Bills Digest no. 58 2005–06
Tax Laws Amendment (Loss Recoupment Rules and Other
Measures) Bill 2005
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
Contact Officer & Copyright Details
Amendment (Loss Recoupment Rules and Other Measures)
House: House of Representatives
Sections 1 to 3, Schedules 1 to 4, 6 and 7, and Schedule 5 with the
exception of item 16, on the day on which the Act receives Royal
Assent; and Schedule 5, item 16 immediately after the commencement
of the provision(s) covered by table item 3.
The House of Representatives passed the Tax Laws Amendment (Loss
Recoupment Rules and Other Measures) Bill 2005 (the Bill) on 12
October 2005. The Bill was introduced in the Senate on the same day
where debate on the Second Reading Speech was adjourned.
On 11 October 2005, the Bill was referred to the Senate
Selection of Bills Committee by Mr Joel Fitzgibbon MP (ALP) for the
Schedule 1 may constitute a disincentive for
investment in mining.
Schedule 2 requires further discussion in relation
to the policy intent of the measure.(1)
On 12 October 2005, the Senate referred the provisions of the
Bill to the Economics Legislation Committee for inquiry and report
by 8 November 2005. Submissions, due by 21 October 2005, will be
available on the Committee s website at
The background and purpose of each of Schedules
1 to 7 are detailed below with reference
At present, companies can deduct losses incurred in earlier
income years if they satisfy either the continuity of ownership
test (COT) or the same business test (SBT). The COT requires that
the same persons have more than 50% of a company s voting power,
hold rights to 50% or more of the company s dividends and capital
distributions during the period from the start of the loss year to
the end of the income year.(2)
If a company does not meet the conditions for the COT, or if it
is impracticable to show whether or not a company meets those
requirements, the company may apply the SBT. The company satisfies
the same business test if throughout the year in which it wants to
claim the loss it carries on the same business as it carried on
immediately before then, and does not derive income from a new
business or transaction.(3)
A modified COT can be used by listed public companies and
their wholly-owned subsidiaries. The existing modified test
uses a substantial continuity of ownership test (SCOT). The SCOT is
similar to the COT, but requires testing to be applied at defined
times, rather than continuously throughout the relevant
In April 2004, Senator Helen Coonan, then Minister for Revenue
and Assistant Treasurer, announced planned changes to the regime,
under which a simplified COT will be provided for all widely held
companies and a broader range of subsidiary companies. In addition,
the simplified COT will replace the SBT for large companies and
large consolidated groups. (5) The Minister also
announced the intention to prevent the use of the SBT by companies
in an income year in which their total income exceeds $100
The Explanatory Memorandum states that these reforms
should reduce compliance costs as eligible companies will be able
to apply the new modified COT. It is also anticipated that it will
reduce the Australian Taxation Office s administrative costs as
there will be fewer requests for rulings and company audits will be
The COT changes will apply to losses incurred in income years
commencing on or after 1 July 2002 and to certain other eligible
losses incurred before that date. The Government announced in its
2005-2006 Budget that it would defer the SBT changes for one
year.(8) The SBT changes will generally apply to income
years commencing on or after 1 July 2005.
As a continuance of the Government s reform of Australia s
international tax arrangements, Schedule 2 allows
Australian companies which receive foreign income on which no
Australian tax is payable, to pay dividends to foreign shareholders
free of Australian withholding tax.
Conduit foreign income can be described as foreign income for
foreign residents which has been received by an Australian
corporate entity. Under the proposed changes, foreign residents
would be provided with a tax relief where they receive foreign
income through Australian corporate tax entities. Tax News
Network Australia summarised the effect of the proposed
taxation rules as follows:
These rules will allow Australian companies that
receive foreign income on which no Australian tax is payable to pay
dividends to foreign shareholders that are also free of Australian
According to the Explanatory Memorandum, much of the
income which flows from the foreign company to an Australian
company will be exempt from Australian taxes. Consequentially, when
distributed to foreign shareholders, the amounts distributed would
be subject to withholding tax under section 128 of the Income
Tax Assessment Act 1936 (ITAA 1936). The tax measures in
Schedule 2 are designed to ensure that the flow of
foreign income from foreign entities to foreign owners will not
attract taxation when flowing through the Australian company.
Schedule 2 sets out how a corporate tax entity
will calculate an amount of conduit foreign income and how such
income can pass through a series of Australian corporate tax
entities to foreign owners without the payment of Australian
Schedule 3 is a direct response to the Full
Federal Court decision in Commissioner of Taxation v La
Rosa  FCA 125 in which the court held that Mr La
Rosa, a convicted drug dealer, was entitled to a deduction for a
loss incurred in earning his income as a drug dealer. The High
Court subsequently refused the Commissioner of Taxation special
leave to appeal.(11)
Therefore, under current law, income earned through illegal
means is considered ordinary income and the general deduction
provisions of the Income Tax Assessment Act 1997 (ITAA
1997) apply, as do the capital gains tax provisions.
The Bill amends the ITAA 1997 by preventing deductions for
expenditure related to illegal activities for which the relevant
person has been convicted, as long as the offence is punishable by
imprisonment for at least one year. Losses and outgoings incurred
in relation to those same activities will not be able to form part
of the costs base or reduced cost base for capital gains purposes.
This will apply to wholly illegal activities such as drug dealing
and people smuggling. If a conviction relates to an illegal
activity undertaken by an otherwise lawful business, then
deductions will be denied in respect of those activities of the
business to which the conviction relates.(12) These
changes are effective after 29 April 2005.
Schedule 4 of the Bill deals with the
calculation of depreciation (decline in value), for taxation
purposes, of a particular kind of intangible asset; copyright in
films. Depreciation is a deduction in the calculation of taxable
The Bill changes the way that depreciation may be calculated by
allowing the asset (film copyright) to be depreciated over a
shorter or longer period than the current legislation permits.
Currently, for intangible assets, like copyright, the effective
life of an asset is prescribed in the legislation and there is no
option for choosing another period. The effective life is the
period over which the asset is taken to be used for taxable
purposes and is the period over which it may be depreciated. For
non-Australian films, the effective life is currently 25 years.
These amendments are concerned only with non-Australian films.
Australian films are dealt with specifically in Divisions 10B and
10BA of the ITAA 1936.
The legislative mechanism by which these changes are effected is
that film copyright is brought within the ambit of the existing
uniform capital allowances system. That system provides a mechanism
for working out the decline in value of assets generally.
Currently, film copyright is expressly excluded from the system.
These amendments remove the exclusion (thereby including
One element of the uniform capital allowances system is the
determination of the effective life of an asset. Unlike the current
position for film copyright, the uniform capital allowances system
provides for alternative ways of determining the effective life of
an asset. The alternative mechanisms are:
use the effective life determination made by the Commissioner
for a range of assets (the safe harbour determination), or
self assessment. This option must be used for assets for which
the Commissioner has not made a determination.
These amendments therefore provide for flexibility in place of
the current rigid system for determining the period over which film
copyright may be depreciated.
An employee share scheme (ESS) is a scheme whereby an employee
acquires shares or rights in connection with their employment at
less than market value; that discount is assessable as income.
Subject to certain conditions, an ESS participant can access tax
concessions in relation to the discounts under section 26AAC or
Division 13A of the ITAA 1936 depending on the date of
The Schedule 5 amendments will mean that in
circumstances where, as a result of a corporate restructure or 100%
takeover, an employee is issued new rights or shares, these will be
viewed as a continuation of their old shares or rights to the
extent that the new shares or rights match those previously held.
Consequently, ESS participants will be able to claim a continuation
of the same concessions in those situations as a taxing point will
not arise; and, as there will be continuity of treatment, they will
not be liable for the capital gains tax they would have otherwise
incurred on disposal of their old shares or
Schedule 6 amends the ITAA 1997 and the
Superannuation Guarantee (Administration) Act 1992 (SGA).
These provisions allow a late payment (within set time limits) of
an employer s Superannuation Guarantee obligations to partly offset
penalties arising from making these payments outside the required
Commencing operation on 1 July 1992, the Superannuation
Guarantee regime requires employers to pay 9 per cent of an
employee s ordinary time earnings into a superannuation fund or
retirement savings account nominated by the employee or the
Superannuation Holding Accounts Special Account (known as SHASA)
where the employer cannot reasonably find any other superannuation
fund/account into which to make these payments.(15)
Payments are required to be made within 28 days of the end of each
calendar year quarter. (16)
Under the current provisions of the SGA, substantial penalties
apply to employers if Superannuation Guarantee payments are either
not made, or payments for the relevant quarter are made later than
28 days after the quarter finishes. These penalties are:
administration fee of $20 for each employee for whom there has been
an underpayment, or late payment, of contributions,(17)
per cent of the salary and wages of each employee for whom an under
payment or late payment is made. Salary and wages are the basis of
calculation of the penalty, rather than the generally lower
ordinary time earnings,(18) plus
3. a 10
per cent per annum interest calculated from the start of the
relevant quarter rather than from the date the contributions should
have been made,(19) and
above penalties are not tax deductible to the employer, whereas the
superannuation contribution made on or before the due date would
The first three penalties (individually known as Superannuation
Guarantee Shortfalls )(21) are automatic and apply even
if the contributions are made shortly after the due date. Together
with penalties for not keeping proper records the first three of
the above penalties make up the Superannuation Guarantee Charge
.(22) The notional interest component and the 9 per cent
of salary and wages are paid to the employee s superannuation fund
or other account by the Australian Taxation
Briefly, the proposed measures would allow an employer s payment
of their Superannuation Guarantee obligations to offset the second
and third of the above penalties only if these payments are made
within a further 28 day period following the due date. As noted
above, the due date for an employer s Superannuation Guarantee
contributions is 28 days after the end of the relevant calendar
If the payment was made within this additional 28 day period,
the employer would still have to pay the first of these penalties
(the administrative fee) and the payments would still not be tax
The time limit for making the appropriate Superannuation
Guarantee contributions is quite strict. If the employer is only
one day late in making these contributions, the full range of the
above penalties applies. The proposal essentially gives employers a
further 28 days to make the appropriate contribution so that the
penalty is partly offset and thus introduces additional flexibility
for employers in managing their superannuation contributions.
As reduced penalties will still apply if late contributions are
made employers will still have an incentive to make these payments
within 28 days of the close of the relevant calendar year
On the other hand, employers have all of the relevant quarter,
plus the additional 28 days after the end of the quarter, to make
the appropriate payments. It could be argued that current
arrangements allow employers sufficient flexibility to manage their
Superannuation Guarantee contributions. As the proposal reduces the
incentive to make payments by the due date, this proposal may lead
to abuse of the Superannuation Guarantee regime by employers.
Currently, under section 19 of the SGA, the penalties only apply
where a person is an employee. Though not free from doubt, the SG
penalties do not apply where a person ceases to be an
employee.(24) Schedule 7, in amending
the ITAA 1936, ITAA 1997, and the SGA, addresses this problem by
ensuring that employers make Superannuation Guarantee payments to
former employees, who receive wages or salary in any quarter
following the ending of the employment relationship.
This proposal will ensure that all of an employee s
Superannuation Guarantee entitlements are paid in full. It may also
reduce any incentive to release employees simply to reduce an
employer s short-term Superannuation Guarantee obligations.
See bolded comment on page 21 of this digest concerning a
The Schedule 1 provisions relating to tax loss
recoupment rules for companies are the result of three years of
consultations between the Government and business. Prior to
Treasury s release of an Exposure Draft Bill on Loss Recoupment
Rules for Companies on 11 February 2005,(25) the
Government had noted, in relation to the proposed reforms,
Submissions received by Government indicate
companies excessively rely on the SBT to recoup prior year losses
because of growing uncertainty and cost associated with
demonstrating the COT has been met.(26)
The Government s response has been to simplify the COT so as to
make it easier for widely held companies, such as listed companies,
as well as institutional managed and superannuation funds, which
have many small portfolio shareholdings, to comply with the test.
For some of these companies, tracing ownership has proven difficult
because of the different classes of shares and the large number of
shares traded, which of itself may not make for any material change
in ownership of the company. (27)New tracing provisions
address this problem.
On changes to the SBT, however, the Government was not able to
achieve a consensus:
The Government has also received submissions about
the practical difficulties experience by large companies and
consolidated groups in complying with the SBT, and the associated
uncertainty and cost that this causes. The Government recognises
the practical difficulties that can arise when comparing the nature
of a large business across two points in time, which may be several
years apart. However despite lengthy consultation with key business
organisations, no acceptable solution to improve the operation of
the SBT has been identified.(28)
The Government has therefore lifted the threshold of application
to companies with a total income of more than $100 million so as to
reduce the number of companies able to use the SBT.
Schedule 2 continues the reform process, which
formed part of the 2003 federal budget, of Australia s
international tax arrangements. The proposed changes must be seen
in the context of Australia s endeavour:
To maintain Australia's status as an attractive
place for business and investment [ ].(29)
According to the Assistant Treasurer, the proposed rules aim at
Australia a more attractive base for
multinationals looking to establish regional headquarters. It also
benefits Australian-based multinationals by enhancing their ability
to compete for foreign capital.(30)
The rules are based on Recommendation 3.11(1) of the
of International Taxation Arrangements A Report to the
Treasurer which reads:
The Board recommends proceeding with the foreign
income account rules recommended by the Review of Business Taxation
as they apply to direct investment flows (such as non-portfolio
dividends and branch profits but excluding capital gains, portfolio
dividends or similar types of income such as interest and
On 17 June 2005, the Treasury released an
exposure draft detailing proposed conduit foreign income
measures and invited submissions from the public. Submissions
closed on 20 July 2005 and three submissions have been
published on the Treasury s webpage. The measures proposed in
this Bill are the result of this consultation process.
As noted, Schedule 3 is a direct response to
the La Rosa case. The Treasurer announced on 29 April 2005 that the
law would be amended and would apply to expenditure incurred after
that date. He also noted that the amendments would not replace or
in any way diminish federal, state or territory powers to
confiscate the proceeds of crime.(32)
Schedule 4 sets out provisions for film
copyright to be included in the effective life depreciation regime.
Currently, films may not qualify for concessional treatment under
Divisions 10B and 10BA of the ITAA 1936 because they lack
sufficient Australian content or, even though funded by Australian
taxpayers, are made overseas. Under the amendments, taxpayers may
write-off copyright expenses in a film over a period based on the
film s effective life rather than the current statutory 25 year
period for copyrights. Taxpayers will also be able to choose
between a safe harbour effective life determination or self
assessment of the effective life of copyright in a
film.(33) The new provisions apply to copyright in a
film acquired on or after 1 July 2004.
Of the changes included in Schedule 5 relating
to ESSs, the Explanatory Memorandum notes that these have
not previously been announced. This is correct in that the
Government did not release a Draft Exposure Bill detailing the
amendments. However, the amendments were flagged in the Government
s response to Recommendation 30 of the 2000 Nelson Report on
Employee Share Ownership(34) in which the Government
considered it appropriate:
to provide rollover for employees in the event of
a corporate restructure where both their employment and the schemes
in which they participate remain substantially the
The Schedule 6 measures applying to late
payments of superannuation contributions by employers, and the
Schedule 7 measures applying the Superannuation
Guarantee to back payments of wages, were announced in the 2005 06
Budget on 10 May 2005.(36)
Responses to the Schedule 1 amendments have
been mixed. According to KPMG Corporate Finance partner, Antony
Companies in the resource sector will be one of
the most affected groups as they have large upfront costs with
deferred revenue streams, but rely on capital raisings or M&As
to finance growth
The post-tax returns of any acquisition may well
be significantly different under this regime.(37)
The Institute of Chartered Accountants tax counsel expressed
similar reservations(38)as have Allens Arthur
The proposed reforms are a substantial improvement
to the current position However, in an acquisition context, the SBT
ceiling will have a major impact on the value purchasers are
prepared to attribute to a target company s losses. In many cases,
these losses will automatically be taken out of the tax system as a
result of the sale.(39)
Likewise, PriceWaterhouseCoopers notes that there will be
disappointment that the Government has ignored submissions on
proposed changes to the SBT. The group also questioned the
Government s justification for lifting the income threshold to $100
million because large companies have difficulty passing the
Whilst this is true (particularly for consolidated
groups), the Australian corporate sector includes many large single
business companies which would have strong arguments that they
carry on the same business.
As always, revenue considerations probably best
explain the Government s stance: the denial of the SBT for the big
end of town is the price that corporate Australia is being asked to
pay in return for simplified COT tracking rules.(40)
PriceWaterhouseCoopers supports the policy behind the modified
COT rules, that is, to make it easier for businesses to pass this
test, but places a rider on its support: it is to be hoped that the
new laws will be administered with that policy intent in mind.
(41) Other tax advisers, including Ernst & Young,
also support the COT changes.(42)
The Schedule 2 amendments have received support
from KPMG and the Corporate Tax Association, for bringing Australia
s tax competitiveness in line with countries such as Hong Kong and
New Zealand which do not tax conduit foreign
Of the Schedule 5 amendments, Allens Arthur
Robinson raises a number of concerns in its June 2005 publication,
the scope of the terms 100% takeover and restructure
confusion as to the CGT position of an employee who has elected
to pay tax on grant of options, and
failure to address the acquisition of shares under a $1000 tax
The firm concluded:
While there are clearly some problems with the
limited scope of the rules (which no doubt will lead to lots of
class ruling applications), there is a potential unexpected upside
for employees holding restricted tax deferred
The publication is available at: http://www.aar.com.au/pubs/tax/fotmajun05.htm
(though note that the article incorrectly states that the
provisions are now law ).
Those measures affecting superannuation contained in
Schedules 6 and 7 have been well
received by both business and superannuation industry
groups.(45) The Association of Superannuation Funds of
Australia (ASFA) fully supports both measures(46) with
the Chief Executive, Philippa Smith, reportedly commenting that it
would reduce the harshness of current rules:
If a cheque was delayed or there was a simple
miscalculation and the employer needed to correct it, there was no
discretion allowed for employers trying to do the right
Mr Fitzgibbon MP (ALP) moved a second reading amendment in
relation to both Schedules 1 and
2, and the Government s failure to advance
meaningful tax reform .(48) On the Schedule
1 measures, he supported the policy intent of reducing
compliance on business, but noted that the new COT regime was
potentially a major barrier to investment (49) in a
number of sectors. He referred to:
concern in the business community, particularly in
the areas of joint ventures, innovation and mining exploration
companies, where returns on investment can be some years down the
track from the original investment.(50)
Mr Fitzgibbon further questioned the government s failure to
provide a clear policy justification for the changes in
Schedule 2(51) especially in light of
the not insignificant cost of $70 million.(52)
Mr Fitzgibbon noted that Schedules 3 to
7 were not controversial and have bipartisan
Mr Hatton MP (ALP) noted, in relation to Schedule
1, that people within the mining and resource industries
had questioned the effectiveness of the new rules. He also queried
why the financial impact is not quantifiable; and whether it is
possible to quantify the compliance costs.(53)
To date, the Australian Democrats and the Australian Greens have
not commented on the Bill.
Schedule 1 amends the ITAA 1936 and the ITAA 1997 to give effect
to the government s policy as outlined above. The main effects will
The new modified COT will change the times at which the test of
ownership is applied currently at the start of each test period,
and at each abnormal trade and the end of each income year to the
end of each test period, the end of each income year and the end of
specified corporate change events.
- The new modified COT will be available for use by widely held
companies which is defined to mean companies listed on approved
stock exchanges, and companies having more than 50 members except
where 20 or fewer people control or have rights to 75% of the
company s shares, 75% of the voting power of the company or 75% of
dividends paid by the company. A company is also widely held if it
is a Division 166 company, which means that more than 50% of its
voting power, rights to dividends or capital distributions are held
The existing modified COT rule is available only to listed
companies and their wholly-owned subsidiaries.
There are a number of tracing rules provided to assist companies
in complying with the COT.
Indirect holdings of less than 10% of voting power will be taken
to be held by the top interposed entity (the entity in which the
indirect stakeholder with less than 10% interest has a direct
Holdings of between 10% and 50% held by a widely held company
will be attributed to the widely held company as ultimate
Holdings by certain entities deemed to be beneficial owners will
generally be attributed to that owner.
Indirect holders by way of bearer shares in a foreign company
will, in some circumstances, be attributed to a single notional
Indirect holdings by depository entities via shares in a foreign
listed company will be attributed to the depository entity in
The SBT will not be available to companies with an income in
excess of $100 million for the income year in respect of which it
intends to claim the loss.
Schedule 2, Part 1, Item 1 of the Bill will
introduce proposed new Division 802 into the ITAA
1997. This Division will lay down the rules for the taxation of
foreign residents income with an underlying foreign source.
Proposed new Subdivision 802-A will deal with
one aspect of these rules, namely the rules relating to conduit
Under proposed new section 802-15, conduit
foreign income of Australian corporate tax entities (the entities)
will be, under certain circumstances, exempt from Australian taxes.
Under this provision, the entity s conduit foreign income will be
non-assessable, non-exempt income of a foreign resident (that is,
where the flow of income is from the foreign company to the
Australian company see diagram below) and will not be subject to
withholding tax under section 128B of the ITAA 1936 (that is, where
the income flow is from the Australian company to the foreign
shareholder see diagram below) (proposed new subsection
802-15(1)). The following simplified diagram, which is
based on the diagram for example 5.1 of the
Explanatory Memorandum to the Bill, may assist with the above
Under certain circumstances, the new measure will also permit a
tax-exempt flow of conduit foreign income through a chain of
Australian entities. Under proposed new section
802-20, the conduit foreign income may flow through the
Australian entities (in the diagram below called Australian Company
1 and 2) as non assessable, non-exempt income if the following
three prerequisites are fulfilled:
Australian Company 2 receives from Australian Company 1 an
unfranked distribution which has an amount declared to be conduit
Australian Company 2 makes an unfranked distribution it declares
wholly, or in part, to be conduit foreign income, and
Australian Company 2 makes the unfranked distribution, which it
has declared to be conduit foreign income, within the required
The following simplified diagram may assist with this:
The result of this measure is that the conduit foreign income
flows through Australian Companies 1 and 2 as non-assessable
non-exempt income without attracting taxation. The amount of
non-assessable non-exempt income is to be calculated by applying
the formula set forth in proposed new subsection
802-20(2). Further rules, including, for example, that a
conduit foreign income amount can only be counted once, are set out
in proposed new subsections 802-20(3) to
Explanatory Memorandum sets out detailed examples in
relation to calculating non-assessable non-exempt income for the
purpose of section 802-20 at page 132-4.(56)
The amount of an entity s conduit foreign income is to be worked
out under proposed new section
802-25 which, in turn, refers to proposed
new sections 802-30 to 802-55.
These provisions contain the relevant rules for an entity to
determine how much conduit income it can declare. Proposed
new section 802-30 contains the legislated formula
according to which entities can calculate foreign source income
amounts which are to be included in the conduit foreign income.
Proposed new section 802-35 stipulates which
capital gains and losses have to be included in, or deducted from,
the amount of conduit foreign income. Proposed new
subsection 802-35(3) contains a timing rule, prescribing
that the adjustment under subsections 802-35(1)
and (2) are to be made at the end of the income
year in which the capital gains tax event occurred. Under proposed
new section 802-40, an entity must include foreign
tax credits. The amount which has to be included in the conduit
foreign income has to be calculated using the formula set forth in
Where an entity has distributed frankable distributions with
unfranked parts which have been declared to be foreign conduit
income, then the entity will be entitled, under proposed
new section 802-45, to reduce the amount of
foreign conduit income to the extent of the unfranked parts that
have been declared. This provision must be read together with
proposed new section 802-60 which deals with the
situations in which an entity decides to stream distributions to
particular shareholders. It stipulates that entities must not
declare unfranked distributions to conduit foreign income and
stream these distributions to foreign shareholders only. Proposed
new section 802-60 provides for an adjustment of
the declared foreign conduit income in these situations. Where the
entity has over-declared foreign conduit income, an administrative
penalty will be applied under proposed new Schedule 1,
section 288-20 of the Taxation Administration Act
1953 (the TAA) (as to this section, see discussion below). The
Explanatory Memorandum sets out a detailed example in
relation to streaming of conduit foreign income at page 135.
In case the entity has received unfranked distributions from
another Australian entity, the conduit foreign income is further
reduced if the requirements set out in proposed new
subsection 802-50 apply. These requirements include
the entity receives frankable distributions which
have an unfranked part
the unfranked part, or parts thereof, are declared to be conduit
foreign income, and
the declared amount, or parts thereof, is non-assessable,
non-exempt income under proposed new section 802-20.
No double benefits will be permitted under proposed new
Part 2 proposes various further amendments to
the ITAA 1936 and ITAA 1997 which aim at full implementation of the
rules for the taxation of foreign residents income as discussed
above. These amendments include, for example, modifications to the
single entity and history entry rules in section 701-1(1) and 701-5
of the ITAA 1997 (item 15, proposed new
subdivision 715-U). They also include the introduction of
the administrative penalty regime for over-declaring foreign
conduit income. Item 25 will introduce proposed
new section 288-20 into the TAA. Where an entity
has been over-declaring foreign conduit income, this section will
provide that this entity is liable to an administrative penalty
(proposed new subsection 288-80(1)). Proposed
new subsections 288-80(3) and (4)
contain the basis for the penalty, setting out formulae according
to which the penalty amount is to be determined. The calculation of
the penalty will depend upon whether the foreign conduit income is
based on Australian or foreign membership interests. New
subsection 288-80(3) deals with situations in which the
entity has over-declared foreign conduit income based on the
distribution on Australian membership interests. New
subsection 288-80(4) deals with situations where the
over-declaration occurred based on the distribution of foreign
membership interests. The Explanatory Memorandum provides
Example 5.10 which demonstrates the calculation of an
Part 3 contains transitional provisions and
consequential amendments. Item 27 will provide
guidance to entities whose income years start on or after 1 July
2005, but before the measure receives Royal Assent. Item
28 will make provisions for all other entities.
Application and effect
The measures in Schedule 2 will commence with
Royal Assent and take effect from the beginning of the first income
year that starts on or after 1 July 2005, but the effect can be
modified by the transitional provisions referred to above.
Projected costs of the measures in Schedule 2
According to the Explanatory Memorandum, the cost of
the measure is projected to be:(58)
The Explanatory Memorandum also foreshadows a possible
increase in compliance costs for entities.(59)
Items 1 to 4 amend the ITAA
Item 2 inserts a new section
26-53 which prevents deductions of a loss or outgoing to
the extent that it was incurred in the furtherance of or directly
in relation to an indictable offence for which the taxpayer was
convicted. New subsection 26-53(2) provides that
the Commissioner may amend an assessment at any time within four
years after conviction for such an offence.
Item 3 inserts a new section
110-38 which prevents the expenditure forming part of the
cost base to the extent that the new section 26-53 prevents it
Item 4 inserts a new subsection
110-55(9A) that similarly provides that such expenditure
cannot form part of the reduced cost base, the formulate for which
is set out in section 110-55.
These amendments apply to amounts incurred after 29 April 2005
Items 1 to 3 make amendments
consequent upon those made by Items 4 to
12 below by amending Division 10B of the ITAA
1936. Division 10B (along with Division 10BA) deals with the
depreciation of copyright in Australian films. A two year write-off
period currently applies to such copyright but a taxpayer can elect
that this period not apply. If such an election is made the current
position is that a 25 year write-off will apply under section 124U.
Item 2 repeals section 124U which is no longer
needed as a result of the amendments made by Items
4 to 12 below. Items 1
and 3 make amendments to take account of the
repeal of section 124U.
Items 4 to 12 amend the ITAA 1997.
Item 4 amends paragraph 40-70(2)(b) to remove
film copyright from the list of assets in relation to which the
diminishing value method of calculating depreciation cannot be
Item 5 amends table item 5 in paragraph
40-95(7) to remove film copyright from the list of intangible
assets for which the legislation currently prescribes an effective
Item 6 amends table item 7 in paragraph
40-95(7) to remove film copyright licences from the list
of intangible assets for which the legislation currently prescribes
an effective life.
Item 7 makes a minor amendment to subsection
40-100(4). The provision sets out the factors which the
Commissioner must take into account in working out the effective
life of an asset. The factors are those applicable to tangible
assets. The amendment provides that the Commissioner must take the
factors into account only if they are relevant to the asset.
Clearly, some factors are not relevant to intangible assets like
Item 8 makes a minor amendment to subsection
40-105(1). It is a similar amendment to that made by Item
7 but it deals with the factors to be taken into account
when the taxpayer self assesses the effective life of an asset.
Item 9 amends subsection 40-105(4) with the
effect that film copyright and film copyright licences are removed
from the list of assets in relation to which self assessment (of
effective life) is not available. The effect is that
self-assessment becomes available for film copyright.
Item 10 inserts a new note at the end of
subsection 40-110(1) which lists examples of the changes in
circumstances that may result in a need to re-calculate the
effective life of a depreciating asset.
Item 11 amends subsection 40-110(5) with the
effect that film copyright and film copyright licences are removed
from the list of assets in relation to which the effective life
cannot be recalculated under the system of self assessment.
Item 12 provides that these amendments apply
only to film copyright acquired after 1 July 2004.
Items 1 to 12 amend the ITAA
Item 3 inserts a new section
26AAD which covers the effect on the operation of section
26AAC of a 100% takeover and restructure of a company. Under
section 26AAC, ESS participants can access either a tax-excluded or
a tax-deferred discount. The amendments provide that, subject to
certain conditions, the acquisition by a taxpayer of shares or the
right to acquire shares in a company ( the new company ) that can
reasonably be regarded as matching rights in another company ( the
old company ) that the taxpayer had acquired under an ESS, will be
treated for the purposes of section 26AAC as a continuation of the
shareholding in the old company. This is in circumstances where the
acquisition occurs in connection with a 100% takeover, or a
restructure, of the old company and as a result of that change, the
taxpayer ceased to hold the shares or rights in the old
If the shares or rights acquired by the taxpayer do not match,
it will be considered a share or rights disposal, for the purposes
of section 26AAC.
There are three conditions for the continuation of shares or
immediately before the takeover or restructure, the
taxpayer held shares or rights in the old company under an ESS;
the matching shares or rights must be ordinary shares or rights
the matching shares or rights must be subject to the same
conditions or restrictions or conditions or restrictions that have
the same effect, as those that previously attached to the rights or
shares held in the old company.
The result is that ESS participants who opt for the tax-excluded
discount will not incur a capital gain or loss, and those who opt
for the tax-deferred discount, will be able to continue the
New subsection 26AAD(6) sets out the
apportionment rules. These allow for the original consideration
paid by the taxpayer for shares or rights in the old company to be
spread out proportionately among all the apportionable assets
according to their market values immediately after the takeover or
restructure. Apportionable assets are defined in new
subsection 26AAD(7) as those that are a continuation of
the original shares or rights or can otherwise be reasonably
regarded as matching those original shares or rights.
Item 10 removes subsection 139DR(4) of the ITAA
1936 and thus provides the same relief for ESS participants who
access the tax-upfront concession under Division
Items 13 and 14 amend the ITAA
1997. Item 13 inserts a new subsection
115-30(1A). This amends the capital gains tax provision in
line with the new section 26AAD in the ITAA 1936. Item
14 notes that under section 139E of the ITAA 1936, an
election by a taxpayer to be taxed upfront will not prevent a share
or right from being treated as a continuation of the share or right
acquired under an ESS. According to the Explanatory
Memorandum, the amendment also ensures that:
any capital gain or loss will be disregarded
the same CGT cost base treatment will be retained, and
ESS participants acquiring new shares will no longer have to
satisfy the 3 year waiting period before disposing of
Items 15 to 18 amend the
Income Tax (Transitional Provisions) Act 1997 to the
effect that the treatment accorded an ESS participant under
subdivision 130-DA, which provides that an ESS participant acquires
a share or right at the time it was acquired by the trust, and the
capital gains treatment afforded under subdivision 130-D, will
extend to matching new shares or rights. Items 19
similarly amends the Taxation Laws Amendment Act (No. 3)
2003 to reflect the changes to the ITAA 1936.
Item 20 provides that the amendments apply to
acquisitions of shares or rights on or after the day on which
Schedule 5 commences.
6 Superannuation guarantee charge
Item 1 repeals a portion of Section
12-5 of the ITAA 1997 and inserts a new portion denying
the employer tax deductions for late payments of the Superannuation
Guarantee obligations that partly offset the Superannuation
Guarantee Charge (SGC).
Item 2 inserts new section
26-85 into the ITAA 1997. This new section denies
employers any tax deduction in respect of payments of
Superannuation Guarantee amounts that they elect to offset their
Item 5 inserts new section 23A
into the SGA. This new section allows a late payment of an employer
s Superannuation Guarantee obligation to offset any SGC
liabilities, but only where:
such contributions are made within a 28 day period from the due
date for the payment of the employer s Superannuation Guarantee
obligations (the due date is itself 28 days after the end of the
preceding calendar year quarter), and
the employer elects, via an approved form , that this
contribution offsets the SGC for the relevant quarter, and
this election is made within 4 years after the employer s SGC
for the relevant quarter became payable.
New subsection 23A(3)
stipulates that the offset will only cover the employer s nominal
interest component or the employer s individual Superannuation
Guarantee Shortfall for a particular quarter.
New subsection 23A(4) specifies that the
offsetting contribution will first cover the nominal interest
component with the remainder, if any, covering the employer s
individual Superannuation Guarantee Shortfall for the relevant
Initially, employers determines their own compliance with the
requirements of the SGA. Under section 33 of this Act, if employers
have a Superannuation Guarantee Shortfall for the relevant quarter,
they must lodge a Superannuation Guarantee Statement with the
Commissioner for Taxation by certain dates. These statements
contain, amongst other things, the employer s nominal interest
component, individual Superannuation Guarantee Shortfalls and the
amount of the SGC for the relevant quarter.
Item 6 repeals current subsection 33(1)
containing the dates for the lodgement of these statements and
inserts a new subsection 33(1) containing new
dates. These new dates reflect the additional 28 day period for the
payment of Superannuation Guarantee amounts that offset any SGC
Under subsection 35(1) of the SGA, once a Superannuation
Guarantee Statement has been lodged an assessment of the employer s
liability to the SGC is taken to have been made.
Item 7 substitutes a new subparagraph
35(1)(d). This extends the dates on which an assessment of
the employer s liability to pay the SGC is taken to have been made
in line with the additional 28 day period to make a Superannuation
Guarantee payment that partly offsets the employer s SGC
Under current subsections 46(1) and (2) of the SGA an employer s
SGC is payable on either the lodgement day for that particular
quarter, or if the Superannuation Guarantee Statement is lodged
after a certain date, the day on which the Statement is submitted
to the ATO. Item 8 substitutes a new
subsection 46(2) which changes the dates specified as
lodgement days for the purposes of submitting the Superannuation
Guarantee Statement to the ATO. In effect, this changes the date on
which the SGC is payable, if the Statement is lodged before the
lodgement day . Again, the dates are extended from the end of the
relevant quarter to align them with the additional 28 day period
for making Superannuation Guarantee Payments that partially offset
an employer s Superannuation Charge Liability for that quarter.
Item 10 requires that different provisions in
Schedule 6 of the Bill take effect on different
the main operative provisions contained in Items 1, 2,
4, 5 and 9 are to take effect on 1
items 3, 6 7 and 8, covering
the extension of dates for lodgement of a Superannuation Guarantee
Statement, assessment of an employers Superannuation Charge
Liability and the payment of any outstanding Superannuation Charge
take effect, on 1 October 2005.
The reasons behind this difference in dates of effect are not
readily apparent. However, no major difficulties appear to arise as
a result of this difference.
7 Superannuation on back payments
Item 1 inserts a new subsection
82AAC(1) of the ITAA 1936. Generally, the subsection has
been rewritten to allow a tax deduction for an employer in respect
of any Superannuation Guarantee contributions, made by the due date
(that is, within the relevant quarter or up to 28 days after the
end of that quarter) paid on behalf of either former or current
Though the Explanatory Memorandum is silent on the
following point one commentator has noted that the proposed changes
to subsection 82AAC(1) also clear up confusion on the deductibility
of Superannuation Guarantee contributions for contractors deemed to
be employees under section 12 of the SGA but may not have been
either employees or eligible employees as defined in section 82AAA
of the ITAA 1936 for the purposes of the existing subsection
82AAC(1) of the latter Act. The proposed subsection achieves this
in new subparagraph
82AAC(1)(c)(iii) by linking the definition of an employee
to the definition of employee in the SGA.(63)
At first sight the language of new subsection
82AAC(1) appears not to achieve its intended outcome.
Sub-paragraphs 82AAC(1)(c)(i) and
(iii) note that the deduction is available to
the other person was an eligible employee;
the other person was an employee for the purposes of that [SGA]
A question may arise over the use of was in these
sub-paragraphs. One reading of the proposed sub-section is that it
may not support the employer receiving a tax deduction for
Superannuation Guarantee contributions made in respect of current
employees. Such a reading proposed sub-section 82AAC(1) would
produce the perverse outcome that employers could not claim a tax
deduction in respect of Superannuation Guarantee contributions made
for current employees. This is clearly not the Government s
intention, and it would be in nobody s interest to produce this
result. To put the matter beyond doubt Members and Senators may
care to consider whether a minor amendment to the above proposed
sub-paragraphs may be necessary.
Items 2 to 13 generally
replace the term eligible employee or employee with the term person
in the relevant sections of the ITAA 1936. These changes govern an
employer in claiming a tax deduction for Superannuation
Contributions made on behalf of either current or former employees.
Items 14 to 16 make similar
changes to relevant sections of the ITAA 1997. All these items
simply apply the previously existing rules governing the tax
deductibility of Superannuation Guarantee Contributions for an
employer to situations where these contributions are made in
respect of former employees.
Items 17 and 18 ensure that
Part 2 and Part 8 of the SGA apply in situations where
Superannuation Guarantee payments are made by employers on behalf
of former employees. Part 2 explains terms used in the Act and Part
8 deals with the payment of Superannuation Guarantee Shortfall
amounts by the ATO to the employee s, or former employee s,
Selection of Bills Committee, Report No. 12 of 2005, Appendix 3,
11 October 2005,
ITAA 1997, s. 165-12.
ITAA 1997, ss. 165-13, 165-15.
ITAA 1997, Division 166.
Senator Helen Coonan, Minister for Revenue, Improved Tax Loss
Recoupment Rules for Companies,
Press Release, Co21/04, 7 April 2004.
Explanatory Memorandum, p. 4.
Budget 2005-6, available at http://www.budget.gov.au/2005-06/bp2/html/revenue-03.htm
Tax News Network Australia, New Measures to Improve Tax and
accessed 7 October 2005.
Explanatory Memorandum, p. 5.
27 October 2004.
The Hon. Peter Costello MP, Treasurer,
Income Tax Deductions to be Denied For Illegal Activities, Press
Release, No. 038., 29 April 2005.
Explanatory Memorandum, p. 159. Section 26AAC discounts
may be accessed if an ESS participant acquired shares on or before
6 p.m. on 28 March 1995. After that time, Division 13A provisions
The Hon. Mal Brough, MP, House of Representatives, Debates, 14
September 2005, p.15.
The Superannuation Holding Account Special Account (SHASA) is a
special account within the Commonwealth Consolidated Revenue Fund
that acts as a destination of last resort for employers to pay
Superannuation Guarantee amounts. For example, a person may work,
say as a fruit picker, and suddenly leave that employer without
providing a forwarding address or details of where to pay their
Superannuation Guarantee entitlements. In these circumstances an
employer could pay the employee s Superannuation Guarantee
entitlements into SHASA to meet their obligations.
SHASA pays no interest, and does not charge any fees. The
Australian Taxation Office is required to try and make regular
efforts to contact individuals with monies in SHASA and arrange for
these monies to be transferred into superannuation funds that pay a
rate of return (and also charge a fee).It is to be closed to new
contributions from 1 July 2006 (sections 1, 4 and 7 of the
Superannuation Legislation Amendment (Choice of Superannuation
Funds) Act 2005).
SGA, subs.23(6). The language of this Act has been extensively
amended to refer to payments made in respect of each calendar year
SGA, s. 32.
SGA, s. 19.
SGA, ss. 31, 46.
ITAA 1936, s. 51(9).
SGA, s. 17.
SGA, s. 16.
Explanatory Memorandum, p. 185 notes that the current
view of the Australian Taxation Office (ATO) is that an employer
has a Superannuation Guarantee obligation in respect of a former
employee who is paid wages after they have ceased employment with
that employer. However, the ATO s view until 5 November 2003 was
that no Superannuation Guarantee obligation arose in these
circumstances. See ATO Interpretative Decision 2003/36
Exposure Draft Bill is available at:
Senator Helen Coonan, Minister for Revenue, Improved Tax Loss
Recoupment Rules for Companies, op cit.
Senator Helen Coonan, Minister for Revenue and Assistant
Address to 2004 Corporate Tax Association Convention, Sydney, 3
Senator Helen Coonan, Minister for Revenue, Improved Tax Loss
Recoupment Rules for Companies, op cit.
The Hon P Costello, Treasurer, Review of International Taxation
Press Release, No. 32 of 2003, 13 May 2003
The Hon M Brough, Assistant Treasurer, New Measures to Improve
Tax and Superannuation,
Press Release, No. 82 of 2005, 14 September 2005.
The Board of Taxation, Review
of International Taxation Arrangements A Report to the
Treasurer, Canberra, 2003, p.
The Hon. Peter Costello MP, Treasurer, Income tax deductions to
be denied for illegal activities,
Press Release, No. 038, 29 April 2005.
The Hon. Peter Costello, MP, Treasurer,
New Tax Treatment for Film Copyright, Press Release No. 046, 10
May 2005 .
Treasurer and Minister for Workplace Relation, Government
Response to Nelson Report on Employee Share Ownership,
Joint Media Release, No. 014, 27 March 2003.
ibid., p. 10.
The Hon. Peter Costello MP, Treasurer, Budget Paper No. 2 2005
06, Budget Measures 2005 06, p. 35.
Tax-loss rule changes seen as a mixed blessing , Australian
Financial Review, 16 September 2005, p.5.
Allens Arthur Robinson, Focus: Tax focus on M&A , June 2005,
available at: http://www.aar.com.au/pubs/tax/fotmajun05.htm
PriceWaterhouseCoopers, The new loss recoupment rules for
companies, 16 September 2005, available:
Allesandro Fabro, Tax-loss rule changes seen as a mixed blessing
, op cit.
Tax break gives multinationals a boost, Australian
Financial Review, 21 June 2005, p. 10.
Allens Arthur Robinsons, Focus: Tax focus on M&A June 2005,
Late super payment penalties altered, Age, 16
September 2005, p. 2.
Association of Superannuation Funds of Australia, Good News
for Employers, Employees on New Super Measures, Media Release,
16 September 2005, available at: http://www.asfa.asn.au/media/rpm.cfm?page=mr050916
Peter Weeks, op. cit.
Mr Fitzgibbon, Debates, House of Representatives,
Debates, 12 October 2005, p.6.
Explanatory Memorandum, p. 116.
ibid, p. 130.
ibid., pp.132 4.
ibid., p. 138.
ibid., p. 5.
ibid, p. 160.
ibid, p. 174.
ibid, p. 161.
Stuart Jones, Deductibility of Super Guarantee contributions for
contractors , APT Weekly Tax Bulletin, No 41, 30 September
2005, paragraph 1664.
Jonathan Chowns, Jerome Davidson, Thomas John, Les
Nielson and Katrina Gunn
21 October 2005
Bills Digest Service
Information and Research Services
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production. The views expressed do not reflect an official position
of the Information and Research Service, nor do they constitute
professional legal opinion.
IRS staff are available to discuss the paper's
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members of the public.
© Commonwealth of Australia 2005
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