notional depreciation value, the value of the asset for future
depreciation will be adjusted to include notional as well as actual
amounts to set the new starting value of the asset.
Application: From 1 July 1988
to 3 July 1995 (as noted above, this is from when the current laws
operate).
-
- Prime Minister, More Time for Business, p. iii.
- Ibid., p. v.
Chris Field
6 January
Bills Digest Service
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ISSN 1328-8091
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