Bills Digest 82 1995-96
Taxation Laws Amendment Bill (No. 1) 1996
WARNING:
This Digest is prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments.
This Digest was available from 17 May 1996
CONTENTS
Date introduced: 9 May 1996
House: House of Representatives
Portfolio: Treasury
Commencement: Royal Assent. However, measures relating
to the valuation of off-market share buy back schemes will have affect
from the time of announcement, ie. when the 1995-96 Budget was announced.
The Bill will:
- reduce the provisional tax uplift factor for the 1996-97 years of
income from 8% to 6%; and
- alter the rules applying to the calculation of the value of off-market
share buy backs.
As the Bill deals with two separate measures, the background to each
measure will be discussed in the Main Provisions section.
Provisional Tax Uplift Factor
Provisional tax is levied on individual taxpayers and most trustees
who earn assessable income that is not subject to the PAYE scheme that
applies to those that earn wages and salaries. Provisional tax applies
where the income from wages and salary is $1000 or more in the previous
income year or, if the taxpayer earned no wages or salary in the previous
year, where they would have been liable to tax in the previous year. A
common area where provisional tax applies is investment income, such as
regular payments of interest or dividends.
The amount of provisional tax payable is based on the previous years
income subject to provisional tax multiplied by the `uplift factor'. The
uplift factor is used to calculate the expected income in the year of
taxation and, hence, the amount of tax payable on that income. Where the
provisional tax payable in the previous year did not exceed $8 000, provisional
tax is payable at a time specified by the Commissioner of Taxation, which
is not to be earlier than 30 March in the year of income. Where provisional
tax in the previous year exceeded $8 000, provisional tax is generally
payable in four instalments equally spaced through the year commencing
on 1 September in the year of income. The final payment is used as an
adjustment to reconcile the provisional tax paid during the year with
the tax payable.
If a taxpayer considers that their income will not increase by the amount
of the uplift factor they may elect to self-assess their provisional tax
liability. However, penalties apply if there is a substantial underestimation
of the provisional tax payable.
Currently, the Income Tax Assessment Act 1936 (ITAA) provides
that the uplift factor for 1996-97 is 8% and, unless Parliament otherwise
provides, 10% for other years (it is normal for the uplift factor to be
altered to reflect changes in economic circumstances).
Prior to the 1996 General Election, the then Opposition announced that
if elected it would reduce the uplift factor for 1996-97 from 8% to 6%,
stating that the reduced rate would be of benefit to small business as
it would reduce the instalments of provisional tax payable by such entities.
It may be noted that the proposed uplift factor significantly exceed
the expectations for economic growth for 1996-97, which is estimated by
Treasury to be currently running at 3.25%.
Item 1 of Schedule 1 of the Bill provides that the uplift factor
for 1996-97 will be 6% and will remain at 10% for other years unless Parliament
provides otherwise.
Share Buy Backs
Companies with share capital are restricted in the circumstances in
which they may buy back shares in the company. Broadly, a company may
only buy back its shares if the following conditions are satisfied:
- the articles of association permit a buy back;
- only ordinary shares can be bought back;
- the buy back does not exceed 10% of the company's shares in a 12 month
period; and
- the directors have made a solvency declaration within 2 months of
the buy back.
The taxation implications of buy backs centre on two main areas, the
calculation of the consideration that the seller has received for the
shares for purposes of the capital gains tax (CGT); and the amount of
income or loss that is to be included in ordinary income. This Bill deals
only with the later matter.
In determining the consideration paid for the shares, the procedure
to be used depends on whether the share was purchased on the stock market,
where the buyer and seller would generally not be aware of each others
identity, and off market transactions. In the former case the determination
is simple as the purchase price is used. The later is more complex and
is dealt with in section 159GZZZQ of the ITAA which provides that the
amount received in consideration for the share will be its purchase price
less any amount that was a dividend. This section will be amended by Part
2 of Schedule 1 of the Bill.
The first amendment is that, subject to the amendments mentioned below,
the consideration received will be the purchase price of the share (item
6).
Subject to the application of any reduction amount (see below), the
amount of consideration received will be the market value of the share
as if there was no buy back proposal. The reduction amount is any dividend
included in the consideration, determined according to existing section
159GZZZP, that is included in the taxpayers assessable income or is an
eligible non-capital amount, ie. an amount that is not attributable to
a share premium account, a share capital account, or profits from the
revaluation of assets that have not been disposed of.
However, if the amount calculated above results in the taxpayer incurring
a capital loss or a deduction, the reduction amount will be reduced if
a rebate has been allowed in respect of the dividend. The amount of the
reduction will be the rebate divided by the company tax rate. The maximum
reduction will be the amount of the loss. This will have the effect of
reducing the capital loss or deduction.
Application: The amendments will apply to buy backs after 7.30
pm. on 9 May 1995. However, transitional provisions mean that if the proposed
buy back was announced, arranged or began to be implemented before this
time and was not part of a scheme to increase losses or deductions the
amendments will not apply to such buy backs (Division 2).
This measure is the same as one contained in Taxation Laws Amendment
Bill (No. 5) 1995. That Bill lapsed on the dissolution of Parliament for
the 1996 General Election.
Chris Field Ph. 06 277 2439
16 May 1996
Bills Digest Service
Parliamentary Research Service
This Digest does not have any official legal status. Other sources should
be consulted to determine whether the Bill has been enacted and, if so,
whether the subsequent Act reflects further amendments.
PRS staff are available to discuss the paper's contents with
Senators and Members and their staff but not with members of the public.
ISSN 1323-9032
© Commonwealth of Australia 1996
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Published by the Department of the Parliamentary Library, 1996.
This page was prepared by the Parliamentary
Library, Commonwealth of Australia
Last updated: 17 May 1996
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