Bills Digest no. 22 2006–07
Tax Laws Amendment (2006 Measures No. 5) 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 and Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Tax Laws Amendment (2006 Measures
No. 5) Bill 2006
Date introduced: 17 August 2006
House: House of
Representatives
Portfolio: Treasury
Commencement: The Act commences on Royal Assent. The commencement
and application of the Schedules are dealt with in the Main
Provisions section of this Bills Digest.
The Tax Laws Amendment (2006 Measures No. 5) Bill 2006 (the
Bill) has three Schedules and the purpose of each Schedule is
briefly as follows.
- Schedule 1 proposes to make amendments to the Fringe
Benefits Tax Assessment Act 1986 (FBTAA 1986) to change the
following fringe benefits tax (FBT) thresholds to:
- increase the minor benefits exemption threshold from $100 to
$300,
- increase the reduction of taxable value that applies to
eligible in-house fringe benefits and airline fringe benefits from
$500 to $1,000, and
- increase the reportable fringe benefits amount threshold from
$1,000 to $2,000.
Schedule 1 also proposes to extend the FBT concessions for
remote areas by broadening the definition of remote where the
shortest practicable route to a remote area involves travel wholly
or partially over water.
All these amendments will take effect for the
FBT year commencing 1 April 2007 and later FBT years.
- Schedule 2 proposes GST concessions in relation to the military
rehabilitation and compensation scheme (MRCS) established under the
Military Rehabilitation and Compensation Act 2004. The
amendments in this Schedule which take effect from 1 July 2004, the
date of commencement of the MRCS, will ensure that:
- supplies of drugs, medicines and other pharmaceutical items are
GST-free if supplied as pharmaceutical benefits under the MRCS,
and
- that the GST-free motor vehicle concession for veterans will be
extended to include a new category of severely injured veterans
under the Military Rehabilitation and Compensation Scheme
(MRCS).
- Schedule 3 proposes amendments to the Income Tax Rates Act
1986 to extend the full tax-free threshold of $6,000 to
taxpayers who cease to be engaged in full-time education for the
first time from the year 2006 07; at present these taxpayers are
only entitled to a proportion of the tax-free threshold of
$6,000.
As there is no central theme to the
Bill, the background to the various measures and the related main
provisions will be considered under the amendments proposed by each
Schedule.
On 12 October 2005, the Prime Minister and the Treasurer in a
Joint Press Release announced the appointment of a Taskforce to
identify practical options for alleviating the compliance burden on
business from Commonwealth Government regulation.(1) The
terms of reference of the Taskforce were set out in the Joint Press
Release as follows:
The Taskforce will:
- identify specific areas of Commonwealth Government regulation
which are unnecessarily burdensome, complex, redundant or duplicate
regulations in other jurisdictions;
- indicate those areas in which regulation should be removed or
significantly reduced as a matter of priority;
- examine non-regulatory options (including business
self-regulation) for achieving desired outcomes and how best to
reduce duplication and increase harmonisation within existing
regulatory frameworks; and
- provide practical options for alleviating the Commonwealth s
red tape burden on business, including family-run and other small
businesses.
The report of the Taskforce titled
Rethinking Regulation: Report of the Taskforce on Reducing
Regulatory Burdens on Business (the report of the
Taskforce) was released on 7 April 2006.(2) The report
deals with tax and superannuation regulation in paragraphs 5.2 and
5.3 of Chapter 5, on pages 107 to 128. The need to streamline
fringe benefits tax arrangements is covered on pages 114 to
117.
In a Joint Press Release of the Prime Minister and the Treasurer
on 7 April 2006 entitled -
Government response to the report of the taskforce on reducing the
regulatory burdens on business, the Australian Government gave
its interim response to the report of the Taskforce.(3)
This interim response included the following recommended changes to
the FBT regime:
- an increase in the minor fringe benefits exemption threshold
from $100 to $300, effective from 1 April 2007;
- an increase in the fringe benefits reporting exclusion
threshold from $1000 to $2000, effective from 1 April 2007;
On 15 August 2006, the
final response of the Australian Government to the report of
the Taskforce was
released by the Treasurer.(4) This Bill only
implements the above recommendations that were in the interim
response in relation to FBT. It does not implement the additional
recommendations that were in the final response.
There were two FBT measures announced in the 2006 07 Budget
which are implemented by this Bill. They relate to the
following:
- the increase in the in-house fringe benefits tax-free threshold
from $500 to $1,000, with effect from 1 April 2007, and
- the broadening of the FBT definition of remote where the
shortest practicable route involves travel over water, with effect
from 1 April 2007.(5)
Section 58P of the FBTAA 1986 provides for certain minor
benefits to be exempt from FBT. Airline transport benefits and
in-house fringe benefits are not covered by the exemption of minor
benefits under section 58P. Subsection 58P(1) sets out the tests
for exemption and paragraph 58P(1)(e) requires that the notional
taxable value be less than $100. Item 1 of
Schedule 1 amends paragraph 58P(1)(e) by
increasing the threshold to $300 and is in accordance with
Recommendation 5.31 on page 116 of the report of the Taskforce.
The
Explanatory Memorandum to the Bill states at page 4 that this
measure will have the following revenue
implications.(6)
|
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
|
Increase the minor benefits
exemption threshold
|
Nil
|
-$3m
|
-$1m
|
-$2m
|
Section 62 of the FBTAA 1986 provides for the reduction of
aggregate taxable value of one or more eligible fringe benefits in
relation to an employee for a year of tax. The eligible fringe
benefits are an in-house fringe benefit or an airline transport
fringe benefit.
If the taxable value or the sum of the taxable values does not
exceed $500, the reduction under paragraph 62(1)(a) is equal to the
taxable value or the sum of the taxable values.
In any other case, the reduction under paragraph 62(1)(b) is
$500.
Item 2 of Schedule 1
substitutes $1,000 for $500 in paragraphs 62(1)(a) and (b) to
increase the threshold for the reduction of the taxable value in
respect of these eligible fringe benefits for each employee for a
tax year.
As indicated above, this measure was announced in the 2006 07
Budget.
The
Explanatory Memorandum to the Bill states at page 4 that this
measure will have the following revenue implications.
|
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
|
Increase the reduction of
taxable value that applies to eligible fringe benefits
|
Nil
|
-$10m
|
-$10m
|
-$10m
|
Under subsection 135P of the FBTAA 1986 an employee has a
reportable fringe benefits amount for a year of income, if the
employee s individual fringe benefits amount for the year of tax
ending on 31 March in the year of income, in respect of the
employee s employment by the employer is more than $1,000.
Item 3 of Schedule 1
substitutes $2,000 for $1,000 in subsection 135P(1) to increase the
threshold of the reportable fringe benefits amount to $2,000. This
measure implements part of the Recommendation 5.30 on page 116 of
the report of the Taskforce.
The
Explanatory Memorandum to the Bill sates at page 4 that this
measure will have the following revenue implications.
|
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
|
Increase the reportable
fringe benefits amount threshold
|
Nil
|
Nil
|
-$2.1m
|
-$2.1m
|
Section 140 of the FBTAA 1986 provides a test of remoteness from
the nearest eligible urban area for certain remote area FBT
concessions including the exemption for certain remote area housing
benefits and the reduction in the taxable value of certain benefits
arising from housing assistance.
Subsection 140(2) provides that distance is to be measured by
the shortest practicable surface route between a point in the
nearest eligible urban area and a point tested for remoteness.
Item 6 of Schedule 1 inserts
new subsection 140(2A) which includes a formula
for ascertaining the shortest practicable surface route where the
eligible urban area and the tested location includes a route by
water.
The effect of this formula is to double the kilometres between a
location and the nearest eligible urban area where the shortest
practicable route involves travel over water only. Where the
shortest practicable route involves travel over both land and
water, the total number of kilometres by water are doubled and
added to the total number of kilometres by land.
This measure recognises that it is generally more difficult and
inconvenient to travel over water than to travel over land.
The
Explanatory Memorandum to the Bill states at page 4 that this
measure will have the following revenue implications.
|
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
|
Extend the definition of
remote
|
Nil
|
-$1m
|
-$1m
|
-$1m
|
Item 2 in Column 1 of the
table in proposed section 2 of the Bill provides
that Schedule 1 commences on 1 April 2007.
Item 7 of Schedule 1 provides
that the amendments made by Schedule 1 apply in relation to the FBT
year starting on 1 April 2007 and later FBT years.
In a
Press Release on 11 May 2004, Senator Helen Coonan the former
Minister for Revenue and Assistant Treasurer announced that
Government would extend the GST-free motor vehicle concession for
veterans to include a new category of severely injured veterans
under the Military Rehabilitation and Compensation Scheme (MRCS)
established under the
Military Rehabilitation and Compensation Act 2004
(MRCA 2004). Senator Coonan added that:
Currently, only veterans who have lost (or
effectively lost) a leg or both arms or are on a Totally and
Permanently Incapacitated pension under the Veterans
Entitlements Act are eligible for a GST-free car.
This measure will extend the GST-free car
concession to the new category of severely injured veterans in the
MRCS, (7)
Paragraph 38 505(i)(b) of the A New Tax System (Goods and
Services Tax) Act 1999 (the GST Act) provides that a supply is
GST-free if it is the supply of a car to an individual who has
served in the Defence Force or in any other armed forces of Her
Majesty, and
(b) as a result of that service:
(i) has lost a leg or both arms, or
(ii) has had a leg, or both arms, rendered permanently and
completely useless, or
(iii) is a veteran who receives a pension under Part II
under the Veterans Entitlements Act 1986.
Item 3 of Schedule 2 adds
new paragraph 38 505(1)(b)(iv) to include an
individual who is receiving a Special Rate Disability Pension under
Part 6 of Chapter 4 of the MRCA 2004, or satisfies the eligibility
criteria in section 199 of that Act. The eligibility criteria in
section 199 are:
- the person is receiving compensation worked out under
Division 2 of Part 4 as a result of one or more service
injuries or diseases;
- as a result of the injuries or diseases, the person has
suffered an impairment that is likely to continue
indefinitely;
- the Military Rehabilitation and Compensation Commission has
determined under Part 2 that the person s impairment
constitutes at least 50 impairment points;
- the person is unable to undertake remunerative work for more
than 10 hours per week, and rehabilitation is unlikely to increase
the person s capacity to undertake remunerative work.
The Explanatory Memorandum to the Bill states at page 4 that the
amendments regarding the extension of GST pharmaceutical
concessions when supplied as pharmaceutical benefits under the MRCS
have not previously been announced. The MRCS was established under
the MRCA 2004.
Subsection 38 50(4) of the GST Act provides that a supply of a
drug, medicine or other pharmaceutical item is GST-free if the
supply is on a prescription, and
(a) is supplied as a pharmaceutical benefit within the
meaning of section 91 of the Veterans Entitlements Act
1986, and
(b) it is supplied under an approved scheme with the meaning of
section 91 of that Act.
Item 3 of Schedule 2 adds
new subsection 38 50(4A) so that a similar
concession also applies when a drug, medicine or other
pharmaceutical item is supplied on prescription:
(a) as a pharmaceutical benefit under section 5 of the MRCA
2004, and
(b) is supplied in accordance with a determination made under
paragraph 286(1)(c) of that Act.
The Explanatory Memorandum to the Bill states at page 4, that
the financial impact of the measures in Schedule 2 is
negligible.
Item 3 in Column 1 of the
table in proposed section 2 of the Bill provides
that Schedule 2 commences on the day on which this
Act receives the Royal Assent.
Item 4 of Schedule 2 provides
that the amendments made by Schedule 2 apply to net amounts for tax
periods starting or that started, on or after 1 July 2004.
Under Division 4 of Part II of the
Income Tax Rates Act 1986 (ITRA 1986) a taxpayer who
ceases full-time education for the first time is not eligible for
the full tax-free threshold of $6,000 for the year of cessation of
full-time studies. Such a taxpayer is entitled to a pro-rata
tax-free threshold worked out by multiplying the number of months
in the income year that the taxpayer was not studying full-time by
$500, which is the monthly equivalent of the tax-free
threshold.
If the taxpayer received income in the pre-workforce period of
the relevant income year (the period when the taxpayer was a
full-time student), subsection 20(1) of the ITRA 1986 provides a
formula for working out the threshold, which is obtained by adding
to the reduced threshold so much of income derived in the
pre-workforce period to bring it up to the standard tax-free
threshold for the year.
Budget Paper No. 2 , 2006 07 stated at page 25 that Government
will remove the part-year tax-free threshold for taxpayers ceasing
full-time education , with effect from the 2006 07 income
year.(8) It added at page 26 that this will reduce
compliance costs as follows:
This will reduce compliance for taxpayers who have
finished full-time education for the first time by removing the
requirement for these taxpayers to calculate a part-year tax-free
threshold and will end the requirement for taxpayers to isolate
income (and any deductions) attributable to the period during which
a taxpayer was engaged in full-time study.
To give effect to this measure:
- item 7 of Schedule
3 repeals sections 17 and 19 of the ITRA 1986, which
define part-year workforce period and pre-workforce income
respectively.
- item 8 of Schedule 3 repeals
subsection 20(1) in its present form.
Item 8 substitutes a new subsection
20(1) to deal with the threshold applicable to a part-year
residency for taxpayers generally.
The explanatory Memorandum to the Bill at page 5 states that
this measure will have the following revenue implications.
|
2006 07
|
2007 08
|
2008 09
|
2009 10
|
|
Nil
|
-$2m
|
-$2m
|
-$2m
|
Item 3 in Column 1 of the
table in proposed section 2 of the Bill provides
that Schedule 3 commences on the day on which this
Act receives the Royal Assent.
Item 9 of Schedule 3 provides
that the amendments made by this Schedule apply to assessments for
the 2006 07 year of income and later years of income.
Do the amendments to the FBT
regime proposed in the Bill and those
announced recently go far enough in meeting calls for a
comprehensive reform of the FBT regime?
As mentioned above, this Bill implements two of the
recommendations in the report of the
Taskforce on Reducing Regulatory Burdens on Business titled
Rethinking Regulation (the report of the Taskforce).
The final response of the Australian Government to the report of
the Taskforce which was released by the Treasurer on 15 August 2006
included the acceptance of the further specific recommendation
relating to FBT, namely, the exclusion from FBT reporting for
pooled motor vehicles.(9)
The Explanatory Memorandum to the Bill at page 4 states that the
FBT measures implemented by this Bill are expected to reduce
compliance costs for employers and consequently reduce regulatory
burdens on business.
However, the initial reactions to the acceptance by the
Government of the FBT recommendations in the Taskforce report is
that they do not go far enough to ease the regulatory burdens. In
an article titled
Tinkering falls short of much-needed tax revamp in the
Australian Financial Review of 29 August 2006, Mark Fenton-James
makes the following comments:
The latest changes to the way GST and fringe benefits tax are
calculated by small businesses are welcome measures to reduce the
compliance burden. But it is only tinkering on the margin, as the
whole tax system needs to be revamped with small business in
mind.
Mark Fenton-James summarises the comments made by Pitcher
Partners manager Gary Mathews on the FBT changes as follows:
He says the government needs to take a more
fundamental approach and evaluate the whole FBT legislation, which
is about 20 years old, to see if changes in business practices
during the past two decades should be reflected in broader changes
to the legislation.
Views of the Institute of Chartered
Accountants in Australia for the overhaul of the FBT regime
The need for fundamental change in the design of the FBT regime
expressed above echoes the views
of the Institute of Chartered Accountants in Australia (ICAA) that
the case has never been stronger for an overhaul of Australia's
fringe benefit tax.(10) The ICAA published a report in
March 2006 entitled Fringe benefit tax design: decision
time. This report was written by Associate Professor Neil
Warren of ATAX, Faculty of Law, University of New South Wales. This
report argues that there are substantial economic efficiency,
equity and simplicity gains to be had from three major reforms:
1. The taxation of fringe benefits in the hands of
the employee (rather than the employer).
2. Valuing all benefits at cost (rather than some
concessionally, such as with motor vehicles)
3. Raising the threshold below which minor fringe
benefits are tax-exempt income.(11)
Recommendation 4 of the ICAA report recommended
that the exempt minor fringe benefits threshold which is $100 at
present should be increased to $200, in line with the Consumer
Price Index (CPI) increases since the introduction of FBT in 1986.
Further, the report suggested that the threshold should also be
indexed regularly. The measure in the Bill goes further than the
threshold suggested in the ICAA report in fixing it at $300,
although there is no provision for regular indexation.
Recommendation 5.48 of the report of the Taskforce recommended that
the Board of Taxation should develop a systematic approach to
adjusting thresholds in tax law. The Australian Government has in
its final response to the report of the Taskforce indicated at page
65 that it has accepted Recommendation 5.48 and referred to the
Board of Taxation the question of developing a systematic approach
to adjusting thresholds in tax laws.
The major reform in paragraphs 1 and 2 above which ICAA proposed
in March 2006 will require a complete revamp of the FBT regime.
Report Beyond 4100 (May 2006) by Professor C. John Taylor is a
report on measures to combat rising compliance costs through
reducing tax law complexity, commissioned by the Taxation Institute
of Australia (TIA).(12)
In a foreword to the report, the President of the TIA states
that Beyond 4100 had its genesis in the Board of Taxation
s (the Board) project to identify inoperative provisions which
aimed at reducing the size of tax laws by 4100 pages. This project
of the Board has culminated in the Tax Laws Amendment Bill (Repeal
of Inoperative Provisions) Bill 2006, which was introduced into the
House of Representatives on 22 June 2006.(13)
The President adds, in the foreword, that the project of the
Board did not look at instances where policy simplification could
also give rise to a reduction in complexity and the resultant
reduction in compliance cost dividend. This lead to the TIA
conducting a complementary research project focussing on
identifying generic causes of complexity in the Australian income
tax system, and giving some specific examples of complexities
attributable to each generic cause.
Beyond 4100 points out that that the introduction of
the obligation to disclose reportable fringe benefits on group
certificates (now PAYG Summary Statements) arguably negates a major
justification for levying FBT on employers (paragraph 2.12, page
24).
Further, Beyond 4100, in Chapter 8 on pages 72 and 73 argues
that there is a case for a comprehensive rewrite of Australia s
income and fringe benefits tax laws. This call for a rewrite of the
FBTAA 1986 is also made against the background that the Tax Laws
Amendment (Repeal of Inoperative Provisions) Bill 2006 when enacted
will only reduce the 468 pages of the FBTAA 1986 by one quarter of
a page.
Rethinking Regulation, the report of the Taskforce on
Reducing Regulatory Burdens on Business points out at pages 110 and
111 that tax compliance costs may be divided into two broad
categories, namely:
- the cumulative burden of tax compliance, and
- specific concerns with the tax law, such as aspects of fringe
benefits tax, GST, income tax and tax administration.
The recommendations made in the report of the
Taskforce in relation to FBT are intended to address some specific
concerns. The report states that the review of tax laws generally
in reducing the cumulative burden of tax compliance was beyond the
scope of the review of tax laws by the Taskforce and indicates
future directions for the design of tax laws:
Reducing the cumulative burden of tax compliance
is inherently more difficult than responding to specific pressure
points, and raises fundamental policy tradeoffs which are beyond
the scope of this review. Tax is different to other areas of
regulation in that the instrument for collecting revenue is often
an integral part of government policy.
However, business desire for government to tackle
the cumulative tax compliance burden was a strong and recurring
theme of submissions. Ultimately, tax law design must take into
account the cumulative compliance burden, or impose significant and
unproductive costs on society. As a result, the Taskforce reaffirms
the importance of a number of tax design principles that it
considers would help government develop longer term solutions to
reducing tax compliance costs.
The Australian Government should give priority to
the following principles when developing future tax changes:
1. Tax system design should be predominately about
raising revenue efficiently using a broad-base, low-rate
approach.
2. Direct expenditure, including the social
security system and direct grants, should be used to achieve equity
objectives and compensate for tax changes.
3. Measures to protect the revenue base must
balance the revenue risk against the costs of compliance.
4. Effective consultation with business and good
tax design are fundamental to ensuring that tax decisions
adequately account for compliance costs.
The report of the Taskforce had in Recommendation
5.48 indicated certain issues for consideration by the Board of
Taxation in its current scoping study of small business compliance
costs including the simplified tax system and a systematic approach
to adjusting thresholds in tax laws. The Australian Government s
final response to this report at page 65 stated that it agreed with
this recommendation.
The Treasurer, in Press Release No. 088 of 15 August 2006 in
releasing the Australian Government s final response to the report
of the Taskforce, indicated that the Office of Regulation Review in
the Treasury portfolio will be strengthened and reoriented,
becoming the Office of Best Practice Regulation. The Treasurer
added:
It will work closely with government agencies as
they develop policy proposals in order to prevent the generation of
unnecessary new regulation. Furthermore, the Government is
mandating appropriate levels of regulatory analysis, including
through the use of the Business Cost Calculator , also available to
businesses, to quantify in dollar terms the compliance cost of
proposed regulatory options. The Government will also undertake
annual reviews to examine the cumulative stock of regulation and
identify an ongoing red tape reduction agenda.
- The Hon John Howard, MP, the Prime Minister and the Hon Peter
Costello, MP, the Treasurer,
Taskforce on reducing the regulatory burden on business,
Joint Press Release, Parliament House, Canberra, 12 October
2005.
- Regulation Taskforce 2006,
Rethinking Regulation: Report of the Taskforce on Reducing
Regulatory Burdens on Business, Report to the Prime
Minister and the Treasurer, Canberra, January 2006.
- The Hon John Howard, MP, the Prime Minister and the Hon Peter
Costello, MP, the Treasurer,
Government response to the report of the taskforce on reducing the
regulatory burdens on business (interim response), Joint
Press Release, Parliament House, Canberra, 7 April 2006.
- Australian Government, Rethinking Regulation: Report of the
Taskforce on Reducing Regulatory Burdens on Business,
Australian Government s Response, (final response), 15 August
2006.
- Budget Measures 2006-07, Budget Paper No. 2, p.19. These
measures were also announced in Attachment B of the Treasurer s
Press Release No. 039 of 9 May 2006.
- Explanatory Memorandum to the Tax Laws Amendment (2006 Measures
No. 5) Bill 2006, p. 4.
- The Hon Senator Helen Coonan, the former Minister for Revenue
and Assistant Treasurer,
GST and the extension of the concession for veterans cars,
Parliament House, Canberra, 11 May 2004.
- Budget Measures 2006-07, Budget Paper No. 2, pp.25-36. These
measures were also announced in Attachment B of the Treasurer s
Press Release No. 039 of 9 May 2006.
- The Hon Peter Costello, MP, the Treasurer,
Report of the Taskforce on reducing regulatory burdens on business-
Final Government response, Press Release No. 088,
Parliament House, Canberra, 15 August 2006.
- The Institute of Chartered Accountants of Australia:
Thought Leadership. Available at http://www.icaa.org.au/news/index.cfm?menu=358&id=A118085019
on 4 September 2006.
-
Fringe benefit tax: decision time, Executive summary, p.
05.
- Taxation Institute of Australia, Beyond 4100, A report on
measures to combat compliance costs through reducing tax law
complexity, (May 2006). Available at
http://www.taxinstitute.com.au/files/Taylor_Report_24_May_06_FINAL.pdf
on 5 September 2006.
- Readers may refer to Bills Digest no. 14, 2006-07, of 14 August
2006 on the Tax Laws Amendment (Repeal of Inoperative Provisions)
Bill 2006 which includes a general assessment of the impact of the
repeal and savings provisions in this Bill on the work of tax
practitioners.
Bernard Pulle
11 September 2006
Economics Section
Bills Digest Service
Parliamentary Library
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ISSN 1328-8091
© Commonwealth of Australia 2006
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