Bills Digest No. 129 1997-98
Taxation Laws Amendment Bill (No. 7) 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
Passage History
Purpose Background
Main Provisions
Endnotes
Contact Officer and Copyright Details
Taxation Laws Amendment Bill (No. 7) 1997
Date Introduced: 4 December 1997
House: House of Representatives
Portfolio: Treasury
Commencement: Refer
to the Main Provision section for the application dates of the various
measures.
The Bill implements a number of changes
announced in the 1997-98 Budget. The main amendments relate to:
- choice of superannuation fund;
- measures to address 'dividend streaming' by the direction of franked
dividends to certain classes of shares;
- the introduction of rules to prevent private companies using methods
such as loans to shareholders and associates to prevent distributions
being assessable income;
- alignment and alteration of the rules applying to certain remittances
of deductions made from employees wages to the Australian Taxation Office;
and
- the introduction of a savings tax offset (rebate) for savings and
investment income.
As there is no central theme to the Bill the background
to the various measures will be discussed below.
Choice of Superannuation
Fund
Currently, an employee rarely has a choice as to which
superannuation fund their employer's compulsory superannuation contributions
are distributed to. Compulsory employer superannuation can exist under
either a Federal industrial award or under the superannuation guarantee
charge (SGC) scheme. The distributions of the contributions vary under
the two schemes and, generally, award superannuation must be contributed
to an industry fund (with equal employer and union representation in the
board of trustees) while the employer will have the choice of fund to
which contributions are made under the SGC scheme (where the employer
makes the contribution voluntarily rather than paying the SGC, as is the
normal case). There are, of course, variations on these general principles
such as where the employer and employee discuss to which fund contributions
are to be made to and where SGC contributions are made to an industry
fund. However, there are pressures on employers to seek the least administratively
costly way of paying superannuation contributions which generally means
that the employer will chose one fund for all employees so that they do
not have to deal with more than one fund. The problem with dealing with
more than one fund increases as the number of employees rises and the
employer wishes to minimise the number of funds dealt with (this matter
will be discussed below).
Under award superannuation, the fund to which contributions
are to be made is specified in the award. Under SGC, superannuation contributions
must be made to a complying fund, which is one which is certified by the
Insurance and Superannuation Commission (ISC) under the Superannuation
Industry (Supervision) Act 1993.
The proposal to enable employee choice of fund was announced
in the 1997-98 Budget and detailed in the Treasurer's Press Release titled
Savings, Choice and Incentive, dated 13 May 1997. The original proposals,
which have subsequently been altered, had the following main points:
- employers would be required to offer a choice of a minimum of 5 complying
funds or Retirement Savings Accounts (RSA) to chose from, including
an industry fund (where one exists), a public offer fund, a RSA, a RSA
provided by the institution receiving the employee's pay (if the institution
offers RSAs) and, if it exists, an in-house superannuation fund;
- if the employee did not make a choice of fund within 28 days the employer
could nominate the fund;
- the choice of fund was to apply to new employees from 1 July 1998
and to existing employees two years later;
- Federal awards relating to superannuation would be overridden by the
legislation but this would not apply to superannuation payable under
State awards due to Constitutional restrictions;
- agreements under the Workplace Relations Act 1996 could overrule
the legislation; and
- the legislation would not apply to unfunded government schemes.
Following the release of the policy there was considerable
employer concern regarding their potential liability if they failed to
provide sufficient, or accurate, information regarding the various funds
that their employees had to choose from. Employers feared that they may
be held liable for any loss suffered by an employee if they provided insufficient,
false or misleading information. Lobbying from various organisations,
particularly employer groups, resulted in the proposals being changed
and the changes were announced by the Assistant Treasurer in a Press Release
dated 25 November 1997. Major changes related to:
- employers would not be liable where they have complied with the Bill;
- removing the requirement that employers had to offer a RSA from the
institution that received the employee's pay, where such a RSA existed,
so reducing the number of alternatives that had to be offered to 4;
- allowing employers to offer the employee unlimited choice of fund
(where the onus will be on the employee to collect the relevant information
and select the fund of their choice); and
- allowing the selection of the funds to be offered to be facilitated
through one institution or service provider.
The choice of fund rules will be enforced by providing
for a maximum increase of 25% in the SGC that would have been payable
if no superannuation contributions had been made.
The reasons given for the introduction of the choice
of fund rules is given in the Second Reading Speech to the Bill as:
The choice of fund arrangements are designed to give employees greater
choice and control over their superannuation savings, which in turn will
give them greater sense of ownership of these savings. The arrangements
will increase competition and efficiency in the superannuation industry,
leading to improved returns on superannuation savings.
While the proposal has received support from a range
of areas, including acceptance from the Association of Superannuation
Funds of Australia, the leading industry group, a number of concerns have
been raised about the proposed scheme. One problem that has been anticipated
is an increase in advertising for the various competing products, which
could have the effect of increasing costs to funds and so reducing the
return to members. Another potential problem is whether people will be
able to understand the information provided or will spend the time understanding
the information provided. The Insurance and Superannuation Commission
(ISC) has issued proposed rules relating to the amount of information
provided and a commentator has noted that the rules for public offer funds
will be virtually the same as currently exist and that the information
provided by a major public offer fund at present comprises 6 pages, 2
pages of attached figures and 16 further pages of additional information.(1)
While the requirements for RSAs will be less, even the amount of information
that will be provided if four options are presented will be substantial.
If the unlimited choice option is followed, the onus
will be on the employee to research the available options. Another potential
problem is the method in which funds are presented to employees and the
likely emphasis on short term growth rather than longer term growth and
stability. While previous returns may be used to advertise the performance
of a fund, a trustee of the Australia Post superannuation scheme has noted:
'making investment decisions based on past performance data has been particularly
unreliable as an investment strategy.'(2)
There is therefore the fear that employees may be offered
advertising for a fund that promises a large return based on short term
performance rather than the long term viability of the scheme and this
'headline' performance could be used to attract people to a fund where
the potential member does not fully understand the risks associated with
the investment strategy of the fund. The example often used relates to
recent events in the UK where people were given a choice of pension fund.
It has been reported that an inquiry into the new scheme found 570 000
cases of mis-selling worth approximately $10 billion.(3) There is also
the possibility that employers, who will not be subject to any legal action
if they fail to act prudently, will take little care in selecting the
funds and RSA offered, instead accepting those that offer the employer
the easiest administration when making the contributions.
Other concerns are that the regime could see a proliferation
of accounts if, for example, people in itinerant industries accept the
employers default fund. This may lead to a person having a number of small
accounts rather than an account in an industry fund. There have also been
concerns expressed that prior to making a choice of fund an employee could
be without death or disability insurance.(4)
The final concern is not with the scheme itself, but
with the proposed starting date of 1 July 1998 for new employees. It is
reported that a recent GIO survey found that 78% of employees and 42%
of employers were not aware of the choice of fund scheme.(5) Not only
will the legislation have to be passed by Parliament by this date but
there will also need to be a considerable education campaign to address
people's lack of knowledge of the scheme.
Amendments to
the Superannuation Guarantee (Administration) Act 1992
Item 28 of Schedule 5 of the Bill will insert
the requirements that must be complied with to satisfy the choice of fund
rules. Proposed section 32C provides that the requirements will
be satisfied in a number of circumstances:
- where the employer contribution is made to a chosen fund (see below),
a default fund (see below) or for a member of either of the Commonwealth
schemes (CSS and PSS) - the contribution is made to an unfunded public
sector scheme;
- the contribution is made under an Australian Workplace Agreement or
a certified agreement;
- for people employed under State awards, the requirements will be taken
to have been satisfied (in the Press Release announcing the measures
it was argued that this was for Constitutional reasons and that the
States would be asked to pass complimentary legislation. It may be noted
that the SGC scheme as a whole applies to State employees as well as
those employed under State awards and is based on the taxation power
of the Commonwealth which also applies to State award employees); and
- contributions made before 1 July 1998 will satisfy the requirements,
as will contributions to any fund made in respect of a person employed
by the employer before 1 July 1998 if the contribution is made before
1 July 2000 and contributions to the PSS or CSS before 1 July 2000 (this
is the phasing in provision for new and existing employees).
'Employee chosen fund' is defined in proposed sections
32D to 32F. A fund will be an employer offer chosen fund if the requirements
of proposed Division 5 are satisfied. An employer must offer an employee
a chose of funds within 28 days of the employee commencing or within 28
days of the employee requesting a choice, although there may only be one
such request every 12 months. The employer must also offer a choice within
28 days of becoming aware that they cannot contribute to the chosen or
default fund. As well, the employer may offer a choice at any time the
employer choses (proposed section 32K). The limited choice option
for the employer will be satisfied if the following choices are provided:
- at least one public offer fund;
- at least one RSA or other capital guaranteed fund;
- at least one employer sponsored fund if such a fund or funds exist;
and
- at least one industry fund, if one exists.
If a fund falls into more than one of the above categories,
it may only be taken to satisfy one and the employer may chose which category
it satisfies. Also, the employee must be eligible to be a member of the
fund for it to satisfy the criteria.
To satisfy the limited choice option, the employer must
also provide certain information, including the names of the funds, the
day by which a choice must be made (28 days although the employer may
except a choice after this time), the name of the default fund or funds,
information on the funds required under the regulations and, if the regulations
require additional information to be made available, where that information
may be accessed.
To be an unlimited choice offer, the following information
must be provided to the employee:
- a statement that the employee may chose any complying fund or RSA;
- the day by which the offer must be accepted (generally 28 days);
- the name of the default fund; and
- information required to be provided under the regulations as described
above.
As well as the employer offering limited or unlimited
choice, the choice of fund rules will be satisfied if the employee has
nominated a fund to the employer and the employer has accepted the fund
(Note: there is no obligation on the employer to accept the employees
choice of fund if it is not part of the limited choice funds proposed
by the employer) (proposed section 32E).
A fund will cease to be a chosen fund if the employee
choses another fund and has given the employer notice of the change; the
employee has given the employer notice that they desire to make another
choice and the employer has not responded within the required time (28
days); or if 'it is impossible for the employer to contribute ... to the
chosen fund' (while the example given in the Bill is of a closed fund,
it may take litigation to establish exactly the meaning of the employer
not being possible to contribute to the fund. For example, would this
include the employer not being able to finance the contributions?) (proposed
section 32F).
Default Funds
A default fund will arise if for an employee who has
not chosen a fund and who have been employed for less than 28 days; have
been offered a choice of funds and have not replied within the allowed
time or the time for the chosen fund becoming the fund of the employee
(2 months) has not expired; or the employer have offered a choice of fund
and the employee has not responded within the required time (28 days).
Basically, the provisions cover the time between when the employee has
been appointed and the time they make a choice of fund, the time for the
selection of fund has expired or during the 2 months in which the employer
has to connect the employee to the chosen fund. These measures largely
address the problems of a lack of death or disability cover as outlined
above) (proposed section 32G).
A fund will be a default fund where the employer has
previously contributed to the fund for the employee under the choice of
fund rules and the employer has not contributed to another fund while
the choice was in force. If such a fund does not exist (as for example
in the case of new employees) the employer will be able to choose a complying
fund or RSA as the default fund. A fund or RSA will cease to be a default
fund if the employer ceases to be able to contribute to the fund on behalf
of the employee (proposed section 32H).
Proposed section 32U overrules Commonwealth and
Territory industrial awards that deal with superannuation by providing
that a contribution under the choice of fund rules will be taken to have
been a contribution that satisfies the award. The main effect of this
provision will be that where an award requires contributions to be made
to an industry fund, a fairly common part of award superannuation, contributions
to a chosen or default fund will be taken to have satisfied this requirement.
Employer's potential liability for damages will be addressed
by proposed section 32V which provides that an employer will not
be liable for anything done in complying with the choice of fund rules.
The penalty for failure to comply with the choice of
funds requirements is contained in item 21 which will amend section
19 of the Act. The penalty will be 25% of the SGC that would have been
payable had no contributions been made and will apply where a contribution
is made to a fund in breach of the choice rules.
Division 2 of Part 18 of Schedule 5, which will
amend the Superannuation Industry (Supervision) Act 1993, contains
a number of provisions relating to the provision of information relating
to superannuation products. Proposed section 148A provides that
a trustee of a fund is not to intentionally or recklessly make a statement
in a regulated document that the trustee knows to be false or misleading
or in which there is a material omission of information. The maximum penalty
for a breach of this requirement is imprisonment for 5 years. If a trustee
has issued, or authorised the issue of, such a document they will also
be liable for civil action from people who have suffered loss as a result
of their action (proposed section 148B). A trustee of a fund is
not to intentionally or recklessly issue or authorise to be issued a regulated
document that contains a statement made by an 'expert' unless there is
written authorisation to use the statement. The maximum penalty for a
breach of this provision will be 6 months imprisonment. (Expert is defined
in the SIS Act to be a person whose profession or reputation gives authority
to the statement.) It will also be an offence not to keep a copy of the
authorisation without reasonable excuse (maximum penalty is 10 penalty
units - currently a penalty unit is $110) (proposed section 148C).
Proposed Division 3 provides for the issue of
stop orders by the Insurance and Superannuation Commissioner where it
appears to the Commissioner that there is a material statement in a regulated
document that is false or misleading or that there is a material omission
from the document. The stop order will direct that the entity to which
it is issued is not to issue a superannuation interest while the order
is in force and it will be an offence, with a maximum penalty of 2 years
imprisonment, to breach such an order (proposed sections 148D to 148G).
Application: As noted above, the choice of fund rules
will apply to new employees from 1 July 1998 and to existing employees
from 1 July 2000.
Franked Dividends and Other Distributions
Franking of dividends refers to the situation where a
company has paid company tax and the amount of tax paid is credited to
a franking account (or accounts). When dividends are paid, they can be
franked, which means that the credits available from the franking account
are distributed to the shareholders. These are then used to offset the
amount of tax payable by the recipient of the dividends.
It was announced in the 1997-98 Budget that measures
would be introduced to curtail certain schemes used to maximise the value
of the franking credits to certain shareholders. Such schemes often involve
the distribution of franking credits to those who own a certain class
of shares and are designed to provide maximum franking credits to those
on the highest marginal personal tax rate so that the value of the credits
accredited to such people may exceed the actual rate of tax paid by the
company (this can occur as the amount of tax paid is distributed only
to a limited class of shareholders resulting in the credits available
being higher than the rate of tax paid by the company which would apply
had the credits been distributed to all shareholders). As with other schemes
that benefit one class of people, the reverse side is that those who own
shares other than those in the class favoured by the distribution of franking
credits see a reduction in the credits provided to them. Such schemes
are commonly known as dividend streaming.
In Press Releases dated 13 May 1997 (Budget night) the
Treasurer announced a number of changes relating to franked dividends,
including those relating to dividend streaming. Major announcements relate
to:
- providing a specific anti-avoidance scheme for dividend streaming;
- ensuring that when the dividend payment is in lieu of an interest
payment franking credits are not available;
- inserting a new definition of 'class of shares' so that for tax purposes
shares with similar rights will have to treated the same for franking
purposes; and
- measures to prevent trading in franking credits.
This Bill addresses the first three of the above items.
There has been little comment on the proposed rules,
although it has been reported that certain groups are unhappy with the
wording and potential effect of the legislation. In arguing that the measures
contained in the Bill go further than the Budget announcement, the chief
executive of the Corporate Tax Association is reported as stating: 'They
are much wider than is necessary to address the perceived abuses or concerns
held by government'. The same person also argued that the proposed rules
will cover legitimate commercial arrangements, particularly in regard
to the class of share rules, and that activities such as share buybacks
would be affected. A tax manager of Ernest & Young is also reported
as saying that the new rules would amount to an extension of the anti-avoidance
rules contained in Part IVA of the Income Tax Assessment Act 1936
(ITAA). He is reported as saying: 'Sound commercial transactions that
satisfy prescriptive areas of the law can now be subject to a new veto
power of the Commissioner.'(6)
The explanatory memorandum to the Bill does not give
a figure on the potential gain to revenue from the measures contained
in the Bill, rather stating that the range of measures relating to dividend
franking will protect the revenue from significant loss.
The definition of a class of shares is contained in section
160APE of the ITAA and currently depends on whether the shares have the
same nominal value, although shares cannot be in the same class if they
have differing rights regarding the receipt of dividends, distribution
of capital or voting power. Item 3 of Schedule 8 will repeal the
current definition and insert a new one where shares will be in the same
class if they have the same, or substantially the same, rights.
The main operative provision regarding dividend streaming
is proposed section 160AQCB which will be inserted into the ITAA
by item 5 of Schedule 8. The proposed section will apply where
a company streams the payment of dividends or other benefits in a way
so that some shareholders derive a greater benefit from franking credits
than other shareholders. In such a case, the Commissioner may determine
that a franking debit arises for the company in respect of the dividends
paid to the disadvantaged shareholders or that no franking credit benefit
arises to the advantaged shareholders (it appears that the Commissioner
can only make one or other of these determinations in respect of a particular
distribution as the proposed subsection refers to the Commissioner making
either of the determinations, not either or both). A taxpayer will be
able to object to such a determination under the normal taxation objection
provisions contained in the Taxation Administration Act 1953. Where
the determination is that the company's franking account be debited, the
debit will be calculated by deeming the disadvantaged shareholders' distribution
to have been franked to the maximum extent that the advantaged shareholders'
distributions had been franked. Apart from dividends, the other benefits
subject to the rules are the issue of bonus shares, return of capital,
forgiveness of debt and the payment of money or other property to the
shareholder by the company. The amendments will apply to distributions
made after 7.30 pm on 13 May 1997 except for dividends payable by public
companies that declared the distribution before that time (item 9).
Anti-avoidance rules in relation to dividend streaming
are contained in Part 2 of Schedule 8. The main provision is proposed
section 177EA which will apply where:
- there is a scheme for the disposal of shares or an interest in shares;
- a frankable dividend or other distribution (ie. where there is a distribution
of a partnership amount or a trust amount and this amount is included
in a person's income or is allowed as a deduction) has been paid, is
payable or is expected to be paid;
- the dividend or distribution was, or is expected to be, franked;
- except for these provisions, a person would receive, or could reasonably
be expected to receive, franking credits; and
- having regard to the relevant circumstances (see below), it could
be concluded that a person or person carried out the scheme for a purpose
of enabling the person to obtain franking credits (NB. the purpose
need not be the dominant purpose for entering into the scheme as in
Part IVA).
The mere acquisition of shares or an interest in shares
will not of itself warrant the conclusion that there is a scheme.
If a scheme is found, the Commissioner may determine
that, if a company is involved in the scheme, that a franking debit arises
to the company or that the benefits attached to the franking credits are
of no effect. Taxpayers may object against a determination of the Commissioner
under the Taxation Administration Act 1953.
The relevant circumstances that the Commissioner is to
have regard to are listed in proposed sub-section 177AE(19) and
include:
- the extent and duration of the chance for profit or loss borne by
the people in the scheme and whether there has been a change in the
risk of loss or opportunity for profit;
- would the taxpayer derive greater franking benefits than others who
have shares or an interest in shares in the company;
- whether any consideration or gift given by the taxpayer was calculated
by reference to the franking benefits to be gained;
- whether a deduction is allowable or a capital loss incurred in connection
with the paying of the dividend or making the distribution; and
- whether the dividend or distribution is equivalent to a payment of
interest.
Other provisions in Part 2 of Schedule 8 relate
to the implementation of the above rules.
Application: The amendments will apply to dividends paid
or distributions made after 7.30 pm on 13 May 1997 unless a dividend is
paid by a public company and the dividend was declared before that time
(item 26).
Distributions by Private Companies
It was announced in the 1997-98 Budget that new rules
would be introduced to prevent various transactions by private companies
being used to reduce the amount of tax payable when funds are distributed
by the company. The primary situation to be addressed is where a company
makes a loan to a shareholder that is not an 'arms length' transaction.
Such loans may be used to distribute funds to a shareholder with the result
that the funds received are not defined as income and so are not subject
to income tax. The proposed measures were announced by the Treasurer in
a Press Release dated 13 May 1997. The basis of the scheme is that a loan
will be deemed to be a dividend unless it falls within the category of
an excluded loan, which aims to include normal commercial loans. If a
loan does not fall with the excluded loan category there will be a debit
to the company's franking account but no franking credits will be available
to the person in receipt of the funds to prevent dividend streaming as
described above (in this way the amendments can be seen as complementing
the measures described above which apply to public companies). There will
also be a number of rules to prevent evasion of the rules relating to
loans, for example to cover situations where a third party is interposed
between the taxpayer to whom the loan is made and the company. The Press
Release announcing the measures states that the measure 'is likely to
impact on tax minimisation practices used by some high wealth individuals.'
The Press Release also stated that the definition of excluded loan 'will
be supported by detailed regulations'.
The explanatory memorandum to the Bill estimates that
the measures will prevent revenue losses of $2 million in 1997-98, $50
million in 1998-99, $30 million in 1999-2000 and $30 million in 2000-1.
There has been minimal discussion of this issue with
general acceptance of the need for the anti-avoidance legislation. Interestingly,
the amendments will not apply from the date of the announcement as is
usual with Budget measures and other changes to taxation laws which generally
have effect from the date that the announcement is made.
A new Division 7A will be inserted into Part III of the
ITAA by Schedule 9 of the Bill. Payments will be treated as dividends
where the payment is made to an entity that is a shareholder in a private
company or an associate of such an entity, or a reasonable person would
concluded that the payment was made because the entity has been such a
shareholder or associate at some time. The amount of the dividend will
generally be the amount paid, although this will be capped at a maximum
of the company's distributable surplus. A payment will be taken to have
been made where there is an actual payment for the benefit of the entity;
an amount is credited to the entity or for the benefit of the entity;
or there has been a transfer of property to the entity (proposed section
109C).
Where a loan is to be treated as a dividend, the private
company will be taken to have paid the dividend at the end of it's financial
year if the loan is made during that financial year; has not been repaid
during the year; proposed sub-division D (which exempts certain
loans from the deeming rule) does not apply; and either the entity to
which the loan is made is a shareholder in the company or an associate
of such a shareholder or it is reasonable to conclude that the loan was
made because the entity has been a shareholder or associate at some time.
Loan will include the advance of money; provision of credit, payments
for or on behalf of the entity where there is an obligation to repay the
amount and any other transaction that, in substance, effects a loan of
money. If a loan made before 4 December 1997 is varied after that date,
it will be deemed to be a new loan on the new terms and conditions (proposed
section 109D).
Where more than one loan has been made to the entity
during the year, the loans have not been fully repaid and the amount repaid
to the private company is less than the minimum yearly repayment, the
loan will be taken to be a dividend. The minimum repayment rate will be
based on the amount of the loan not repaid, the remaining term of the
loan and the previous year's benchmark interest rate (this will be the
amount determined under section 136 of the Fringe Benefits Tax Act
1986 and is basically the average of the variable home loan interest
rate offered by the major banks). Where there is more than one loan, they
will be amalgamated and the repayments will be treated as repayment against
the total amount of the loans rather than being offset against individual
loans.
Proposed section 109F provides that forgiven debts
are to be treated as dividends in certain circumstances. The provision
will apply where a private company forgives a debt in a year and the debtor
was a shareholder in the company or an associate of a shareholder or a
reasonable person would conclude that the debt was forgiven as the debtor
was a shareholder or an associate of a shareholder at some stage. When
a debt is forgiven is defined by reference to Division 245 of the ITAA,
which includes where the obligation to pay is relieved and where, in certain
circumstances, there is a debt for equity swap. A debt will also be taken
to be forgiven if it is 'parked'. This is where the right to receive payment
is assigned to an entity that is an associate of the debtor or to an entity
that is party to an arrangement with the debtor regarding the assignment
and a reasonable person would conclude that the new creditor will not
exercise the right to payment. Forgiveness will also occur where a reasonable
person would conclude that the private company will not insist on repayment.
A number of forgiven debts that are not to be treated
as dividends are listed in proposed section 109G and are:
- where a private company forgives a debt owed to it by another private
company;
- where a private company forgives a debt because the debtor becomes
bankrupt or where the debt is forgiven under an arrangement with creditors
under the Bankruptcy Act 1966;
- if a debt is forgiven and the loan that created the debt is treated
as a dividend under previous sections of these amendments; and
- where the Commissioner is satisfied that the debt was forgiven as
repayment would have caused financial hardship, the entity had the capacity
to repay the debt when it was incurred and the debtor lost the ability
to repay the debt as a result of circumstances beyond the debtor's control.
Proposed subdivision D contains a number of circumstances
when payments and loans are not to be treated as dividends. They are:
- repayment of debt to the extent that the debt would have been had
the parties been dealing at arm's length;
- payment or loan to another company;
- where the amount is treated as assessable income under other provisions
of the ITAA;
- loans made at arms length in the ordinary course of business;
- loans that have an interest rate that equals or exceeds the bench
make interest rate and the term of the loan does not exceed the maximum
term (this is 25 years if the loan is secured by a mortgage over real
property where when the loan is made the value of the property subject
to the mortgage was at least 110% of the value of the loan at the time
it was taken out, or in other cases 7 years - NB: it is also provided
that the regulations may determine the maximum term of the loan, which
raises the question of why there is a definition contained in the Bill
that can be altered by regulation rather than simply providing for the
maximum term to be fixed by regulation);
- the Commissioner will have power to declare that an amalgamated loan
(see above) is not to be treated as a dividend where the repayment during
the year is less than the amount calculated using the formula described
above which includes the benchmark interest rate and the Commissioner
is satisfied that the repayment was less than the minimum amount because
of circumstances beyond the debtors control and that the entity would
suffer financial hardship if the payment was to be deemed a dividend.
In making such a decision the Commissioner is to take account of a number
of matters listed in proposed sub-section 109Q(2) which principally
relate to the financial status of the debtor.
Proposed subdivision E deals with loans made through
interposed entities, which involve a scheme to evade the rules relating
to direct loans or other transfers. A key provision is proposed section
109V which provides that where a 'target entity' is paid an amount
from a privately owned company the payment is, for the purposes of the
proposed rules, to be treated as a payment by the private company to the
final recipient. Whether a payment is deemed to be directed through an
interposed entity will depend on whether a reasonable person could conclude
that the loan or payment was made to the interposed entity solely or mainly
as part of an arrangement to direct the amount to the target entity and
whether there was a final payment of the amount to the target entity (proposed
section 109T)). Similarly, if a third party guarantees a loan by the
private company in circumstances covered by proposed section 109T, this
will be treated as a loan subject to the above provisions (proposed
section 109U). The amount of the interposed loan will be the amount
determined by the Commissioner having regard to the amount of the loan
to the interposed entity and the amount paid to the target entity (proposed
section 109W).
Item 5 of Part 1 of Schedule 9 provides that where
there is a deemed dividend payment under the above rules, the franking
accounts of the company will be debited by an amount equal to the deficit
that would have occurred had the deemed dividend been paid as an actual
dividend (this provides the second leg of the enforcement mechanism which
denies the franking credit to the receiver of the deemed dividend and
also imposes a charge on the company's franking accounts).
Application: Dividends, including deemed dividends under
the above rules, paid after 4 December 1997.
Remittance to the Australian Taxation
Office
Changes to the timing of the remittance of tax collected
under the Pay As You Earn (PAYE), Prescribed Payments System (PPS) and
Reportable Payments System (RPS) were announced in the 1997-98 Budget.
(PPS applies to certain payments made for work or services in specified
industries and requires the payer to withhold tax from the payment. The
rate will generally be 20% if the payee presents a declaration form, or
48.7% if a declaration is not presented. RPS requires remitters in specified
industries to declare all payments they have made to the ATO once per
year which are then matched against the recipients by their tax file number.
If the recipient has not supplied their TFN the payer is to withhold tax
at the rate of 48.7%.)
Under the PAYE system, the time within which deductions
must be remitted to the ATO depends on the size of the employer. If annual
remittances exceed $1 million, the employer is required to remit once
every two weeks. If remittances in the previous financial year were less
than $10 000, or are expected to be in the current year, the Commissioner
may allow them to be classified as a small employer and they will be required
to remit 4 times per year. Other employers are required to remit monthly.
For PPS and RPS, remittance must be made within 14 days
of the end of the month in which the payment was made.
The Budget proposals were outlined in a Press Release
by the Treasurer dated 13 May 1997, the main features being:
- the remittance time for large taxpayers will be 7 days after the deduction
was made, rather than the current 14 days. This is estimated to result
in $830 million in collections being brought forward in 1998-99;
- large taxpayers will be required to remit electronically;
- the threshold for small taxpayers that remit quarterly will be increased
to $25 000. This is estimated to allow another 133 000 employers to
remit quarterly and is estimated to result in revenue deferral of $500
million in 1998-99;
- the time for remittance of PAYE, PPS and RPS will be aligned; and
- when calculating the category the employer falls into, total PAYE,
PPS and RPS remittances will be combined. This is likely to result in
some taxpayers whose current PAYE obligation does not put them in the
large taxpayer category falling into that category when PAYE, PPS and
RPS remittances are combined. No estimates are given of the number who
could be affected by this move.
The amendments relating to remittance are contained in
Schedule 4 of the Bill, which will insert a new Division 1AAA into
Part VI of the ITAA. A large remitter will be one who: deducted more than
$1 million in combined PAYE, PPS and RPS deductions in the year ended
30 June 1997; was a member of a company group and the group deducted more
than $1 million in their 1996-97 financial year; total deductions in a
financial year ending after 30 June 1998 exceeded $1 million; where in
a year ending after 30 June 1998 a remitter is a member of a company group
and the total deductions by the group exceed $1 million in such a year;
or the Commissioner has made a determination under proposed section
220AAC (see below). A person cannot be a large remitter under the
new rules before July 1998.
Proposed section 220AAC allows the Commissioner to determine
that a person who would otherwise be a small or medium remitter will be
deemed to be a large remitter either for a particular future month, or
for a particular future month and all later months. The Commissioner will
be able to revoke or vary a determination. In making such a determination
the Commissioner may have regard to the matters listed in the proposed
section, which include any avoidance arrangement entered into; the extent
to which the person makes payments that were previously made by another;
and any other matters the Commissioner considers relevant.
The time for remittance by large remitters is listed
in the table contained in proposed section 220AAE which lists the
day the deduction is made and the day on which payment is due. The payment
is generally to be made 7 days after the deduction is made. A person,
other than a government body, who intentionally or recklessly breach the
requirement will be guilty of an offence with a maxim penalty of 12 months
imprisonment.
Large remittances must be made electronically or in another
form approved by the Commissioner. If the approved method of remittance
is not used, the person will be liable to a penalty, which will be the
greater of $500 and 16% on the amount due for a period of 7 days (proposed
section 220AAF).
Medium remitters are dealt with in proposed subdivision
C. A person will be a medium remitter if they are not a large remitter
and make deduction in excess of $18 750 for the period 1 July 1997 to
31 March 1998 (this is a proportional amount that will be used to determine
whether the person is a medium remitter for the first year of the new
scheme) or makes deductions exceeding $25 000 in the year ending 30 June
1998 or later years. A person cannot be a medium remitter before July
1998 and the Commissioner will have power to determine that a person who
would otherwise be a medium remitter is not a medium remitter (proposed
section 220AAJ).
The Commissioner will have power to declare that a person
who would otherwise be a small remitter is a medium remitter either for
a particular future month, or for a particular future month and all later
months. The Commissioner will be able to revoke or vary a determination.
In making such a determination the Commissioner may have regard to the
matters listed in the proposed section, which include any failure by a
small remitter to comply with these amendments; any avoidance arrangement
entered into; the extent to which the person makes payments that were
previously made by another; the amount likely to be deducted in the following
12 months; and any other matters the Commissioner considers relevant (proposed
section 220AAK).
A medium remitter must remit the deductions they have
made within 7 days of the end of the month in which the deduction was
made. A person, other than a government body, who intentionally or recklessly
breach the requirement will be guilty of an offence with a maximum penalty
of 12 months imprisonment (proposed section 220AAM).
Remittances must be made electronically or in another
form approved by the Commissioner but there is no specific penalty for
a failure to do so (proposed section 220AAN).
Small remitters are dealt with in proposed subdivision
D. A small remitter is defined as a person who is neither a large
or medium remitter (proposed section 220AAQ). Remittances must
be sent in sufficient time for them to be received in the ordinary course
of business by 31 March, 30 June, 30 September and 31 December and each
remittance is to cover the deductions made in the quarter ending on these
dates. A person, other than a government body, who intentionally or recklessly
breaches the requirement will be guilty of an offence with a maxim penalty
of 12 months imprisonment (proposed section 220AAR).
Proposed subdivision E contains a number of offences
and penalties, including:
- where a remittance is not made by the due date a penalty will apply.
For a non-government body this will be 20% of the unpaid amount plus
interest calculated at the rate of 16% of so much of the original amount
and penalty as remains unpaid. For government bodies the penalty will
be calculated at the rate of 16% of the unpaid amount (proposed section
220AAV);
- where a large remitter fails to use an approved remittance method
(see above) (proposed section 220AAW).
The Commissioner will be given power to remit all or
part of any interest penalty imposed under the above provisions if the
grounds contained in proposed section 220AAX are met. In relation
to the 16% interest penalty, it may be remitted if the Commissioner is
satisfied that:
- the reason for the delay was not caused by the person liable to make
the remittance and the person has taken reasonable action to mitigate
the causes of the late remittance;
- the cause of the delay in contributions was an act of the person liable
to make the payment and the person has taken reasonable action to mitigate
the causes of the delay and having regard to the circumstances it would
be fair and reasonable to remit all or part of the penalty; or
- the Commissioner is satisfied that there are reasonable grounds to
remit all or part of the penalty (the above provisions give the Commissioner
power to remit penalty interest payments in a number of circumstances
where there are reasonable grounds for the payment not to have been
made on time. However, this does not apply to the 20% penalty applicable
under proposed paragraph 220AAV(93)(a) which will apply automatically
regardless of the reasons for the delay. In many cases of a payment
received marginally outside the allowed time, eg. a one or two day delay,
the 20% penalty will greatly exceed the potentially interest liability.
In regard to the penalty applicable for the non-use of
electronic lodgement by a large remitter, the Commissioner may remit all
or part of the penalty amount payable if satisfied on the same grounds
that apply for the penalty interest rate (proposed section 220AAV).
Additionally, any penalty will be reduced by the amount
calculated under an order made by a court for the payment of the debt
that includes payment of interest on the amount awarded (proposed section
220AAY).
Proposed subdivision F provides for the Commissioner
to seek recovery of amounts due through the courts as a civil debt or
as an order as part of criminal proceedings.
Decisions relating to whether a person is a large or
medium remitter will be subject to review under the normal taxation appeals
mechanisms contained in the Taxation Administration Act 1953 (proposed
section 220AAZF).
Savings Rebate
This measure has it origins in the reduction of tax rates
proposed in the Taxation (Deficit Reduction) (No. 3) Act 1993 which
proposed an initial reduction in tax rates and a further reduction when
regulations were made to give effect to the legislation (the further reductions
are commonly referred to as the L.A.W. tax reductions following statements
made by the then Prime Minister). However, following the re-election of
the Labor government in 1993 the further tax reductions were not implemented.
It was announced in the 1995-96 Budget that the proposed tax reductions
would instead be used to fund matching employee contributions to superannuation.
The proposal was that through awards and industrial agreements employees
would be required to contribute 3% of their earnings to superannuation
by 2000. It was also envisaged that there would be matching government
contributions, subject to a means test, to a maximum of 3% of the employee's
earnings. The latter component was proposed to be funded through the abolition
of the L.A.W. tax reductions. Combined with the maximum rate of employer
contribution under the Superannuation Guarantee scheme, which will rise
to 9% by 2002-3, this would have provided by that date a 15% contribution
towards superannuation, a figure often seen as that necessary to enable
sufficient retirement income. Through the proposed means tests the measures
were aimed at low to middle income earners.
It was announced in the 1997-98 Budget that the funds
set aside for delivery of the original L.A.W. tax reductions would instead
be used to fund a tax rebate on member funded, undeducted superannuation
contributions and income from other savings and investments. It was announced
that the maximum amount of rebate would be $450 in 1999-2000 and later
financial years after a transitional maximum of $225 in 1998-99. The rebate
will be at the rate of 7.5% of savings and investment income in the transitional
year and 15% in later years. It was also announced that the rebate would
not be subject to a means test, and so be equally available to the highest
and lowest resident income earners. In this regard it was stated that:
It will provide equitable assistance to private savings, that recognises
the importance of superannuation savings, but also provide assistance
for individuals who save for other life cycle needs. The savings rebate
will also benefit individuals who have retired and are living on the returns
from their savings.(7)
It may be argued that while the lack of a means test
opens up the rebate to all those who have saved regardless of their income
or assets, the introduction of a savings rebate implies that the person
is financially capable of making additional superannuation contributions
or having funds available to secure sufficient investment or savings income
to be able to take advantage of the rebate. In it's Media Release on the
1997-98 Budget, dated 13 May 1997, the Australian Council of Social Service
stated:
Very few low wage earners and social security recipients can afford to
save the amounts required to take full advantage of the rebate. They would
have to contribute $3 000 per annum to superannuation, or save between
$50 000 to $100 000 in other savings vehicles to receive the full $450
rebate each year. Its main beneficiaries will therefore be high income
earners and wealthy retirees, most of whom would have saved in the absence
of the rebate.
Schedule 10 of the Bill will insert a new subdivision
61-A into the Income Tax Assessment Act 1997 (the 1997 Act). In
the proposed subdivision the rebate is referred to as a tax offset (the
'tax offset' has the same effect as a rebate as it reduces the amount
of tax payable on a dollar for dollar basis, rather than a deduction which
reduces the amount of tax payable by the taxpayer's marginal tax rate).
Individuals who are Australian residents at any time during the year of
income will be eligible for the tax offset, as will trustees where the
beneficiary of the trust is under a legal disability. In the later case,
the tax offset will apply for each beneficiary. The amount of rebate available
will, after the transitional year, be 15% of the amount calculated by
using the following steps:
- calculate the total savings and investment income for the year (see
below);
- add any contributions to a superannuation fund and/or a Retirement
Savings Account;
- subtract any deductions that relate to savings or investment income;
- subtract any deduction allowed regarding superannuation contributions
(including RSAs); and
- the result will be the amount subject to the 15% (7.5% in 1998-99)
tax offset allowed to a maximum of $450 ($225 in 1998-99).
Savings and investment income is defined in proposed
section 61-60 to be:
- assessable income that is not PAYE income;
- superannuation benefits, pension or retiring allowance paid from an
Australian source which are included in assessable income and are not
already subject to a rebate under the ITAA;
- superannuation benefits, pension or retiring allowance payable from
a non-Australian source which are included in assessable income and
for which a deduction has been allowed (basically the relevant provision
of the ITAA allows deductions relating to the purchase of annuities
from such sources); and
- the proportional of an eligible termination payment included in assessable
income.
However, certain items are specifically excluded from
the definition of savings and investment income. These are: remuneration
paid to members of local government; tax related expenditure to the extent
to which it is recouped and included in assessable income; and election
expenses of candidates for Parliament to the extent that it is recouped
and included in assessable income.
For the purposes of the ITAA, the tax offset will be
taken to be a rebate or a tax credit (proposed sections 160ADA and
160AHA) (this reflects the difficulties of operating under both the
ITAA and the 1997 Act until the taxation laws improvement program is completed).
Application: The amendments will apply for the 1998-99
and later years of income. However, for 1998-99 the maximum rate of tax
offset will be 7.5% of the amount calculated using the steps described
above with a maximum offset of $225 during that year (items 14 and
15 of Schedule 10).
- The Australian Financial Review, 31 December 1997.
- The Australian Financial Review, 15 January 1998.
- The Australian Financial Review, 11 December 1997.
- The Sydney Morning Herald, 8 December 1997.
- The Australian Financial Review, 22 December 1997.
- The Australian Financial Review, 15 December 1997.
- Treasurer, Press Release, 13 May 1997.
Chris Field
23 February 1998
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
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IRS staff are available to discuss the paper's contents with Senators
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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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