Bills Digest No. 161  1998-99 Taxation Laws Amendment Bill (No.6) 1999


Numerical Index | Alphabetical Index

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 and Copyright Details

Passage History

Taxation Laws Amendment Bill (No.6) 1999

Date Introduced: 31 March 1999

House: House of Representatives

Portfolio: Treasury

Commencement: Upon Royal Assent, however, the measures contained in the Bill have different application dates, which will be considered in the Main Provisions section of the Digest.

 

Purpose

The amendments contained in the Bill are:

  • Measures dealing with spectrum licences (Schedule 1), and
  • Technical corrections and consequential amendments (Schedules 2, 3, 4, 5, 6 and 7).

Background

As this Bill contains no central theme the background to the two main measures is included in the discussion of the main provisions.

Main Provisions

Schedule 1 ¾ Spectrum Licences

The Australian Communications Authority may issue a spectrum licence, for consideration, under the Radiocommunications Act 1992 for a period of up to 15 years. A spectrum licence allows a licence holder to access specified parts of the radio frequency spectrum to provide telecommunications services such as mobile phone services. The cost of buying a spectrum licence is a capital expense under the income tax law. This means that a licence holder is not entitled to an income tax deduction in respect of the cost of the asset. Under capital gains tax, when a licence expires a taxpayer makes a capital loss. Such capital losses may only be deducted from capital gains made by the taxpayer. Generally making a capital gain involves an element of risk, unlike income such as interest which may be derived with negligible risk. In order to use a capital loss a taxpayer, without unrealised capital gains, must take on the risk that its investment may also result in a capital loss. This may result in some taxpayers being unable to use capital losses arising from the expiry of a spectrum licence.

The Government announced, by Treasurer's Press Release No. 26 of 11 March 1998, that measures would be introduced on the taxation of spectrum licences. The first measure will allow expenditure incurred in the acquisition of a domestic spectrum licence to be claimed as a deduction during the life of a licence. The deduction under the proposed measures may only be claimed by taxpayers who have acquired a spectrum licence under the Radiocommunications Act 1992. The Treasurer stated that:

Allowing amortisation of the acquisition cost of domestic spectrum licences is appropriate as it is consistent with the underlying wasting nature of spectrum licences, which contribute to the income earning capacity of the holder over their life. Amortisation is consistent with matching the cost of the licence to the income it generates. The current tax treatment of spectrum licences is inappropriate as they are on capital account which means there are no deductions for acquiring the licences but there will be capital losses when they expire.

Furthermore, amortisation is consistent with the tax treatment of spectrum licences in overseas jurisdictions such as the United States and Japan. Without this change, in the forthcoming auction of spectrum licences Australian resident bidders may be at a financial disadvantage compared with overseas bidders due to the differing tax treatment.(1)

The second measure is to ensure that Australia is able to assert its taxing rights over income from the use of spectrum licences owned by non-residents. For non-residents from countries with which Australia does not have a double tax treaty, the royalty withholding tax will be amended to apply to royalties paid in respect of such licences. For non-residents from countries with which Australia has a double tax treaty, the treaties will be renegotiated to subject royalties paid in respect of such licences to royalty withholding tax. For the latter group of non-residents, in order to immediately subject such royalties to Australian tax, the licence requirements will be amended.

Capital allowances for the cost of acquiring a spectrum licence

Proposed Division 380 of the Income Tax Assessment Act 1997 (the 1997 Act) creates an income tax deduction for expenditure incurred by a taxpayer in obtaining a spectrum licence that the taxpayer uses for the purpose of producing assessable income. A deduction for this expenditure is called a capital allowance in the 1997 Act (subsection 995-1(1)). Proposed Division 380 also has balancing adjustments to include an amount in a taxpayer's assessable income to reverse earlier deductions, in certain circumstances.

A taxpayer is entitled to a deduction for expenditure made in obtaining a spectrum licence that was used by the taxpayer for the purpose of producing assessable income (proposed subsection 380-10(1)). The procedure for determining the amount a taxpayer may deduct each income year is contained in proposed section 380-15. The cost of obtaining a licence is spread over the life of the licence. The process set out in proposed section 380-15 requires a taxpayer to determine 'unrecouped expenditure' in respect of a licence. The term 'unrecouped expenditure' is defined in proposed section 380-20 by virtue of subsection 995-1(1) of the 1997 Act. A taxpayer's unrecouped expenditure is the taxpayer's expenditure in obtaining the spectrum licence. This amount is reduced over time as deductions are obtained each income year. Proposed subsection 380-20(2) directs a taxpayer to reduce its unrecouped expenditure at the commencement of an income year by the amount of the deduction for the preceding income year. A table in proposed section 380-20 deals with the other situations in which a taxpayer's unrecouped expenditure may be reduced.

The amount that can be deducted is determined under proposed section 380-25. In relation to a taxpayer to whom a licence was issued, the amount paid to acquire the licence is the taxpayer's expenditure for the purpose of proposed Division 380. Proposed section 380-25 also sets out how to determine a taxpayer's expenditure in other situations.

Proposed Subdivision 380-B deals with the tax consequences of a taxpayer partially realising a spectrum licence. Any proceeds arising from a realisation will reduce a taxpayer's future deductions. A partial realisation of a spectrum licence is defined in proposed section 380-35 as an amount appearing in a table in the provisions. Four of the items deal with assignments of a licence. The final item deals with a part of a spectrum licence being resumed.

Proposed Subdivision 380-C deals with the replacement of spectrum licences. If the whole of, or part of, a spectrum licence that a taxpayer holds is replaced with another spectrum licence, the taxpayer's unrecouped expenditure in respect of the first licence is reduced. This process may lead to the taxpayer being required to make a tax adjustment. If the amount arising from the partial realisation is less than the taxpayer's unrecouped expenditure, the taxpayer may be entitled to a deduction (proposed section 380-65). If the amount arising from the partial realisation is more than the taxpayer's recouped expenditure, the taxpayer may be required to include an amount in assessable income (proposed section 380-70).

Proposed subsection 380-80 deals with balancing adjustments. Proposed section 380-80 sets out the requirements for a balancing adjustment. One of these requirements is that a balancing adjustment event has taken place in respect of a taxpayer (proposed paragraph 380-80(1)(c)). The balancing adjustment events are listed in a table in proposed section 380-80. The events are:

  • the taxpayer assigns the spectrum licence under Division 5 of Part 3.2 of the Radiocommunications Act 1992
  • the spectrum licence ceases to exist because it expires, is cancelled or is resumed by the Australian Communications Authority, and
  • another entity becomes the licencee, but the previous licence holder still has an interest in the spectrum licence.

Amendments to ensure Australia asserts its taxing rights over income from the use of spectrum licences

Royalty withholding tax(2) imposes a final tax on non-resident taxpayers receiving royalty payments from Australia. This tax allows Australia to secure its taxing rights in respect of non-resident taxpayers. The tax is imposed on non-residents, however, collection obligations for the tax are placed on the persons in Australia making royalty payments to non-residents. A person in Australia paying a royalty to a non-resident person which is subject to royalty withholding tax must deduct the tax and remit it to the Australian Taxation Office. Without this procedure Australia would generally be unable to enforce its taxing rights over non-residents receiving royalty payments from Australia.

Items 2, 3 and 4 of Schedule 1 deal with expanding the scope of royalty withholding tax to impose payments made to certain non-resident spectrum licencees. These items are contained in Part 2 of Schedule 1 which is titled 'Consequential amendments'. This implies the amendments in Part 2 of Schedule 1 are amendments consequential to the provision of capital allowances for spectrum licences in Part 1 of Schedule 1. The inclusion of Items 2, 3 and 4 in Part 2 of Schedule 1 is a drafting error as they deal with new charging measures. Moreover, this measure is unconnected to the measures in Part 1 of Schedule 1. The Explanatory Memorandum for the Bill makes no mention of this error and this matter is considered in the Explanatory Memorandum under a separate heading 'Amendments to ensure Australia asserts its taxing rights over income from the use of spectrum licences'.(3)

The term 'royalty' is defined in subsection 6(1) of the Income Tax Assessment Act 1936. The definition is an inclusive definition - it states certain payments are treated as a royalty for the purposes of the income tax law (which includes royalty withholding tax). Item 2 of Schedule 1 amends the definition of the term 'royalty' in subsection 6(1) to treat the use of a right to use a spectrum licence issued under the Radiocommunications Act 1992 as a royalty for the purposes of the income tax law (proposed paragraph 6(1)(dc)). Item 4 of Schedule 1 also amends the definition of royalty to treat any payment in relation to the use of a spectrum licence as a royalty for the purposes of the income tax law (proposed paragraph 6(1)(iic)). This will result in any payments to certain non-residents in respect of a spectrum licence being subject to royalty withholding tax. This measure will only apply to a non-resident person from a country with which Australia does not have a double tax treaty.

Double tax treaty renegotiation

In relation to non-resident persons, from countries with which Australia has a double tax treaty, receiving royalty payments from the use of a spectrum licence, the Government has announced that it intends to renegotiate Australia's double tax treaties in order to treat such payments as royalties for treaty purposes. If such payments are treated as royalties under Australia's double tax treaties, the payments will then be subject to royalty withholding tax. Australia's treaty partners need to agree to this change before it can be implemented. By its nature, a treaty can only be amended by the bilateral agreement of the treaty partners.

Interim measures pending double tax treaty renegotiation

Prior to the renegotiation of Australia's double tax treaties the Government announced by Treasurer's Press Release No. 26 of 11 March 1998 that:

[T]he Government intends to amend the Radiocommunications Act 1992 so that all payments made in relation to spectrum licences (including rights to use such licences) to persons who are residents of countries with which Australia has DTAs [double tax agreements] will be subject to tax in Australia. . . . This will be achieved by imposing a condition on spectrum licences.

The amendments to the Radiocommunications Act referred to in the above statement are contained in the Radiocommunications Legislation Amendment Bill 1999 (RLA Bill). The RLA Bill was introduced into Parliament on 18 February 1999. While Taxation Laws Amendment Bill (No. 6) 1999 was introduced on 31 March 1999, the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 6) 1999 does not contain a reference to the RLA Bill.

The RLA Bill was considered in Bills Digest No. 119-121. Item 8 of Schedule 2 of the RLA Bill inserts proposed section 69A into the Radiocommunications Act 1992. This provision requires a spectrum licencee to be either a resident of Australia or carry on its business through an Australian permanent establishment. The permanent establishment condition applies to all non-residents regardless of whether they reside in countries with which Australia has a double tax treaty. This condition requires a licencee to have a connection with Australia to enable Australia's taxing rights to apply to any income or gains the licencee makes under the spectrum licence.

The requirement that a licencee makes its income or gains through an Australian permanent establishment enables the income and gains to be taxed under the business profits article in Australia's double tax treaties. The business profits article generally directs that Australia may tax the business profits that are attributable to a permanent establishment. The term 'permanent establishment' is defined in subsection 6(1) of the Income Tax Assessment Act 1936 by virtue of subsection 995-1(1) of the Income Tax Assessment Act 1997. The term permanent establishment is also defined in Australia's double tax treaties pursuant to the International Tax Agreements Act 1953. A permanent establishment includes a branch of a foreign company.

Amendments to the International Agreements Act 1953

Proposed section 11A of the International Agreements Act 1953 will create a legal fiction for non-resident licencees who fail to comply with proposed section 69A of the Radiocommunications Act 1992. The requirement is that the licencee must make its income and gains under a spectrum licence through an Australian permanent establishment of the non-resident. This measure only applies to a non-resident person who is resident in a country with which Australia has a double tax agreement. Two proposed legal fictions are created under the proposed amendments. Firstly, that the non-resident licencee carries on business in Australia through a permanent establishment (proposed paragraph 11A(d)). Secondly, that the income derived by that person under a spectrum licence will be treated as being attributable to that permanent establishment (proposed paragraph 11A(e)).

The legal fiction is that all income or gains made by a non-resident spectrum licencee will be treated as attributable to a permanent establishment in Australia. This allows the income or gains to be taxed under the business profits article in Australia's double tax treaties.

Schedules 2, 3, 4, 5, 6 and 7 ¾ Technical Corrections

Tax Law Improvement Project (Schedules 2 and 3)

The Parliament enacted three instalments of the rewrite of the Income Tax Assessment Act 1936. The rewrite project is called the Tax Law Improvement Project (TLIP). This is a project to restructure, renumber and rewrite in plain language Australia's income tax law. It aims to improve taxpayer compliance, and reduce compliance costs, by making the law easier to understand. The first TLIP Bill titled Income Tax Assessment Bill 1996 was referred to the Public Accounts Committee for consideration and advisory report. The Committee tabled its report on 22 August 1996 titled, Report 345, An Advisory Report on the Income Tax Assessment Bill 1996 and the Income Tax (Consequential Amendments) Bill 1996.(4) One of the Committee's recommendations was that technical errors in the TLIP legislation should be corrected as a matter of priority and technical amendment legislation should be the regular vehicle for making such corrections. The Income Tax Assessment Act 1997 (ITAA) commenced on 1 July 1997.

Schedules 2 and 3 deal with technical corrections to the Income Tax Assessment Act 1997. Schedules 2 and 3 were first introduced into Parliament on 31 August 1998 in Taxation Laws Amendment Bill (No. 4) 1998. This Bill lapsed when Parliament was prorogued for the 1998 General Election.

Amendment of other Acts (Schedule 4)

Schedule 4 contains technical corrections to the:

  • Airports (Transitional) Act 1996
  • Income Tax (Transitional Provisions) Act 1997
  • Taxation Law Improvement Act 1997.

Catch-up amendments (Schedule 5)

Schedule 5 makes technical amendments to the Income Tax Assessment Act 1997 and the Income Tax Assessment Act 1936.

Provisional tax uplift factor (Schedule 6)

The provisional tax payable by a taxpayer is calculated using a provisional tax uplift factor. The uplift factor was calculated by reference to a change in a number of gross domestic product measures formerly published by the Australian Bureau of Statistics (ABS). These economic measures were called the 'GDP(I)'. Commencing with the September 1998 quarter the ABS only publishes gross domestic product as a single measure called the 'GDP'. Consequently the income tax law dealing with this index for the purpose of provisional tax needs to be altered to refer to the new GDP index. The Explanatory Memorandum states that the change in the index will not effect the provisional tax uplift factor of 6% for the 1999-2000 income year.(5) The Explanatory Memorandum states that the uplift factor would have been 6% if the old index had been used.

Youth allowance and austudy payment (Schedule 7)

Schedule 7 amends the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 (the 1997 Act) to correct technical errors which occurred following amendments in the Social Security Legislation Amendment (Youth Allowance Consequential and Related Measures) Act 1998.

Concluding Comments

The Treasurer stated in Press Release No. 26 of 11 March 1998 that Australia's double tax treaties would be renegotiated in respect of non-resident licencees from countries with which Australia has a double tax treaty. The purpose of the renegotiation will be to treat the income and gains made by such non-resident spectrum licencees as royalties for treaty purposes. For a double tax treaty to be amended the agreement of both countries is required. Australia has over 40 double tax treaties. To renegotiate the treaties as proposed may involve considerable time and resources.

Endnotes

  1. Treasurer's Press Release No. 26 of 11 March 1998.

  2. Division 11A of Part III of the Income Tax Assessment Act 1936.

  3. Explanatory Memorandum for Taxation Laws Amendment Bill (No. 6) 1999 p. 36.

  4. (AGPS, Canberra, 1996).

  5. Explanatory Memorandum for Taxation Laws Amendment Bill (No. 6) 1999, p. 60.

 

Contact Officer and Copyright Details

Michael Kobetsky, Consultant
22 April 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

Back to top


Facebook LinkedIn Twitter Add | Email Print