Bills Digest no. 11 2006–07
New Business Tax System (Untainting Tax) Bill 2006
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
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Tax Laws Amendment (2006 Measures
No. 3) Bill 2006
New Business Tax System
(Untainting Tax) Bill 2006
Date introduced: 25 May
2006
House: House of Representatives
Poortfolio: Treasury
Commencement: The Bills have various commencement dates. Where
necessary, the respective commencement dates will be provided as
part of the analysis of the individual Schedules below.
Abbreviations
ADRAS
|
Alternative Dispute Resolution Assistance Scheme
|
Amendment Bill
|
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
|
CGT
|
Capital Gains Tax
|
Commissioner
|
Federal Commissioner of Taxation
|
Court
|
Full Court of the Federal Court
|
FBT
|
Fringe Benefit Tax
|
FBTAA
|
Fringe Benefit Tax Assessment Act 1986
|
GST
|
Goods and Services Tax
|
GST Act
|
A New Tax System (Goods and Services) Act 1999
|
ITAA 1936
|
Income Tax Assessment Act 1936
|
ITAA 1997
|
Income Tax Assessment Act 1997
|
ITTPA
|
Income Tax (Transitional Provisions) Act 1997
|
MLS
|
Medicare Levy Surcharge
|
SGAA
|
Superannuation Guarantee (Administration) Act 1992
|
TAA 1953
|
Tax Administration Act 1958
|
TIA
|
Taxation Institute of Australia
|
Untainting Tax Bill
|
New Business Tax System (Untainting Tax) Bill 2006
|
UTAS
|
Unfair Termination Assistance Scheme
|
The Tax Laws Amendment (2006 Measures No. 3) Bill 2006
(Amendment Bill) is an omnibus bill and has a variety of purposes.
Each of the purposes is set out as part of the analysis of each of
its 15 Schedules below. The New Business Tax System (Untainting
Tax) Bill 2006 (Untainting Tax Bill) will impose an untainting
tax.
The Backgrounds to the respective Schedules of the Amendment
Bill as well as the Untainting Tax Bill will be, where necessary,
discussed as part of the analysis of each of the 15 Schedules
below.
The Tax Laws Amendment (2006 Measures No. 3)
Bill 2006
Schedule 1 Cyclone Larry income support payments
End of March 2006, the category five Cyclone Larry hit the
northern shores of Queensland, causing significant devastation,
especially in the area around the North Queensland town of
Innisfail.(1) It followed a broad wave of support to
help those affected by the cyclone, with both the State and Federal
governments promising immediate help.(2) The support
provided at federal level included, so far, ex-gratia payments and
reimbursements under the Natural Disaster Relief Arrangements.
These measures were announced by the by the Prime Minister, the
Hon. John Howard immediately after the devastating cyclone hit the
area.(3) More recently, the Prime Minister announced
further assistance to farmers and small businesses, including
concessional loans with deferred repayment options and an income
support program.(4) The measure contained in Schedule 1
of this Bill is part of the comprehensive package of support
measures, provided to the people of the region by the Federal
government.
Under current income tax law, income support payments are
considered to be ordinary income. Ordinary income, however, is
fully taxable unless a statute provides that the payment can be
offset. An offset is a direct subtraction from the income tax
liability of the taxpayer.(5) In order to provide tax
relief to recipients of Cyclone Larry income support payments, a
statutory basis for a tax offset must be created. The proposed
measure in Schedule 1 will make the necessary amendments to create
this statutory basis by making changes to the Income Tax
Assessment Acts 1936 (ITAA 1936) and the Income Tax
Assessment Act 1997 (ITAA 1997). These changes will extend the
applicability of rebatable benefit provisions to Cyclone Larry
income support payments as provided to farmers and small
businesses.
Item 1 proposes to add proposed
paragraph 160AAA(1)(e) to the provisions to the
statutory definition of rebatable benefit. This proposed paragraph
will provide that monies paid by way of income to support farmers
and small business owners affected by Cyclone Larry will qualify
for the tax offset.
Items 2 and 3 will make the
necessary changes to Division 13 of the ITAA 1997, the tax offset
guide. Division 13 of the ITAA 1997 lists all the payments which
can be offset. These two items will add Cyclone Larry income
support payments to the lists of payments.
Under item 4 of Schedule 1, the amendments will
only be applicable to the income years spanning from 2005-06 to
2007-08. The financial impact of this measure will be negligible in
relation to revenue for the income year 2006-07 and $500,000 for
the income year 2007-08.(6) The compliance costs for
taxpayers will be negligible.(7)
Under the proposed law, Cyclone Larry income support payments
will be treated the same way as payments made by the government to
recipients of the New Start allowance.
In the wake of Cyclone Larry, the Federal governments also
announced to provide certain payments to business out of the
Business Assistance Fund(8) and for fuel excise
relief.(9) The measure contained in Schedule 2 of this
Bill will ensure that the payments made to the businesses will be
tax free.
Under current income tax law, government support payments such
as the business assistance payments are considered to be ordinary
income which is fully taxable as assessable income. Further, fuel
excises relief is considered under tax law to be a subsidy or
bounty and therewith assessable income. As a result, these relief
payments are also taxable. The proposed measure in Schedule 2 will
ensure the tax-free status of these two payments by deeming the
payments to be non-assessable non-exempt income. Non-exempt non
assessable income is income which is both:
- excluded from the taxpayers assessable income, and
- ignored when working out the taxpayer s available
losses.(10)
Item 1 of Schedule 2 stipulates that business
assistance and fuel excise relief payments will be non-assessable
non-exempt income.
The availability of the measure in Schedule 2 is limited to the
income years 2005-06 and 2006-07. However, its financial impact is
expected to reverberate through until the income tax year 2009-10.
The revenue implication of this measure will be:(11)
Year
|
2006-07
|
2007-08
|
2008-09
|
2009-10
|
Impact on revenue
|
$38.0m
|
$21.5m
|
$11.0m
|
$7.5m
|
the implementation costs are expected to be small, with the
ongoing compliance costs for taxpayers minimal.(12)
Schedule 3 will extend the beneficiary tax offset available for
interim income support payments to drought affected taxpayers. The
amendments proposed relate to subsection 160AAA(1) ITAA 1936 and
section 13-1 of the ITAA 1997. The amendments resemble the
amendments made by Schedule 1 of the Amendment Bill and the reader
is referred to this discussion above.
The offset available to interim income support payments
available to drought affected taxpayers will apply from the income
tax year 2005-06 onwards.
According to the
Explanatory Memorandum, the revenue implications of this
measure will be $1 million per income tax year projected of the
next four income tax years. The compliance costs for the taxpayers
is expected to be negligible.
Schedule 4 will make further amendments to the simplified
imputation system. This measure will re-introduce so-called share
capital tainting rules which had been turned-off by the legislature
in 2002, perhaps, as recently suggested, inadvertently
.(13)
The origins of the imputation system in Australia reach back to
1987 when the Taxation Laws Amendment (Company Distributions)
Act 1987 inserted Part 111AA, dealing with franking of
dividends, into the ITAA 1936.
Broadly speaking, the simplified imputation system (SIS) is a
device which enables income tax payments made by a corporate tax
entity to be passed on to its shareholders: the company s tax is
imputed to the taxpayer. The imputation occurs in the form of an
imputation credit. The credit is passed on and included in the
assessable income of the resident taxpayer. The resident taxpayer
is entitled to use the imputation credit as an offset in the amount
equal to the credit. The purpose of the SIS is to avoid the
double-taxation of both income earned and distributions made by
companies.(14)
The flow-chart below explains the workings of the SIS in
relation to a resident company/resident
taxpayer:(15)

For a detailed discussion of tainted share capital accounts,
their history and the different tax treatment of tainted and
untainted accounts, the reader is referred to the Bills
Digest prepared in relation to the Taxation Laws Amendment (No.
7) Bill 1999.(16) The rules relating to tainted share
capital accounts are part of a whole suite of measures designed to
limit the possibility for abuse of the imputation system. In their
original form, the share capital tainting rules aimed at preventing
companies disguising a dividend as a tax preferred capital
distribution from the share capital account .(17) These
original rules applied to companies are until 1 July 2002. The CCH
Australian Master Tax Guide 2006 explains their operation:
Under the pre-1 July 2002 provisions, special
rules applied where a company tainted its share capital account by
transferring amounts from other accounts to it (eg by capitalising
profits and transferring them into the account). If a company s
share capital account was tainted, distributions debited to the
account were unfrankable.
Broadly, where a company transferred an amount to
its share capital account from another account, the account was
tainted and was no longer treated as a share capital account ( ).
Further, a franking debit arose on the day of the transfer.
A company could untaint its share capital account
by making an irrevocable written election ( ). In certain
circumstances, this election might trigger an additional franking
debit or a liability to pay untainting tax.(18)
The period after 1 July 2002, collapses into two further periods
because the measure proposed in this Amendment Bill will not
operate retrospectively to cover this entire period. Therefore,
after the successful passage of this proposed law, the following
periods can be distinguished:
- between 1 July 2002 and 25 and May 2006, no applicable tainting
rules will exist, even after the amendments proposed by this
Amendment Bill have been passed into law. As a result, any amounts
transferred by a company into its share capital account between
this period will not cause the share capital account to be
tainted.(19)
- from 26 May 2006 onwards, the day after the proposed measure in
Schedule 4 has been introduced into Parliament, the proposed new
regime will apply. For more information on the new regime, see the
discussion under Main Provisions below.
Schedule 4 is comprised of four parts. These parts contain:
- the re-written share capital tainting rules (Part 1 of Schedule
4)
- the consequential amendments relating to the re-written rules
(Part 2 of Schedule 4)
- several amendments to the original share capital tainting rules
(Part 3 of Schedule 4), and
- the relocation of the definition of share capital account (Part
4 of Schedule 4).
Item 1 proposes to add Division
197 to the ITAA 1997, setting out the rules concerning
tainted share capital accounts. Proposed subsection
197-5(1) contains the general rule, that is, that Division
197 will apply to amounts transferred to a capital share capital
account from any other company account. This subsection also
clarifies that the general rule will apply to Australian resident
companies. However, proposed subdivision 197-A
contains a number of exclusions which, if they are fulfilled, stop
Division 197 from applying to the amount with the result that the
account may not be tainted. These exclusions include the following
accounting events:
- exclusions for amounts that could be identified as share
capital (proposed section 197-10)
- exclusion for amounts transferred under debt/equity swaps
(proposed section 197-15)
- exclusions for amounts transferred leading to there being no
shares with a par value non-Corporations Act companies
(proposed section 197-20)
- exclusion for transfers from option premium reserves (proposed
section 197-25)
- exclusion for transferred made in connection with
demutualisation of non-insurance etc companies (proposed
section 197-30)
- exclusion for transfers made in connection with
demutualisations of insurance etc. companies (proposed
section 197-35), and
- exclusions for post-demutualisation transfers relating to life
insurance companies (proposed section
197-40).
For details in relation to individual exclusions and examples as
to their application, the reader may refer to the
Explanatory Memorandum.(20) Some of the proposed
exclusions are re-enactments of previously existing ones, however,
the list has been expanded. It has been suggested that the most
commonly used exclusions will be exclusions relating to the
debt/equity swaps and the conversion or demutualisation of
companies.(21)
The tainting of the capital account has consequences for the
company. Proposed subdivisions 197-B and
197-C will deal with the consequences arsing out
of the transfer of an amount captured by this Division.
Proposed subdivision 197-B, comprised of
proposed section 197-45, stipulates that a
franking debit will arise in a company s franking account if an
amount is transferred as described in proposed section
197-5. This franking debit will arise immediately before
the end of the franking period in which the transfer of amount
occurred (proposed subsection (197-45(1)).
Proposed subsection 197-45(2) sets of the formula
according to which the franking debit is calculated. The
calculation of franking debit is depending upon the franking
benchmark set by the company for the franking period.
Proposed subdivision 197-C deals with the
second consequence of the transfer the tainting of the share
capital account. Where an amount is transferred pursuant to
proposed subsection 197-5(1), the transfer
will taint the share capital account. It will remain tainted until
the company chooses to untaint the account (proposed
section 197-50). The choice to untaint the account
can be made at any time using an approved form, however, once made,
the choice is irrevocable (proposed subsection
197-55(2)). When choosing to untaint the account, several
implications may arise. These include:
- a liability to tainting tax may arise (proposed section
197-60), and
- a further franking debit may arise (proposed section
197-65)
The amount of tainting tax payable under proposed
section 197-60 will depend upon, first, the type
of shareholders a company has and, second, a company s chosen
franking rate. The type of shareholder is defined in proposed
subsection 197-60(1), distinguishing between:
- lower tax members shareholders with a marginal tax rate on
dividend income of less than 30 percent. Proposed paragraph
197-60(1)(a) lists other companies, complying
superannuation entities and foreign residents as falling within
this category, or
- higher tax members shareholders whose marginal tax rate on
dividend income is more than 30%.
Specialist revenue law advisers Greenwoods + Freehills have
explained the interaction between kind of the type of taxpayer and
the choice of benchmark as follows:
- If the company is owned entirely by taxpayers with a marginal
tax rate on dividend income at or below 30% (for example, complying
superannuation funds, other companies or non-residents) and its
franking rate was 100% in both years, no untainting tax is
payable. [ ]
- If the company is owned only by shareholders which are
complying superannuation funds, other companies or non-residents,
but its franking rate was less than 100%, untainting tax is
payable. [ ]
- If the company has any individual shareholders, again
untainting tax is payable. [ ](22)
The actual imposition of the tainting tax is, for constitutional
reasons, effected through separate legislation, the proposed New
Business Tax System (Untainted Tax) Bill 2006. The constitutional
background to this proposed legislation is discussed in the second
part to this Bills Digest.(23)
Division 2 of Part 1 sets out the application
and transitional provisions, proposing to amend the Income Tax
(Transitional Provisions) Act 1997 (ITTPA). Item
2 proposes to add Division 197 to the
ITTPA. Generally, proposed section 197-5 will
provide that proposed Division 197 (as inserted into the ITAA 1997
by Part 1 of Schedule 4) will apply to amounts transferred from 26
May 2006 onwards. Proposed subdivision 197-C will
set out special provisions, dealing with accounts tainted at the
time the pre-1 July 2002 regime was closed off.
Proposed Part 2 will make certain consequential
amendments necessary to implement the share capital tainting rules
set forth in Part 1 of this measure. Proposed are amendments to
various provisions of the ITAA 1936, the ITAA 1997 and the Tax
Administration Act 1953, necessary because of the proposed new
tainting rules. To achieve harmony between Part 1 and Part 2,
item 14 will stipulate that Part 2 amendments will
apply in relation to transfers made from 26 May 2006 onwards.
Part 3 proposes to amend the ITAA 1936,
modifying the original share capital tainting rules which
are still stipulated in this legislation.(24) These
amendments aim at ensuring the harmonisation of the original and
proposed new rules. The amendments concern the following ITAA 1936
provisions dealing with:
- debt/equity swaps
- option premium reserves
- demutualisation of insurance companies, and
- post-demutualisation transfers relating to life insurance
companies.
The application of the provisions in Part 3 is regulated by
item 19 which proposes that the changed provisions
will apply for the period between 1 July 1998 and 30 June 2002.
Part 4 proposes the relocation of the
definition of the term share capital account. Proposed
Division 1, item 20 will insert
proposed subdivision 975-G which defines the
meaning of the term share capital account for the purposes
of the tainted share capital account rules (proposed
section 975-300). Proposed Division
2 will make further consequential amendments which arise
from the relocation of the definition.
There has been little reaction to the proposed changes. However,
the reaction from some of the major accounting firms seems to
suggest some relieve that the issue has now been addressed by the
legislature and a proposed legislative framework for tainting rules
is before Parliament.(25) Only some areas have attracted
criticism, including:
- lack of retrospectivity of the new rules as a result
of the new tainting rules not applying retrospectively:
- a total of three periods with different regulation content will
have to managed by companies and accountants, and
- a significant unregulated gap will exist between 1 July 2002
and 25 May 2006.(26)
- impact of the changes on groups it has been noted, that whilst
the
Explanatory Memorandum provides some explanation as to the
potential impact of the proposed changes on both consolidated and
multiple entry consolidation (MEC) groups, the proposed legislation
does not attend to the issue expressly. In the absence of such
express provisions, it has been criticised that the examples and
explanations provided by the
Explanatory Memorandum are insufficient. G + F have commented
that [a]gain, it is disappointing that such important matters are
not giving specific attention in the legislation.
(27)
Schedule 5 will make amendments to the ITAA
1997 for the purpose of providing a statutory exemption from
capital gains tax (CGT) for recipients of certain government
financial assistance payments. The financial assistance payments
specifically concerned in this schedule are:
- Unlawful Termination Assistance Scheme, and
- Alternative Dispute Resolution Assistance Scheme.
The grants paid by the government under these financial
assistance schemes either to employers or employees accompany the
government's recent changes to the Workplace Relations Act
1996.(28) Both assistance schemes aim at providing
financial relief to those who seek remedies against unlawful
termination of their employment or in relation to any other dispute
arising between the employee and the employer.(29)
Under current tax law, financial assistance payments such as
made under the Unlawful Termination Assistance Scheme and
Alternative Dispute Resolution Assistance Scheme would
qualify as a capital gain. This capital gain could lead to an
increase in the assessable income of the taxpayer and therewith to
an increase in the taxpayers tax liability.(30) To avoid
this consequence, the proposed new law will provide that for CGT
purposes, capital gains in form of payments made and under the
financial assistant schemes will be ignored.
Item 1 of Schedule 5 will the repeal current
subsection 118-37(2) of the ITAA 1997, replacing it with proposed
subsection 118-37(2). This new subsection will
deem exempt from CGT, certain payments which have been received
either as:
- reimbursement
- payment of expenses
- voucher, or
- certificate.
Under proposed paragraph 118-37(2)(e), this
will include payments made under the Unlawful Termination
Assistance Scheme or Alternative Dispute Resolution
Assistance Scheme.
Under item 2, payments received under the
Unlawful Termination Assistance Scheme or Alternative
Dispute Resolution Assistance Scheme will be ignored from the
income year 2005-06 onwards. According to the
Explanatory Memorandum, the financial impact of this measure as
well as the compliance cost will be negligible.(31)
Schedule 6 will introduce a new measure which will enable
certain taxpayers to offset the Medicare levy surcharge (MLS) where
the taxpayer received a significant proportion of income in one
income year in form of a lump sum payment in arrears. Currently,
such payments, even if made in relation to a previous tax year,
attract the MLS of 1.5 percent of the taxpayer s total taxable
income. New proposed law will provide that certain lump sum
payments will not attract the MLS. These lump sum payments include
according to proposed section 61-590 ITAA
1997:
- Lump sum payments of eligible income within the meaning of
159ZR of the ITAAA 1936 which is included in the taxpayer s
assessable income, and
- Lump sum payments included in the taxpayer s exempt foreign
employment income (MLS lump sum).
Essentially, the proposed measure harmonises the treatment of
MLS Lump Sums for income-tax and MLS purposes.
Item 4 of Schedule 6 will introduce proposed
subdivision 61-L Tax offset for Medicare levy surcharge (lump sum
payments in arrears) into the ITAA 1997. The operative provisions
of this subdivision include:
- proposed section 61-580: Entitlement to tax
offset this provision will set out the prerequisites for the
entitlement to the Medicare Levy Surcharge lump sum (MLS
lump sum) offset.(32) The requirements in proposed
subsection 61-580(1), concerning the taxpayer,
include, amongst others:
- that the Medicare levy surcharge will be payable for the
current income year
- that the assessable income or the taxpayer s
exempt foreign employment income for the current income
year includes one or more MLS lump sum payments,(33)
and
- the MLS surcharge lump sum payment in arrears is equal
to or greater then ten percent of the taxpayer is taxable
income.
Proposed subsection 61-580(2) provides the
requirements for a tax offset for MLS lump sum payments available
to a taxpayer s spouse. These requirements include that:
- the person was during all or a part of the current financial
year married to the taxpayer
- the taxpayer is entitled to the tax offset for the current
financial year
- the Medicare levy surcharge is payable
- that the spouse is not entitled to the tax offset as a taxpayer
in his or her own right under section 61-580(1), and
- the Medicare levy surcharge would be payable by the taxpayer if
the analyst lump sum is were not paid, were disregarded.
Proposed section 61-585 sets out the method of
calculating the amount of the tax offset.
Proposed section 61-590
provides the definition for the newly introduced term MLS lump
sum.
Items 5, 6 and
7 will introduce new definitions into the
definition subsection 995-1(1) of the ITAA 1997. The terms include
exempt foreign employment income, Medicare Levy
surcharge and MLS lump sum.
Items 1, 2, 9, 10 and 11 will
make several consequential amendments, including adding notes
identifying the offset in the Medicare Levy Act 1986 and
the Medicare Levy Surcharge Fringe Benefits) Act 1999.
Item 8 proposes to insert Part 2-20 into the
Income Tax (Transitional Provisions) Act 1997, providing
that the application of proposed Subdivision 61-L as discussed
above will commence with the income year 2005-06.
According to the
Explanatory Memorandum, the costs to revenue will be $0.1
million for the income years 2006-07 to 2008-09. The compliance
costs are estimated to be minimal.(34)
It may be possible for employee to restructure their income in a
way to receive income, or a substantial proportion of their income,
as payment in arrear, attracting the operation of this Division. In
this instance, these employees could avoid the application of the
MLS despite not being privately health insured.
Schedule 7 proposes amendments to the Superannuation
Guarantee (Administration) Act 1992 (SGAA), introducing
certain reporting requirements, including:
- reporting requirement for superannuation contributions
(proposed section 78 SGAA), and
- the reporting requirement the contributions are transferred
between superannuation providers (proposed section 78A
SGAA).
The reporting requirements existed prior to the abolition of the
superannuation surcharge.(35) The information was to be
communicated to the Commissioner so that the superannuation
surcharge liabilities could be ascertained.
Item 3 proposes to insert new sections 78 and
78A into the SGAA. These new provisions set out the framework under
which superannuation providers have to report to the Commissioner.
This includes:
- the circumstances in which the superannuation provider has to
provide information to the Commissioner (proposed
subsections 78(3) (5) and 78A(3) (5)
SGAA)
- the kind of information which must be provided (proposed
subsections 78(3) and 78A(3)
SGAA), and
- an administrative penalty regime, setting out the circumstances
in which superannuation providers will be liable to an
administrative penalty of five penalty units (proposed
subsections 78(1) (2) and 78A(1) (2)
SGAA).
The reporting requirements will apply retrospectively in
relation to financial years starting on or after 1 July 2005
(item 6, clause (1)). This
measure has the potential to conflict with subsection 12(2)
Legislative Instruments Act 2003 which provides that
legislative instruments will have no effect if they operate
retrospectively and affect rights of persons to their disadvantage
or impose liabilities. Accordingly, item 6,
clause (2) overrides this subsection to ensure
retrospectivity.
According to the
Explanatory Memorandum, the financial impact of the measure is
expected to be nil, with negligible compliance costs for
taxpayers.
Comment
These proposed changes are essential for the proper
administration of the Superannuation Guarantee regime.
Schedule 8 proposes amendments to the Fringe Benefits Tax
Assessment Act 1986 (FBTAA) to implement a fringe benefit
exclusion for fringe benefits provided employers to their employees
to address certain security concerns. The then Assistant Treasurer,
the Hon. Mal Brough, has announced this measure on 8 September
2005.(36) The measure has been the subject of a
consultation process, however, the consultation has been conducted
confidentially.(37)
The CCH Australian Master Tax Guide 2006 describes the fringe
benefits tax as:
a tax payable by employers on the value of certain
benefits, known as fringe benefits , that have been provided to the
employees or to associates of those employees in respect of their
employment.(38)
The benefit which attracts the fringe benefit tax (FBT) is
generally understood to include any right, privilege, service or
facility.(39) Accordingly, measures taken to address an
employee s security concerns would constitute a benefit for the
purposes FBT which, if exceeding a certain limit, would have to
reported. As a result, the benefits may become taxable. The
reporting of such benefits is excluded where a statutory fringe
benefit exclusion applies to the benefit. The proposed new law in
Schedule 8 aims at creating such statutory exclusion.
Item 1 will add proposed paragraph
5E(3)(l) to existing subsection 5E(3) of the FBTAA. This
added paragraph will provide that a personal security related
benefit, for example in form of monitored intruder alarms or
bodyguards, is provided by employers to employees or their
associates, would not attract fringe benefits tax. Crucial for the
operation of this proposed paragraph are the following three
terms:
- security concerns according to the
Explanatory Memorandum, a security concern will exist where
there is a risk to the employee s personal safety specifically
connected to the nature of the work carried on by the employee,
regardless of whether there is a direct threat from identified
individuals all parties. (40)
- personal safety the measure will only cover
benefits provided to employees to ensure their personal
safety. Personal safety concerns in this context may arise
from threats, such as, for example, death threats, but also threats
of being kidnapped or assaulted. According to the
Explanatory Memorandum, it is the legislature's intention that
benefits, which relate to other safety aspects such as threats to
the property of the employee or associate, will not be covered by
this fringe benefit exclusion.(41)
- in respect of the employee s employment for
the exclusion to operate, the security concern must have arisen
within the context of the employee s employment. The
Explanatory Memorandum notices that the phrase in respect of
used in proposed paragraph 5E(3)(l) ought to include the meaning by
reason of, by virtue of, or for or in relation directly or
indirectly to that employment. (42)
The measure is designed to extend to benefits which are provided
not only to current employees, but also to past and future
employees. Further, the provision will be broad enough to not only
include the provision of benefits to the employee but, by virtue of
section 159 FBTAA and 26AAD of the ITAA 1936, also to the employee
s relatives, spouse and children.
Item 2 will add proposed subsection 5E(6) to
the FBTAA. This provision will stipulate that only those fringe
benefits which were provided consistent with a threat assessment
will come within the scope of the exclusion. The provision will
also provide that the threat assessment must have been made by a
person deemed to be competent to make such threat assessments. This
includes:
- a relevant industry body or government body, or
- the Commissioner.
The exclusion will apply retrospectively from 1 April 2004 for
all future FBT years.(43) According to the
Explanatory Memorandum, the measure will cost approximately
$1 million in revenue per year. It is expected that the
compliance cost taxpayers is minimal.
The measure in Schedule 9 aims at adequately restricting funding
credits use. Funding credits can be applied by certain
superannuation funds to reduce taxable contributions relating to
the unfunded liabilities.(44) In relation to unfunded
superannuation funds, credits were granted so that contributions
made after 1 July 1988 to fund benefits that accrued prior to 1
July 1988 are tax neutral. The credits must be available because
unfunded superannuation schemes can be funded by a one-off
contribution covering the entire period a person worked: from the
day the person commenced work until the day the person retires and
receives the benefits from the unfunded superannuation
scheme.(45) Where the person s work commencement day was
prior to 1 July 1988, and both the day of the one-off contribution
to the fund and the retiring date were after 1 July 1988, the 15
percent contribution tax applied to the whole contribution. This is
the result despite parts of the contribution covering the pre-1
July 1988 period (that is, the pre-contribution period in which no
tax liability existed). To remedy this situation, funding credits
were available to offset effectively the contributions tax paid for
the pre-1 July 1988 portion of the contributions tax. The
Explanatory Memorandum contains a timeline with further
explanations to which the reader is referred.(46)
The current law permits the use of funding credits by
superannuation funds to reduce their tax liability in relation to
some of the contribution made with respect to post 1 July 1988
benefits. This unintended outcome is proposed to be rectified by
items 1 to 4 which amend sections
275B and 275C of the ITAA 1936. Importantly, item 1 proposes to
change the current formula-based rule relating to funding credits
to a principle-based rule, to be substituted as proposed
paragraph 275B(2)(b).
Item 5 stipulates the application of the
measure, providing that the measure will apply from 9 May 2006
onwards. The application provision also attempts to prevent
avoidance of the new provisions by providing that outstanding
objections or requests for amendments lodged on or after 9 May 2006
can only be amended in relation to funding credits up to the amount
that can be claimed under the new law.
It is estimated that the compliance costs with respect to this
measure will be minimal, whilst the financial impact of the
proposal will be $150 million of the next four financial years.
The
Explanatory Memorandum notes that the payment of tax may occur
in circumstances where a fund becomes fully funded in a particular
income year, but pays out benefits of comparatively lesser value
than the amount contributed to the fund. Currently, the number of
private sector unfunded superannuation scheme is declining rapidly
and this circumstance may be occurring more commonly. The proposed
amendments seek to ensure that the correct amount tax is collected
in these circumstances.
Under the current law, Public Ancillary Funds and
Prescribed Private Funds are not eligible to apply for an
Australian Business Numbers (ABN).(47) As a result, they
are not able to access certain tax benefits for which an ABN is an
essential prerequisite. The measure in Schedule 10
will make changes to the A New Tax System (Goods and Services
Tax) Act 1999 (items 1 and
2) and the A New Tax System (Australian
Business Number) Act 1999 (items 3 and
4) to provide these funds with the opportunity to
obtain an ABN. Once an ABN is obtained, the ABN holding funds can
seek endorsement through the Commissioner to have access to
income-tax exemptions, to receive input tax credits for goods and
services tax (GST) as well as other GST related benefits.
Item 5 prescribes that the measure will be
applicable to tax periods starting on or after 1 July 2005. The
Explanatory Memorandum specifies the costs to revenue and
compliance costs as unquantifiable, yet insignificant, and minimal
respectively.(48)
Schedule 11 proposes the creation of five new
general categories of so-called deductible gift recipients
(DGRs).
Many organisations engaged in activities which, in layman s
terms, may be considered charitable, will not qualify as a charity
in the legal sense when assessed against the strict common-law
definition of charity developed by the courts.(49) Thus,
they would not be entitled to important benefits available to
charities, including significant tax benefits.
To provide such organisations with relief from the overall tax
burden and to encourage potential donors to give to such
organisations, the legislature has enabled the Australian Taxation
Office (ATO) to endorse certain types of organisations as so-called
DGRs.
Endorsement occurs based on assessing the organisation against a
set of criteria set out in categories.(50) Examples of
these categories are public benevolent institutions, public
universities, public hospitals, school building funds, public
libraries, registered cultural and environmental organisations and
ancillary funds. A full list is set out in Division 30, subdivision
30-B of the Income Tax Assessment Act 1997. Importantly,
these are not just plain administrative categories. Rather, they
are created by the legislature with the basic applicable rules
relating to DGRs set out in Division 30 of the ITAA 1997.
Once an organisation is endorsed by the ATO, the organisation is
able to attract two kinds of tax concessions for itself in form of
certain tax exemptions and benefits and for the donor who can claim
certain donations as a tax deduction.
The measure in Schedule 11 proposes to establish five new DGR
categories, including a category for:
- war memorials
- disaster relief
- animal welfare
- charitable services, and
- educational scholarships.
Item 6 of Schedule 11 proposes to add
item 5.1.3 to subsection 30-50(1), creating the
legislative basis for the endorsement of organisations solely
providing funds to reconstruct or make critical repairs to war
memorials. This category will be subject to further conditions,
including that the memorial:
- is located in Australia
- commemorates certain events or people
- is the focus of public commemoration of such events or people,
and
- is solely on mainly used for this purpose.
The
Explanatory Memorandum contains a set of examples to which the
reader may refer.(51)
The proposed amendments also create a category in relating to
disaster relief. Importantly, this category will distinguish
between and disaster relief provided by certain funds to:
- disaster relief in Australia, and
- disaster relief in developed countries.
Item 4 will add proposed item
4.1.5 to subsection 30-45(1) which will provide the anchor
point for this category. Under the proposed law, public funds
established for a charitable purpose aiming solely at providing
money for the relief of people in Australia and distress may be
endorsed as DGRs.
Item 5 will insert a proposed section
30-46 into the ITAA 1997. This section will provide the
criteria for a public fund to be endorsed as a DGR. Relevantly,
this proposed provision will characterise the kind of disaster for
which the funds may provide relief. For a disaster to qualify under
this measure, it must:
- be declared to be a disaster by the relevant decision maker
(proposed paragraph 30-46(1)(a))
- have developed rapidly (proposed paragraph
30-46(1)(b)), and
- have resulted in the death, serious injury or other physical
suffering of a large number of people or in widespread damage to
property or the natural environment (proposed paragraph
30-46(1)(c)).
Under proposed subsection 30-46(2), a time
frame will apply within which gifts to DGRs endorsed under this
category must be made to be deductible. This time frame is two
years and is linked to the day on which the disaster was declared
to be a disaster for the purposes of this provision.
Item 8 proposes to add proposed item
9.2.2 to subsection 30-80(1) which will establish a
category under which certain public funds providing money for the
relief of people in countries other than:
- Australia, and
- declared developing countries
may be endorsed as a DGR. These public funds must be established
and maintained by a public benevolent institution. Relief must be
provided in relation to disasters which fulfil the criteria
contained in proposed subsection 30-86(1).
Item 11 proposes to insert section
30-86. Proposed subsection 30-86(1)
provides that the disaster must be recognised by the Treasurer. The
Treasurer may recognise a disaster if satisfied that the
disaster:
- developed rapidly, and
- resulted in death serious injury or other physical suffering of
a large number of people or in widespread damage to property or the
natural environment.
Proposed subsection 30-86(2) provides certain
procedural requirements applying to the Minister s recognition of
the disaster, and proposed subsection 30-86(4)
limits DGR status of disaster relief organisations to a maximum if
two years. The recognition of a disaster by the Minister is not a
legislative instrument within the meaning of the Legislative
Instruments Act 2003 and therefore not subject to the
disallowance procedure in Parliament (proposed subsection
30-86(3)).
Schedule 11 will also introduce a new DGR category for
charitable institutions which provide care and rehabilitation to
certain animals. Item 4 will add proposed
item 4.1.6 to the table in subsection 30-45(1) the
ITAA 1997, creating this new category.
This new item 4.1.6 will provide that charitable institutions
with the principal activity of either:
- providing short-term direct care to animals that have been lost
or mistreated or are without owners, or
- rehabilitating orphaned, sick or injured animals that have been
lost or mistreated or are without owners
may be endorsed by the ATO as DGRs. Importantly, charitable
institutions looking after native animals will not be able to be
endorsed as a DGR under this proposed new category. According to
the
Explanatory Memorandum, such institutions maybe covered as a
general environmental organisation under sections 30-55 of the ITAA
1997.(52) Also notice that the principal activity must
be care or rehabilitation where the principal purpose is, for
example, political lobbying, the institution will not be able to
gain endorsement by the ATO under this category. The
Explanatory Memorandum contains a number of examples, to which
the reader may refer.(53)
Under the current law, public benevolent institutions concerned
with the:
- prevention or control of disease in human beings, or
- prevention and control of behaviour that is harmful or duty to
human beings
are not capable of endorsement as a DGR. Item 4
will rectify this situation, proposing to add new item
4.1.7 to the table contained in subsection 30-55(1) of the
ITAA 1997, creating a new DGR category labelled Charitable
Services. This category will only be open to institutions,
which also provide the above-mentioned services. Institutions which
provide solely the above-mentioned services will not be caught by
this proposed category, however, they may qualify as charitable
under other provisions in the ITAA 1997, including as a possible
health promotion charity (section 30-20 ITAA 1997) or a harm
prevention charity (section 30-45 ITAA 1997).
Item 1 of Schedule 11 proposes
to add item 2.1.13 to subsection 30-25(1) of the
ITAA 1997, proposing to create a new DGR category for educational
scholarships. Proposed item 2.1.13 will provide that public funds
which are established for charitable purposes, solely providing
money for scholarships, bursaries or prices may be endorsed by the
ATO as a DGR. The category, however, is subject to the provisions
in item 2, proposed section 30-37
of the ITAA 1997, which applies a set of conditions to
scholarships, bursaries or prices provided by the public fund.
These conditions include that scholarships, bursaries and
prices:
- may only be awarded to citizen or permanent residents
- must be open to individuals or groups within certain
geographical areas
- must promote education in preschools, primary schools,
secondary or tertiary education institutions both in Australia or
overseas, and
- must be awarded on either equity or merit grounds.
In addition, a public fund may impose reasonable criteria and
eligibility conditions, so that the scholarships, bursaries and
prizes can be targeted appropriately. Importantly, payments which
are made to the public fund must be made voluntarily for them to
remain tax deductible. For example, a payment will not be
considered voluntary payment if it was made with the intention of
achieving a beneficial flow-on effect such as in form of reduced
school fees for the donor s child.(54) Again, the
Explanatory Memorandum contains numerous examples which assist
in explaining the various conditions of this DGR
category.(55)
Schedule 12 will make several amendments to the
A New Tax System (Goods And Services Tax) Act 1999 (GST
Act), modifying some of the law relating to certain
charities within the meaning of the GST Act
(charities).(56) Primarily, the changes relate to the
following issues:
- eligibility for cash accounting
- eligibility for GST free supplies
- the choice to elect to input tax fund raising events
- the ability to create non-profit sub entities
- the ability to treat certain reimbursements as credit the
creditable acquisitions, and
- no denial of input tax credit for gifts made to certain
entities.
Below is a brief discussion of each of the issues, including,
where necessary, a brief background relating to the issue and a
discussion of the main provisions. The reader may note that the
Digest follows the structure of the
Explanatory Memorandum for ease of
reference.(57)
This measure will make changes to the cash accounting rules for
some charities and gift-deductible entities.
Unless an entity has chosen to account for its goods and
services tax (GST) liability on a cash basis, or the commissioner
has committed this entity to do so, the general principle is that
the entity is required to comfort GST on accrual basis
only.(58) The Australian GST Handbook 2004/05
explains that:
There can be significant cash flow consequences
depending on whether an entity accounts for GST on a cash or
accruals basis. Whether the consequences are positive or negative
for a particular entity depends on the speed with which it pays its
creditors and collect payment from its because.(59)
Section 29(40) GST Act sets out the requirements according to
which an entity can choose to use cash basis accounting.
Importantly, the entity has to within the current cash accounting
turnover threshold. This threshold is currently $1 million. This
cash accounting turnover threshold, however, does not apply to
gift-deductible entities. They can utilise cash accounting
regardless of their turnover. Based on the Report of the
Inquiry Into The Definition Of Charities And Related
Organisations, the Government has decided to modify the cash
based accounting rules relating to gift-deductible entities. These
changes are designed to encounter suggestions that, under the
current law, gift-deductible entities which operate funds or
institutions endorsed as tax deductible gift recipients can use
cash accounting for its entire operations even though only a minor
part of the entity s activities is charitable.
Under the proposed law, cash accounting for GST will only be
available to the whole operation of the entity if it fulfils the
general requirements applicable under the GST Act. Item
14 of the Schedule 12 will insert proposed
Division 157 into the GST Act for two reasons:
- first it is envisaged that the new location for the framework
will emphasise that it implements a special rule for the GST
treatment of charities, and
- second it will set out the new framework upon which charities
can choose their accounting basis.
Proposed subsection 157-5(1) will set as
general principle that charities may choose to account on cash
basis in relation to GST liability. This provision will also
contain the timing device, stipulating that this choice will take
effect from the first day accounting basis has been chosen by the
charity. Proposed subsections 157-5(2) and
(3) provide exceptions to this general
principle:
- subsection 157-5(2) will specify that
charitable institutions and trustees of charitable funds must be
themselves endorsed charitable institutions or
endorsed trustees for the above general principle to
apply, and
- subsection 157-5(3) will provide in relation
to gift-deductible entities that the general principle
will not apply unless the entity is itself a
charity.(60)
The proposed effect of these amendments is that a charity will
be unable to choose cash based accounting merely on the basis of
having some operations which have some form of recognised
charitable status. In order to be able to make this choice, the
charity must qualify for the accounting base in its own right.
A similar problem arises in relation gift-deductible entities
entitlement to provide GST free or input taxed supplies. Under the
current law, gift-deductible entities are entitled to provide
supplies GST free or input taxed. However, due to the breadth of
the term gift-deductible entities, such entities may be eligible
provide GST free or input taxed supplies for their entire
operation, although only a minor or even negligible aspect of the
operation attracts GST free or input taxed treatment.
Schedule 12 of the Bill proposes a variety of
modifications to the GST Act to counteract this problem and bring
the law in-line with the intended government policy.(61)
Items 6, 7, 9,
10 and 12 propose amendments to
current sections 38-250, 38-255, 38-270, 40-160 and 111-18 of the
GST Act, adding subsections to clarify that supplies made by
gift-deductible entities will only attract GST free and input taxed
status if the supplier, that is the gift-deductible entity, is a
charity. The
Explanatory Memorandum contains examples in relation to this
measure to which the reader is referred.(62)
The problem also arises in relation to the ability to create
so-called non-profit sub-entities.(63)
Non-profit sub-entities can be created by certain charities under
the special rule contained in Division 63 of the GST Act. The
effect of creating such sub entities is that their parents cease to
be responsible for them, a departure of the general treatment of
parents and branches under Division 54 of the GST
Act.(64) Due to the broad meaning of the term
gift-deductible entity, such entities may avail themselves of this
special rule even though only a small part of their operation in
fact can attract the application of the rule. Item
11 proposes to repeal current paragraph 63-5(2)(a),
substituting it with new paragraphs 63-5(2)(a) and (aa) with the
aim to ensure that only certain charities as well as
gift-deductible entities which are non-profit bodies will be able
to create non-profit sub-entities under Division 63 of the GST
Act.
For each tax period, entities must ascertain the so-called
net amount pursuant to section 17(5) of the GST Act. This
net amount is calculated by subtracting all input tax credits from
the total amount of GST for which the taxpayer is liable on the
taxable supplies attributable to that particular tax period
(section 17-5(1) GST Act). Depending upon the net amount, the
taxpayer has either a liability to, or a claim against, the
Commonwealth. In some circumstances, it is necessary to adjust the
net amount. Such adjustments may increase or decrease the net
amount and therewith the liability or claim of the
taxpayer.(65) The Australian GST Handbook 2004/05
describes the situation in which acquisition-related adjustments
can arise as follows:
If a registered entity makes acquisition or
importation and utilises the acquisition or importation solely or
partly for a creditable purpose, it is entitled to an input tax
credit. However, where the extent of the creditable purpose changes
in a subsequent period than the amount of input taxed originally
claimed as a credit may have to be adjusted. This will alter the
net amount calculated for the relevant tax
period.(66)
This kind of adjustment occurs according to Division 129 which
provides the framework for this kind of adjustment. Importantly,
under subsection 129-45(1) GST Act, the need for adjustment does
not arise where the supply took the form of a gift to a charity.
Subsection 129(2) provides an exception to this general rule:
charitable institutions or trustees of charitable funds, unless
they are endorsed, are not covered by it. However, the limitation
does not extend to gift deductible entities. Accordingly, the
problem alluded to above may arise in this context as well.
Item 13 will insert proposed subsection
129-45(3) to provide that gift- deductible entities will
not be able to invoke the general rule, unless the entity is a
charity itself.
Under section 38-260 GST Act, charitable institutions and
trustees of charitable funds operating retirement villages can
provide certain supplies GST free. This includes the supply of
accommodation in the retirement village, the supply of services
relating to the accommodation and meal supplies, as long as the
supply is made to a resident of the retirement village (subsections
38-260(a) (c)). Item 8 we will substitute the
current wording of paragraph 38-260(a) clarifying that only
endorsed charitable institution or trustees to will be
able to access this concession.
Chapter 13 of the Bill will implement a technical clarification
by amending the Tax Laws Amendment (Improvements to Self
Assessment) Act (No. 2) 2005 (the Act). It is envisaged, that
this clarification will put beyond doubt that the repeal of the six
year amendment period for general of anti-avoidance (part IVA)
amendments will apply to the 2004-05 income year and later income
years. According to the
Explanatory Memorandum, this technical correction will bring
into line the government's policy as announced in the Treasurer's
Press Release No. 106 of 2004 and the its legal
implementation.(67)
The financial impact and the compliance cost impact of this
measure are estimated to be nil.(68)
The background to the Wine
Equalisation Tax, and especially the tax rebate on the Wine
Equalisation Tax which is the issue of the tax measure of this
Schedule, has been discussed in detail in the Parliamentary Library
s Bills Digests to the Tax
Laws Amendment (Wine Producer Rebate and Other Measures) Bill
2004.(69) Subsequent to the introduction of the
rebate, the New Zealand government made strong representations
arguing that the rebate on the Wine Equalisation Tax granted to
Australian wine producers would contravene the Australia and New
Zealand Closer Economic Relations Trade Agreement of 1983 (CER).
Further, it was argued that the rebate would also violate the
General Agreement on Tariffs and Trade 1994(70)
(GATT), an integral part of the Marrakech Agreement
Establishing the World Trade Organization (WTO Agreement)
(referred to in this Bills Digest as WTO/GATT Agreement).
The Federal government reacted to these representations and
agreed to extend the eligibility to the rebate to New Zealand wine
producers. The respective measures have been introduced as Schedule
4 of the Tax
Laws Amendment (2005 No. 4) Bill 2005. Please refer to the
Parliamentary Library s Bills Digest to the Tax
Laws Amendment (2005 No. 4) Bill 2005 for a comprehensive
background, detailed analysis of the main provisions and discussion
of the potential issues under the WTO/GATT
Agreement.(71) Notice, however, that the measures passed
as Schedule 4 of the Tax
Laws Amendment (2005 No. 4) Bill 2005 have not yet commenced
operation.(72)
Under the
A New Tax System (Wine Equalisation Tax) Act 1999 (WET
Act), the Commonwealth levies a wine tax on dealings in wine at
wholesale level. The tax rate is currently 29 percent (paragraph
5-5(3)(b) of the WET Act). In order to assist especially small and
boutique wine producers, the Federal government decided in 2004 to
provide a tax rebate available to all wine producers. Under the
current law, wine producers are entitled to tax rebates capped at
$290 000. This equates to the equivalent of selling wine valuing
$1 million before the wine equalisation tax applies.
Under the proposed law, the tax rebate cap will be lifted from
$290 000 to $500 000. Items 1 and
2 will make the necessary changes to subsections
19-15 and 19-25 of the WRT Act, substituting the current cap set at
$290 000 with a cap set at $500 000.
According to item 3, the increased cap will
apply to dealings in wine from 1 July 2006.
According to the
Explanatory Memorandum, the revenue implications of this
Schedule will be as follows:(73)
Income year
|
2006-07
|
2007-08
|
2008-09
|
2009-10
|
Impact on revenue
|
$25m
|
$33m
|
$33m
|
$35m
|
However, it is unclear whether this projection includes the
expansion of the rebate to the New Zealand wine producers. See the
comment below.
It is expected that there will be no additional compliance costs
for taxpayers.
As indicated in the Bills Digests to the Tax
Laws Amendment (Wine Producer Rebate and Other Measures) Bill
2004 and Tax
Laws Amendment (2005 No. 4) Bill 2005, the rebate given to
Australian and New Zealand wine producers is likely to be a
contravention of Australia s international obligations under the
WTO/GATT agreement. The issues surrounding this rebate and its
extension to the New Zealand wine producers have been discussed at
length in these two Bills Digests to which the reader is referred
accordingly.
In addition, it is currently unclear whether the predicted
revenue implications will include the planned extension of the
measure to New Zealand wine producers. If not, the figures set out
in the
Explanatory Memorandum will be significantly higher as soon as
the amendments made by the Tax
Laws Amendment (2005 No. 4) Bill 2005 will come into force. In
the
Explanatory Memorandum to the Tax
Laws Amendment (2005 No. 4) Bill 2005, the additional costs for
the Australian taxpayer were estimated at $32 million dollars over
a period of 4 income years.(74)
This measure is proposed to counteract the Full Court of the
Federal Court s decision in Holdings Pty Ltd v Commissioner of
Taxation [2004] FCAFC 307.
The measure in this schedule is the legislature s reaction to
the Full Court of the Federal Court s (Court) decision in
Marana Holdings Pty Ltd v Commissioner of Taxation [2004]
FCAFC 307 (Marana). The decision in Marana concerned the tax
treatment of the sale of a particular strata title property. A
property developer purchased an old hotel converted the property,
after subdividing and renovating it, into residential apartments.
The developer then on-sold one of the apartments.
Relevant to the matter before the Court were two property
transactions: first, the transaction between the original owners of
the motel and the developer (first sale) and, second, the sale of
the property from the developer to a purchaser (second sale).
The second sale between the developer and the purchaser was the
contentious issue between the applicants and the Commissioner for
Taxation (Commissioner) because a question whether the sale of the
property was the sale of a new residential property for
the purposes of the A New Tax System (Goods and Services Tax)
Act 1999 (GST Act). If not, the transaction could have been
input taxed if so, the second sale would have attracted Good and
Services Tax (GST) (section 40-65 of the GST Act). Against the
submissions of the applicants, the Court decided that the second
sale was a transaction concerning a new residential
premises, basing its decision on a detailed consideration of
the terms residence and residential . Accordingly, the transaction
attracted GST.
The Court s decision has caused uncertainty for some taxpayers.
The
Explanatory Memorandum notes that:
The court's judgment has resulted in potential
difficulties in distinguishing between supplies of premises that
are residential premises and therefore input taxed and suppliers
that are taxable.(75)
It specifies the following areas of being of particular
concern:
- the short-term letting of strata title units such as serviced
apartments by owners to guests
- leasing of strata title units to Hotel operators or similar
operators, and
- leasing of display homes and provision of certain short-term
employee of accommodation.(76)
The proposed amendments aim at clarifying this uncertainty and
better implementing the Government s policy intent of the GST
law.
The Bill was referred to the Senate s Economics Legislation
Committee (Committee) on 14 June 2006. The Committee reported on
the Bill on 21 June 2006.(77) In relation to the measure
set out in Schedule 15, the Committee received two written
submissions, one by the Taxation Institute of Australia (TIA) and
one by KPMG.(78) At the hearing, it also received oral
evidence, provided by the policy manager of the Real Estate
Institute of Australia (REIA).(79)
The written submissions as well as the oral evidence provided to
the Committee were critical of the proposed amendments and
suggested the rejection of the measure. The main concern of the TIA
was the retrospectivity of the measure. It was argued that measure
could be a breach of the rule of law.(80) The submission
of KPMG focused more on the effect of the amendment itself, setting
out several examples or Illustration of the Flaws in the Bill to
demonstrate that the intended changes, as described in the
Explanatory Memorandum, would not be achieved by the proposed
law.(81) A third area of critique concerned the drafting
process of the ATO s GST Ruling 2000/20.(82) Officers of
the Treasury also provided oral evidence in relation to this
measure.(83)
Despite these concerns, the Committee, chaired by Senator
Brandis, recommended that the Senate should pass the legislation,
agreeing with the views expressed by the Treasury.(84)
The Labor Senators, Senator Ursula Stephens and Senator Ruth
Webber, provided additional remarks to the Report. The Senators
noticed that the evidence provided by Treasury conflicted with the
information provided in the
Explanatory Memorandum and requested the Minister to explain
the inconsistency.(85) The Senators also shared the
concerns relating to the retrospectivity of the measure, asking the
Minister to seek advice from the Commissioner as to whether
discretion could be used to grant relief to the taxpayers affected
by the retrospectivity.(86)
The amendments counteract the Marana decision. It is
intended to achieve this by disconnecting the meaning of
residential premises from the period of occupant
occupation or intended occupation of the premises. This is done in
form of a clarification. Accordingly, items 2 to
6 of Schedule 15 will amend various provisions in
the GST Act, adding the clarification to the current
provisions.
Item 8 proposes to insert a similar
clarification into the definition of floating home , whilst
item 9 will repeal the definition of
residential premises, substituting it with a new
definition which also contains the clarification. Item
7 inserts the clarification into paragraph 40-75(1)(a)
ITAA 1997 to ensure that property can be sold as new
residential premises within the meaning of the GST Act,
despite having been sold previously as commercial residential
premises.
The
Explanatory Memorandum contains a number of examples which
demonstrate the effect of the proposed amendments.(87)
The reader may also refer to the examples provided by KPMG to the
Committee which suggest that the effect of the proposed legislation
may not correlate fully with its intended purpose.
(88)
The New Business Tax System (Untainting Tax) Bill 2006
(Untainting Tax Bill) will impose the untainting
tax.(89)
Whilst the administrative measures concerning the imposition of
the tax are set out in the Amending Bill, the actual imposition of
the tax must be contained in separate legislation. This separation
is required for constitutional reasons: under section 55 of the
Constitution, a law imposing taxation shall only deal with the
imposition of taxation, and any other matter therein dealing with
any other matter shall be of no effect .
Section 55 is the so-called anti-tacking provision which is
important because of the special constitutional role the Senate
holds in relation to the House of Representatives when fiscal
legislation is concerned. When compared to the House of
Representatives, section 53 curbs the Senate s equal legislative
powers in relation to fiscal laws. In particular, the Senate cannot
amend laws which impose taxation. To protect the Senate from being
sidelined with respect to amending legislation which also
contains the imposition of taxation, the framers decided to
stipulate the anti-tacking provision.
Item 3 specifies that the tax stipulated in
proposed section 197-60 is
imposed.(90)
Where necessary, concluding comments have been included in
relation to the individual Schedules above.
- I Gerard, Atomic storm shatters Innisfail, The
Australian, 21 March 2006, p. 5.
- Editorial, Media joins swell of support for appeal, The
Courier Mail, 21 March 2006, p. 3.
- The Hon J Howard, Prime Minister, North Queensland Cyclone,
press release, 20 March 2006.
- The Hon J Howard, Prime Minster, Assistance Measures For Those
Affected By Both Tropical Cyclones Monica And Larry, press
release, 26 May 2006.
- In contrast, a deduction is a reduction of the assessable
income for any loss or outgoing incurred to gain or produce
assessable income.
- Explanatory Memorandum to the Tax Laws
Amendment (2006 Measures No. 3) Bill 2006 and New Business Tax
System (Untainting Tax) Bill 2006, p. 3.
- ibid.
- The Hon J Howard, Prime Minister, Tropical Cyclone Larry,
press release, 22 March 2006.
- The Hon J Howard, Prime Minister, Tropical Cyclone Larry Fuel
Excise Relief, press release, 26 March 2006.
- CCH, CCH Master Tax Guide 2006, CCH Australia Limited, Sydney,
2006, p. 286.
- Explanatory Memorandum op. cit., p.
3.
- ibid.
- Greenwoods + Freehills, Share Capital Tainting Rules,
Client Briefing
Paper, 9 June 2006, p. 1.
- For more information on the simplified imputation system see B
Pulle, New Business Tax System (Imputation) Bill 2002 , Bills
Digest, Nos. 165-67, Department of the Parliamentary Library,
Canberra 2002-03; CCH Master Tax Guide, op. cit., pp 141-179.
- Flow-chart compiled by Thomas John for the Department of
Parliamentary Services, 2006.
- C Field, Tax Laws Amendment (No. 7) Bill 1999, Bills
Digest, No. 202, Department of the Parliamentary Library,
Canberra 1999.
- CCH Master Tax Guide, op. cit., p. 171.
- ibid., pp. 174-5.
-
Explanatory Memorandum op. cit., p. 44.
- ibid., at pp. 28-35.
- Greenwoods + Freehills, op. cit., pp. 2.
- Greenwoods + Freehills, op. cit., pp. 1.
- See explanations in relation to the New Business Tax System
(Untainting Tax) Bill 2006 below.
- These rules apply to pre-1 July 2002 transactions and tainted
accounts.
- PriceWaterhouseCoopers, New share capital tainting rules
introduced,
Client Brief, June 2006; Greenwoods + Freehills, op. cit.,
pp. 1
- Greenwoods + Freehills, op. cit., pp. 1-2.
- Greenwoods + Freehills, op. cit., p. 2
- Various authors, Workplace
Relations Amendment (Work Choices) Bill 2005, Bills Digest, No.
66, Department of Parliamentary Services, Canberra, 2005-06.
- The eligibility criteria for the Alternative Dispute Resolution
Assistance Scheme (ADRAS) are set out in the
Operational Arrangements to the scheme; the eligibility
criteria for the Unlawful Termination Assistance Scheme (UTAS) are
set out in the
Operational Arrangement to that regime. For a discussion of the
alternative dispute resolution provisions contained in the
Workplace Relations Act 1996, please refer to the Bills Digest to
the Workplace
Relations Amendment (Work Choices) Bill 2005, ibid., pp.
67-77.
- Decisive is the net capital gain which is calculated on the
basis of the capital gains against capital losses.
- Explanatory Memorandum op. cit., p.
5.
- The term MLS lump sum will be defined in subsection
995-1(1), section 61-590 of the ITAA 1997. See discussion
below.
- The taxpayer s assessable income is comprised of
incoming according to so-called ordinary concepts as well as other
amounts which are included into the assessable income by virtue of
the provisions of the ITAA 1936 and ITAA 1997. CCH Master Tax Guide
2006, op. cit., p. 15. The term exempt foreign employment
income will be defined in subsection 995-1(1) of the ITAA
1997. See item 5 to Schedule 6 of the Bill.
- Explanatory Memorandum op. cit., p.
5.
- On the abolition of the surcharge, see generally L Nielson,
Superannuation Laws Amendment (Abolition of Surcharge) Bill 2005,
Bills
Digest, No. 169, Department of Parliamentary Services,
Canberra, 2004-05. See also L Nielson, Superannuation ready
reckoner: taxation, preservation, self-managed superannuation funds
and social security rules for 2005 06, Research
Brief, No. 3, Department of Parliamentary Services, Canberra,
2005-06.
- The Hon M Brough, Assistant Treasurer, Fringe Benefit Tax
Reporting Exclusion,
press release, 8 September 2005.
- The Treasury,
Treasury s consultation processes on announced tax measures,
currency: 26 February 2006, p. 10.
- CCH Master Tax Guide 2006, op. cit., p. 1730.
- ibid., p. 1731.
- Explanatory Memorandum op. cit., p.
70.
- ibid,. p. 69.
- ibid.
- Note that FBT years run from 1 April of one year to 31 March of
the following year.
- CCH Master Tax Guide 2006, op. cit., p. 308. Unfunded
liabilities are those superannuation liabilities for
employment services already rendered but for which no assets are
held.
- The Department of Finance and Administration explains the term
unfunded superannuation scheme as follows: [A] scheme where the
employer does not pay contributions to a superannuation fund.
Instead, the employer contributes when the employee's benefit is
paid. For taxation purposes, it is also known as an untaxed scheme.
Some schemes provide a combination of funded and unfunded benefits.
Department of Finance and Administration, Superannuation
Glossary.
- Explanatory Memorandum, op. cit., p.
78.
- Public ancillary funds
are established and maintained under a will or instrument of trust,
solely for the purpose of providing money, property or benefits to
deductible gift recipients (DGSs) or the establishment of such
DGRs. Australian Tax Office, Endorsed DGRs - GiftPack for
deductible gift recipients & donors Ancillary Fund,
available at
http://www.ato.gov.au/nonprofit/content.asp?doc=/content/34490.htm&page=13,
accessed 28 June 2006. A prescribed private fund
is a trust to which businesses, families and individuals can make
tax deductible donations. It is prescribed by law. The fund may
make distributions only to other deductible gift recipients that
have been either endorsed by the ATO or are listed by name in the
income tax law. Australian Tax Office, Prescribed Private Funds An
overview, available at
http://www.ato.gov.au/nonprofit/content.asp?doc=/content/8724.htm,
accessed 29 June 2006.
- Explanatory Memorandum, op. cit., p.
8.
- T John, Extension
of Charitable Purpose Bill 2004, Bills Digest, No. 164,
Department of Departmental Services, Canberra, 2002-04.
- The only DGRs that do not need to be endorsed are those
specifically listed by name in the income tax law, including
prescribed private funds.
- Explanatory Memorandum op. cit., pp.
89-91.
- ibid., p. 96.
- ibid., pp. 96-97, examples 11. 14 to 11.19.
- ibid., p. 102.
- ibid., pp. 99 104, examples 11.22 to 11.32.
- A charity is defined under the GST Act include: charitable
institutions, trustees of charitable funds, gift-deductible
entities and government schools. A Carey, J A Davison, P R Hill, I
G Murray-Jones, P A Stacey, Australian GST Handbook
2004/05, Australian Tax Practice, Thompson ATP, Melbourne,
2005, p. 246.
- Explanatory Memorandum, op. cit., pp.
108-112.
- Applying cash accounting principles means that GST is payable
on money received as opposed to debts owed.
- Australian GST Handbook 2004/05, op. cit., p. 119.
- A gift-deductible entity is defined in section 195-1
of the GST Act as an entity is a gift-deductible entity if gifts or
contributions made to it can be deductible under Division 30 of the
ITAA 1997. See also A Carey, J A Davison, P R Hill, I G
Murray-Jones, P A Stacey, Australian GST Handbook 2004/05,
Australian Tax Practice, Thompson ATP, Melbourne, 2005, p.
247.
- Explanatory Memorandum op. cit., p.
109.
- ibid., pp. 110-111.
- These non-profit sub entities include charities within the
meaning of the GST Act. See further Australian GST Handbook
2004/05, op. cit., p. 459-60.
- ibid., p. 459.
- ibid., p. 133.
- ibid., p. 138.
- Explanatory Memorandum op. cit., p.
113.
- ibid., p. 9.
- T John, Tax
Laws Amendment (Wine Producer Rebate and Other Measures) Bill
2004, Bills Digest, No. 9, Department of Parliamentary
Services, Canberra, 2004-05.
- Which incorporates the General Agreement on Tariffs and
Trade 1947.
- T John, Tax
Laws Amendment (2005 No. 4) Bill 2005, Bills Digest, No. 22,
Department of Parliamentary Services, Canberra, 2005-06.
- The commencement provision section 2 of the
Tax Laws Amendment (2005 No. 4) Act 2005, stipulates that
Schedule 4, the wine equalisation tax measures, will commence: at a
single day to be fixed by Proclamation or, if any of the
provision(s) do not commence within the period of 12 months
beginning on the day on which this Act receives the Royal Assent,
they commence on the first day after the end of that period . The
Tax Laws Amendment (2005 No. 4) Act 2005 received Royal Assent
on 19 December 2005, so that the latest these measures will come
into force will be 20 December 2006.
- Explanatory Memorandum op. cit., p.
10.
- Explanatory Memorandum to the Tax
Laws Amendment (2005 No. 4) Bill 2005, p. 5.
- Explanatory Memorandum, op. cit., p.
117.
- ibid.
- Senate Economics References and Legislation Committees,
Provisions of the Tax Laws Amendment (2006 Measures No. 3) Bill
2006,
Report, Canberra, 21 June 2006.
- The submissions were published by the Committee at
http://www.aph.gov.au/Senate/committee/economics_ctte/tlab_3/submissions/sublist.htm.
- The oral evidence is summarised and referred to in the
Committee s Report: Senate Economics Committee, Inquiry into
the provisions of the Tax Laws Amendment (2006
Measures No. 3) Bill 2006,
Report, 21 June 2006.
- Taxation Institute of Australia,
Submission to the Senate Economics Committee, 16 June
2006.
- KPMG,
Submission to the Senate Economics Committee, 19 June
2006.
- Committee Report, p. 10.
- ibid., pp. 11-13.
- ibid., p. 13.
- ibid., p. 16.
- ibid., p. 17.
- Explanatory Memorandum, op. cit., pp.
120-123, Examples, 15.1-15.4. The examples provided by KPMG can be
found in their written submissions to the Committee, KPMG, op.
cit., pp. 3-5.
- KPMG,
Submission to the Senate Economics Committee, 19 June
2006.
- See discussion above, Schedule 4 to the Bill.
- See discussion above, Schedule 4 to the Bill.
Thomas John
8 August 2006
Bills Digest Service
Information and Research Services
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