Bills Digest 145 1996-97
Taxation Laws Amendment Bill (No. 2) 1997
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
Taxation Laws Amendment Bill (No. 2) 1997
Date Introduced: 13 February 1997
House: House of Representatives
Portfolio: Treasury
Commencement: The application dates of the various measures is
outlined in the Main Provisions section.
The Bill will mostly implement anti-avoidance measures announced in
the 1996-97 Budget which are aimed at protecting revenue. Main amendments
relate to:
- the carrying foward of previous year capital gains losses for members
of a company group to implement similar tests that apply to the carrying
foward of income losses;
- to apply the general anti-avoidance provisions of Part IVA of the
Income Tax Assessment Act 1936(ITAA) to certain withholding
tax transactions and to implement specific anti-avoidance provisions
in respect of 'interest' payments and the inter-positioning of tax exempt,
or minimal tax paying entities, in relation to the receipt of certain
interest payments;
- to introduce a 'public offer' test that will apply to increase the
situations where Australian entities may raise funds through off-shore
debentures;
- to deny certain tax concessions to dual resident entities;
- to remove the 'standard' employer deduction for superannuation deductions
which will require employer contributors to calculate the amount that
may be deducted in regard of each employee; and
- to alter the rules that apply to the leasing of cars that have a value
greater than the depreciation limit for luxury vehicles to ensure that
the rules for luxury cars cannot be overcome by leasing arrangements.
As there is no central theme to the Bill the Background to the various
measures will be discussed below.
Capital Gains Tax
The measures relating to Capital Gains Tax (CGT) were announced in the
1996-97 Budget and relate to the transfer of previous years capital losses
between members of a company group, and, to a lesser extent, determining
which year's capital losses can be carried forward to a future year.
Companies
Before dealing with the treatment of capital losses, it is relevant
to deal with the treatment of situations where a company may carry forward
a loss of ordinary income from a previous year, which may be used as a
deduction in a future year. For the transfer of company losses a number
of tests must be satisfied, the major ones being that the companies amongstwhich
the loss is transferred satisfy either the continuity of ownership or
continuity of business tests. These tests must be satisfied in the year
in which the loss is transferred.
The continuity of ownership test provides that where losses are transferred
between members of a company group, more than 50% of the shareholder's
voting, dividend and capital rights need to be beneficially owned by the
same people as at the time when the loss was incurred. This test aims
to address the situation where prior year losses could be transferred
between related companies even though the underlining ownership of those
companies has significantly changed. For example, a profitable company
may wish to buy a company that has made losses for a number of years and
to subsequently use the losses to reduce it's own income, and therefore
tax. As the company being acquired has accumulated losses, the price of
the company may be less than the value of the tax deductions to the profitable
company.
The continuity of business test provides that if a company is still
able to claim prior year losses even if there has been a change in the
continuity of ownership. Simply, this test provides that if there has
been no change in the substantial nature of the business, the business
has not entered into any substantially new activities and satisfies the
anti-avoidance provisions, it will be able to carry forward prior year
losses.
The situation with capital losses is significantly different in effect.
While there are a provisions to prevent the transfer of capital losses
in a year where neither the continuity of business or ownership is satisfied
(subsection 160ZP(9)), capital losses from a previous year are deemed
to have been incurred in the year in which the claim for the loss is made
and are available to set off against capital gains as if the prior year
losses were incurred in the same year that the gain was made. It is therefore
possible for a company to acquire another company that has capital losses
from previous years, become a related company and then transfer the acquired
losses to offset a capital gain that will be reduced by the amount of
the loss. This will reduce the amount of CGT payable on the acquiring
company's capital gain.
It was announced in the 1996-97 Budget that the treatment of capital
losses would be more generally aligned with that for income so that the
continuity of business or ownership tests must be satisfied in relation
to the year when a capital loss was incurred before the loss can be transferred
to a group company.
Under Division 4 of Part IIIA of the ITAA, which deals, in part, with
the transfer of capital losses between members of group companies, a group
company is defined to be one which is a subsidiary of a company or two
or more companies that are subsidiaries of the same company (section 160ZP).
For capital losses to be transferred a number of conditions must be met,
particularly that the companies between which the transfer occurs are
group companies and thateither the continuity of ownership or business
tests are satisfied (section 160ZP).
Amendments to section 160ZP require capital losses to be offset against
capital gains in the year accrued, and allow any access losses to be accrued
(Items 10 to 14 of Schedule 1). Item 15 is the major operative provision
and provides that where an agreement is made to transfer a loss to another
group company (the agreement is necessary for the transfer to occur),
the loss will only be transferable to the degree that:
- where the loss and the gain are accrued in the same year of income
and the continuity of business or ownership tests are satisfied, the
amount of the loss; or
- in other cases (ie. where neither test is satisfied) the amount of
the loss incurred in the same year as the gain is accrued [proposed
subsection 160ZP(7AAA)].
Individuals
The principal that capital losses must be used to offset capital
gains in the year incurred, or in the next year that an offset is claimed,
will be extended to individuals. This will have little practical effect
for individuals.
The explanatory memorandum to the Bill estimates the revenue increase
from this measure to be $20 million in 1996-97; $80 million in 1997-98;
and $55 million in 1998-99 and 1999-2000.
Application: The amendments will apply to the 1996-97 and later years
of income. If there is a carry-over of losses from previous years at the
end of the 1995-96 year of income (Item 22).
Withholding Tax
Schedule 2 the Bill contains a number of amendments relating
to withholding taxwhich are aimed to reduce avoidance of the tax.
Withholding tax is imposed on interest, royalties and dividends paid
to a non-resident. Generally, the system works by requiring the entity
paying the interest, royalty or dividend to subtract a certain percentage
of the payment before remitting the remainder of the amount overseas.
There are a number of specific exclusions from the withholding tax scheme,
such as fully franked dividends, and the rate of withholding tax may be
effected by any double tax agreement Australia has with the country to
which the payment is remitted. Interest payable to a non-resident who
is conducting business in Australia through a permanent establishment
will not be subject to withholding tax as it will be subject to normal
Australian taxation.
In the 1996-97 Budget a number of anti-avoidance means were announced
in regard to withholding tax. The proposals are for an extension of the
general anti-avoidance provisions in Part IVA of the ITAA to be extended
to withholding tax and to make a number of specific amendments aimed at
particular types of payments (interest, royalty or dividend) and particular
tax minimisation schemes. Until recently, the scope of Part IVA had been
restricted by a number of High Court decisions and it is likely that doubts
as to the reach of Part IVA resulted in the specific anti-avoidance provisions
contained in the Bill.
However, the High Court in Commissioner of Taxation v Spotless Services
Limited, the judgement of which was delivered on 3 December 1996, significantly
extended the scope of Part IVA. In summary, Part IVA requires that there
be a sole or dominant purpose when entering into a scheme to obtain a
tax benefit. Prior to the Spotless case, it was considered that so long
as the transaction was commercially viable or the obtaining of a tax benefit
was less than 50% of the reason for entering the transaction, Part IVA
would not apply. This was overturned by the Spotless case and the Commissioner
now has a discretion to deny a tax benefit even if the scheme is commercially
viable if of the opinion that the sole or dominant purpose of the scheme
was to obtain a tax benefit. The High Court also found that a purpose
could be a dominant purpose even though that purpose comprised less than
50% of the total purposes for entering into the transaction. This appears
to give the Commissioner significantly greater power to use Part IVA in
relation to 'artificial' transactions that have the result of reducing
the amount of tax that would have been payable had the transaction not
been entered into. The full scope of the Spotless decision has yet to
be tested.(1)
Item 12 of Schedule 12 will insert a new section 177CA into Part IVA
of the ITAA which will provide that the Part will apply if a taxpayer
is not liable to pay an amount of withholding tax that would, or could
reasonably be expected to have been, included in liability to pay withholding
tax had the scheme not been entered into. Where a tax benefit is subject
to proposed section 177CA, the Commissioner may determine that all or
part of the amount is subject to withholding tax. If such a determination
is made, it is to apply, and the amount assessed will be payable, and
the taxpayer may appeal against the determination, which is normal taxation
practice (Items 13 and 16). If the Commissioner determines that withholding
tax, or additional withholding tax, is payable, penalty rates will apply
to the difference between the amount of tax paid, if any, and the amount
determined by the Commissioner (Item 17).
Schedule 2 will also insert a new definition of interest for the purposes
of withholding tax. Currently, the term interest is defined to include
'an amount in the nature of interest'. Item 1 of Schedule 2 will repeal
this definition, while Item 3 will insert a new definition so that interest
will include:
- an amount in the nature of interest; or
- an amount that could reasonably be regarded as equivalent of interest,
a substitute for interest or an amount received in exchange for interest.
The use of tax-exempt, inter-imposed entities to disguise the nature
of the payment and final recipient is dealt with in Item 5. Proposed section
128AF provides that if a tax-exempt entity receives an amount attributable
to interest, royalties or dividends, the amount is to be attributed to
the non-resident. The provision aims to address the situation where payments
are made to a tax-exempt body which then forwards all or part of the amount
to the non-resident, who so avoids the need to pay withholding tax.
Royalties are dealt with in Items 6 to 11 of Schedule 2. The amendments
will apply where a royalty is derived by a non-resident and:
- the incomeis derived by a person who carries on business outside Australia
or through a permanent establishment overseas and the royalty is not
an outgoing wholly connected with the overseas operation; or
- the royalty paid by non-residents in connection with the carrying
on of a business in Australia.
In the first case, the royalty payment will be deemed not to be an outgoing
incurred in carrying on the overseas business (which will mean that the
royalty will be incurred in Australia and so subject to withholding tax).
In the second case, the royalty will also be deemed to have been paid
in relation to the Australian business, and so be subject to withholding
tax. The measures are designed to address arrangements where an overseas
establishment or resident is interposed between the payer of the royalty
and the recipient which would have the effect of excluding the payment
from Australian withholding tax (Items 6 and 7).
The explanatory memorandum to the Bill estimates that the measure will
raise $85 million in 1996-97 and $100 million per year in later years.
Application: From 20 August 1996.
Further amendments relating to withholding tax and related matters are
contained in Schedule 5 of the Bill. Section 128F of the ITAA provides
for circumstances where withholding tax will not apply to certain debentures.
A new section 128F will be substituted into the ITAA by Item 12 of Schedule
5. The new section will apply to certain debentures listed on overseas
capital market and provides that the Division relating to withholding
tax will not apply where:
- the company was a resident of Australia when the debenture was issued
and when interest was paid on the debenture;
- the debenture was issued outside Australia for the purpose of raising
capital outside Australia;
- interest is paid outside Australia; and
- the public offer test is satisfied.
There are a number of ways that the public offer test can be satisfied,
including that the debenture was offered to 10 or more finance providers;
was offered to at least 100 people who have acquired debentures in the
past or are likely to be interested in acquiring debentures; or was offered
to a dealer, underwriter or manager who will offer the debentures for
sale within 30 days.
Where a non-resident subsidiary of a resident company issues debentures
solely to raise funds for the parent company, the issue of debentures
by the subsidiary will be taken to be an issue by the parent company and
so an issue by an Australian resident.
A major difference between the current and proposed section 128F is
that the proposed section does not contain a requirement that the funds
raised be used in respect of an Australian business. In a Press Release
dated 25 June 1996, the Treasurer stated:
The end use requirement in section 128F that the borrowed funds be
used in an Australian business will be removed to extend the exemption
to overseas borrowings to make loans to home buyers and consumers.
The public offer test is also new and will replace current tests that
provide that regard is to be had to the method of the offering of the
debentures. This requirement has developed into a test that requires debentures
to be widely distributed on overseas markets. This will be replaced by
the public offer test.
There will be transitional provisions so that if a debenture is issued
after the date of effect of the amendment (1 January 1996) and before
the passage of this legislation, the current law will have effect (Item
16).
The explanatory memorandum to the Bill estimates that the measure will
have a negligable cost to revenue.
Application: 1 January 1996.
Dual Resident Companies
A company can be a resident of more than one country. Subsection
6(1) of the ITAA defines a resident company to be one which is:
- incorporated in Australia;
- is not incorporated in Australia and has either its central management
and control in Australia; or
- is not incorporated in Australia and the voting power in the company
is controlled by Australian residents.
If a company is a resident company, including a dual resident company,
it is able to claim a number of concessions that are not available to
non-resident companies. It was announced in the 1996-97 Budget that a
number of benefits available to dual resident companies would be removed
and anti-avoidance provisions extended to certain dual resident companies.
The measures are aimed at preventing companies that are not incorporated
in Australia from using dual residency status where that status is based
on an artificial scheme.
Item 1 of Schedule 3 will insert a definition of 'prescribed dual resident'
into section 6 of the ITAA. There will two types of such residents:
- where a company is a resident, there is an international tax agreement
in force with the other country in which the company is a resident and
the agreement contains a provision to the effect that the company is
a resident of the foreign country; and
- where the company is a resident solely because it has its management
and control in Australia and it also has management and control in another
country.
The effect of the amendments will be to place prescribed dual resident
companies in the same position as non-residents for a number of purposes
and to deny access to the following concessions:
- rebates for certain unfranked dividends paid to a prescribed dual
resident company;
- certain transfers of losses between company groups where a prescribed
dual resident company is involved; and
- certain concessions that apply to resident companies in respect of
security payments.
The changes will also treat prescribed dual residence companies as non-resident
companies for the purpose of determining if a company is foreign controlled
for the purpose of the thin capitalisation rules and for debt creation
rules (the provisions relate to anti-avoidance measures in relation to
non-resident companies and the effect of the latter amendments is to include
prescribed dual resident companies in these regimes in the same manner
as they now effect non-resident companies).
The explanatory memorandum to the Bill estimates that the measure will
result in savings of $50 -$100 million per year.
Application: 1 July 1997.
Superannuation Contribution Limit
Section 82AAC of the ITAA provides limits on the amount that
an employer may claim in respect of deductions for contributions to an
employee's superannuation. There are currently two methods an employer
of 10 or more employees may use to calculate their allowable deductions.
First, and this method also applies to employers with less than 10 employees,
there is an aged based limit so that the maximum deduction claimed is
based on the age of the employee. The limits for 1996-97 are $9 782 for
an employee under 35; $27 170 for those aged between 35 and 49; and $67
382 for those aged 50 and over. The deduction limits recognise that younger
employees should be able to contribute for longer periods to provide adequate
superannuation. The limits are subject to indexation. The second method
is to calculate the deduction on the flat rate of $27 170 for each employee
for 1996-97 (and this amount indexed for later years). This is known as
the standard contribution rate.
The standard method provides greater administrative simplicity for employers
with 10 or more employees. For example, if an employer has 100s of employees,
the need to calculate the maximum deduction allowable in relation to each
employee would be a considerable administrative exercise. The same would
be true of a small business with 10 or more employees where the small
employer would be required to make a calculation in respect of each employee.
On the other hand, if an employer has a generally youthful workforce aged
under 35 the standard method would allow significantly greater deductions
than if the aged based method was used.
It was announced in the 1996-97 Budget that the standard provisions
would be abolished from the time of the Budget announcement. The reason
for the abolition is given in the second reading speech as:
The standard contribution limit was introduced for reasons of administrative
simplicity. However, the standard contribution limit has been subject
to abuse with some employers claiming deductions for contributions on
behalf of particular employees well in excess of the age based limits.
The abuse has come at a cost to revenue and the Government believes
that the standard contribution limit can no longer be justified.
The explanatory memorandum to the Bill estimates the revenue savings
from this measure to be $35 million in 1997-98; $40 million in 1998-99;
and $40 million in 1999-2000.
In relation to compliance costs the explanatory memorandum states:This
measure will result in a slight increase in compliance costs for affected
taxpayers.
Item 2 of Schedule 4 of the Bill will repeal subsections 82AAC(2D) to
82AAC(2H) of the Principal Act which contain the provisions for standard
employer deductions.
As the measures were announced to apply during a financial year, Item
4 contains transitional provisions that provide that if an employer elects
that subsection 82AAC(2D) is to apply to the financial year in which 20
August 1996 occurs, the maximum deduction that may be claimed in respect
of an employee during that year is the maximum of either:
- the amount of contributions made in respect of the employee until
the time of the announcement; or
- the individual deduction limit in respect of the employee.
Application: The year of income in which 20 August 1996 occurs and later
years of income.
Luxury Car Leases
The use of car leases, rather than outright purchase of a vehicle,
is becoming a more common method of financing a car, particularly for
cars used in business.Where a car is purchased and used for business,
the owner may claim a deduction in respect of use of the car for business
purposes and claim depreciation on the vehicle up to a certain maximum
level (currently $55 134). The limit is known as the luxury car threshold.
The depreciation allowance, and the luxury car threshold, also apply to
lessors in respect of the vehicles they lease.Changes to the treatment
of car leases were announced in the 1996-97 Budget and are designed to
counter schemes where the amount deductible under the lease, as lease
payments, exceeds the amount that would otherwise be deductiblehad the
car been purchased.While the luxury car threshold available to the lessor
as owner of the vehicle would apply to set a maximum on the depreciation
claimable, the additional value of depreciation above the luxury car threshold
can be built into the lease and subsequently claimed as a deductionby
the lessee where the vehicle is used for business purposes.
Schedule 6 of the Bill will insert a new Schedule 2E, dealing with the
leasing of luxury cars, into the ITAA. A lease is defined to be any arrangement
to let a car on hire where the right to uses the car is granted by the
owner to another person for monetary or other consideration, or where
such a right to use a car is transferred to a third person (ie. a sub-lease),
but dose not include a short term hiring agreement or a hire purchase
agreement (proposed section 42A-115).
The proposed Division will apply to leased luxury cars that are not
held as trading stock where the lease is entered into after the time of
the Budget announcement (ie 7.30 pm on 20 August 1996). If a lease is
renewed after this time, it will be treated as a new lease and so be subject
to the proposed Schedule (proposed section 42A-10). Where the proposed
Division applies, the lessor will be treated as having disposed of the
vehicle to the lessee, who will be deemed to be the owner of the car.
However, if the car is sub-leased, the lessee will cease to be the owner
of the vehicle (proposed section 42A-15).
The value of the lease will be the amount specified in the lease where
the lease is negotiated at arms length. In other cases, it will be value
of the vehicle if it were sold to the lessee at arms length. For sub-leases,
the depreciated value of the car will generally be used (proposed section
42A-20).
Proposed section 42A-25 provides that the lessor will be deemed to have
made a loan to the lessee and the value of the loan will be the value
of the car plus a financial charge (this is defined in proposed section
42A-130 to be the total payments under the lease plus any other costs,
such as any amount payable on the ending of the lease, less the notional
loan principal, ie. basically the total amount payable under the lease
less the value of the car).
The amount to be included in the lessor's income will be the accrual
amount for the period of the loan during the financial year (this is the
outstanding amount of the deemed loan on the car multiplied by the implicit
interest rate). In addition, if the lessor makes a profit on an actual
or nominal sale of the vehicle, such an amount is to be included in the
lessor's assessable income (proposed section 42A-35).
The lessee will be able to claim a deduction for the notional loan for
the period of the financial year in which the loan remains current. The
lessee will not be able to claim a deduction for the actual lease payments
(proposed sections 42A-50 and 42A-55).
Proposed section 42A-65 provides for adjustments of the lessor's assessable
income on the termination, renewal or extension of a lease. The amount
of the adjustment is based on the formula: notional loan principal (ie.
the principal of the deemed loan under this Schedule) plus the assessed
accrual amount (ie. the amount that is included in assessable income for
the year under consideration). Where the total amount payable to the lessor
exceeds the amount calculated under the formula, the excess is included
in assessable income. Where the amount received is less than this amount,
the difference is allowed as a deduction. Proposed section 42A-70 contains
a mirror provision that provides that where an amount is included in assessable
income under the previous section, an equal amount is allowable as a deduction
to the lessee and, where a deduction is allowed under the previous section,
an equal amount is included in the assessable income of the lessee.
If a lease is extended or renewed, after the adjustment described above
is undertaken, proposed section 42A-80 takes effect. This section provides
that the original notional loan will be deemed to have been repaid and
a new notional loan entered into, and measures similar to those applicable
to the original loan will apply. If an amount is paid by the lessee to
acquire the car at the end of the lease, such an amount will not be assessable
income for the lessor or as a deduction for the lessee. The lessee will
be considered the owner of the car until it is disposed of (proposed section
42A-85). If the lessee ceases to have a right to use the vehicle, it will
be deemed to have been disposed of to the lessor, who will be taken to
have acquired the vehicle for the balance of the notional loan, less any
amount paid to the lessor plus any amount refundable by the lessor, or,
if it is impracticable to calculate this amount, the market value of the
car.
The provisions apply to leases and not to short term hiring arrangements.
However, where there are consecutive arrangements that extend for more
than 6 months, the arrangement will be deemed to be a lease (proposed
section 42A-125).
- The Information and Research Service will be releasing a Consultant
Paper on the implications of the Spotless decision.
Chris Field
6 June 1997
Bills Digest Service
Information and Research Services
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.
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 1997
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Published by the Department of the Parliamentary Library, 1997.
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Last updated: 12 June 1997
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