Bills Digest no. 62 2007–08
Tax Laws Amendment (2008 Measures No. 1) Bill
2008
Note: This
Digest replaces an earlier version dated
20 February
2008
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
Schedule 1 Political
contributions and gifts
Schedule 2 Superannuation
lump sums paid to a member having a terminal medical
condition
Schedule 3 Capital expenditure for the
establishment of trees in carbon sink forests
Schedule 4 Tax offset for
Equine Workers Hardship Wage Supplement Payment
Schedule 5 Tobacco
industry exit grants
Schedule 6 Farm
Management Deposits
Contact officer & copyright details
Passage history
Tax Laws Amendment (2008 Measures No. 1)
Bill 2008
Date
introduced: 13
February 2008
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal Assent for most
schedules. Schedule 3, Part 2
commences on 1 July 2012.
Links: The
relevant links to the Bill, Explanatory Memorandum and second
reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The following table shows the projected cumulative financial
impact of all the measures in this particular Bill.
Table 1 :
Cumulative Financial Impact of the
Bill
|
Year
|
2007-08
|
2008 09
|
2009 10
|
2010 11
|
2011 12
|
|
Financial Impact $m
|
-21.3
|
-30.6
|
-23.4
|
-25.9
|
11
|
Source: Explanatory
Memorandum pp. 3-5.
Overall, the Bill s provisions are projected to have a negative
$90.6 million impact on revenue.[1]
Given the current political make up of the Senate it is possible
that this Bill may be referred to a Senate Committee. In
particular, comments made by the Australian Greens and Democrats
spokespersons on similar measures for the granting of tax
deductions for the planting of carbon sink forests contained in now
lapsed Tax Laws Amendment (2007 Measures No. 6) Bill, that are
almost identical to the proposed measures in Schedule
3 of the current Bill, indicate that similar efforts will
be made to refer this Bill to a Senate committee for further
examination.
This Bill makes a number of different amendments to taxation
legislation. The following provides separate comment on the changes
in each schedule.
Back to top
Schedule 1
amends the Income Tax Assessment Act 1997 (ITAA97) and the
Income Tax Assessment Act 1936 (ITAA36) to generally deny
individual taxpayers a tax deduction in respect of political party
membership fees paid after 1 July 2008. This schedule also denies a
tax deduction to both individual and corporate tax payers in
respect of contributions or gifts made to:
- political parties
- members of parliament (both State, Territory and Federal)
- members of a local governing body (such as a local council),
and
- candidates (both party nominated and independent) for political
office
on or after 1 July 2008.
Employees or office holders may continue to claim
tax deductions for these amounts incurred in earning tax assessable
income.
Currently, a tax deduction is available in respect of the above
contributions and gifts made to political parties registered under
Pt XI of the Commonwealth Electoral Act 1918 or registered
under relevant State or Territory legislation, under Division 30-DA
ITAA97. The maximum deduction for both individuals and companies is
$1500 per annum.[2]
A tax deduction in respect of these amounts was limited to $100
per annum for contributions/gifts made before 22 June 2006. Before
this date the deduction was only available in respect of
gifts/contributions made to parties registered under the above
Commonwealth Act. This meant that gifts/contributions made to:
- independent candidates
- State/Territory political parties
- members of State/Territory parliaments, and
- all State/Territory political candidates
made before 22 June 2006 did not qualify for any tax
deduction.[3]
The denial of tax deductions for political gifts/contributions
was announced by the then Shadow Minister for Finance, The Hon.
Lindsay Tanner MP on 2 March 2007.[4] The policy of removing the tax deductibility of
political gifts/contributions was first announced by the then
Leader of the opposition, the Hon. Kim C Beazley MP on 3 October
2006.[5]
It has been argued that increasing the tax deductibility
threshold for political donations/contributions from $100 to $1500
per annum encourages participation in the democratic process. That
is, making political gifts/contributions tax deductible encourages
citizen s democratic participation.
However, it has also been argued that the existence of such a
high threshold skews political influence to the wealthier in
society who have a greater capacity to contribute and who will
receive proportionately higher (tax-payer funded) subsidies for
making these donations.[6]
One press report argued that the removal of tax deductibility
for these gifts/contributions would anger many political party
members, especially those in the Australian Labor Party.[7]
There are several reasons for the abolition of political
gifts/contributions tax deductibility:
- it would have a positive financial impact, saving the
government an estimated $31.4 million between 2009 2010 and 2001
2012
- it may cause individuals to more carefully consider the
direction of their political support, and
- remove any potential financial advantage (however significant)
that higher income donors may receive in making a tax deductible
donation.
However, there are some points in favour of
retaining this tax deduction. The availability of a $1500 tax
deduction is of greater importance to individual donors than to
corporate or wealthy donors. Insofar as the absence of a tax
deduction discourages a large number of smaller donors from
contributing, it allows corporate and wealthier donors to make up a
greater proportion of a political party s/candidate s source of
funding. It may be argued that this potentially increases the
influence of corporatist and wealthier individual s influence on
political decision making.
This last point has to be tempered by the
realisation that currently it is unlikely that smaller donors to
political parties or candidates exercise much influence simply on
the basis of their donations alone.
Family First has indicated its support for the abolition of tax
deductibility for gifts/contributions to political parties.[8] Senator Murray stated
that the Australian Democrats would oppose any increase in the
amount allowed as a tax deduction in respect of political
donations.[9] Senator
Bartlett also expressed the personal view that tax deductions in
respect of political donations should be removed.[10]
A range of other views on this matter are in the report of the
Joint Standing Committee on Electoral Matters entitled the 2004
Federal Election Polling day 9 October
2004.[11]
The following table outlines the projected financial impact of
this particular measure.
Table 2: Financial impact Abolition of tax deductibility
for political donations
|
Year
|
2008 09
|
2009 10
|
2010-11
|
2011 12
|
|
Financial impact $m
|
-
|
10.1
|
10.3
|
11.0
|
Source: Explanatory
Memorandum p. 3.
Item 3 of Schedule 1 inserts
new section 26-22 into the ITAA97. This new
section prevents a tax deduction for membership fees,
gifts/contributions to political parties, electoral candidates or
members of an Australian legislature or local governing body.
However sub clause (2) of Item
3 allows a deduction to be claimed where such fees, gifts
or contributions are necessarily incurred in the person gaining or
producing tax assessable income.
The Explanatory Memorandum notes, for example, that a compulsory
levy to retain a Member of Parliament s membership of a political
party would still be tax deductible under the general tax deduction
provision of section 8-1 ITAA97.
Item 9 repeals the whole of Division
30-DA ITAA97. This particular Division contains existing
legislation allowing a limited tax deduction for political party
membership fees and gifts/contributions to political parties.
Items 11 and 12 insert new
subsections to sections 110-38
and 110-55(9E) ITAA97. These are consequential
amendments to ensure that political party membership fees and
political gifts/contributions do not form part of the cost base of
an item subject to Capital Gains Tax and thereby reduce the amount
of taxable income assessable when a gift/contribution is made to a
political party.
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Schedule 2 amends the ITAA97 and the Income
Tax (Transitional Provisions) Act 1997 so that superannuation
lump sum benefits paid to a terminally ill person on or after 1
July 2007 are tax free.
A superannuation benefit may be paid to person if they are
permanently incapacitated.[12] However, where such payments take place they are
subject to tax, depending on the person s age and the source of the
funds.
Commonly, lump sum payments made to the permanently
incapacitated are made to persons who are well below their
preservation age.[13] Accordingly, upon withdrawal, the tax impost is
- 21.5 per cent for benefits paid from a taxed superannuation
scheme, or
- 31.5 per cent for benefits of up to $1 million paid from
untaxed superannuation scheme and the top marginal rate plus
Medicare levy for amounts over $1 million from such schemes.
A taxed superannuation scheme is one that has
been subject to the superannuation fund income tax of 15 per cent
on tax deductible contributions (i.e. superannuation guarantee and
salary sacrifice contributions) and a nominal 15 per cent on the
investment earnings of such schemes. About 90 per cent of all
Australian superannuation funds are taxed superannuation schemes.
An untaxed superannuation scheme is one that has not been subject
to this particular tax. These schemes are more common in the
government sector.[14]
This measure was first announced by the then Minister for
Revenue and Assistant Treasurer on 11 September 2007.[15] In his press release
Minister Dutton noted that he was particularly concerned by the
plight of Mrs Christina Fiddimore, a Sydney mother with terminal
cancer then aged 44.
This measure follows a period lobbying both by lawyers from the
Baker & McKenzie Group (working on behalf of cancer patients)
and thought the press.[16] In was no surprise that press reports welcomed the
initial announcement of this measure in September 2007.[17]
The Association of Superannuation Fund of Australia (ASFA) has
strongly supported this measure.[18]
The tax free payment of superannuation benefits to persons with
a terminal illness will allow them to finalise their financial
affairs, pay for expensive medical treatment and provide for their
dependents before death.
There is a slight cost to revenue from the proposed changes.
The following table illustrates the projected financial impact
of this measure.
Table 3: Projected financial impact of tax free lump sum
payments to the terminally ill
|
Year
|
2007 08
|
2008 09
|
2009-10
|
2010 11
|
|
Financial impact $m
|
-20
|
-25
|
-25
|
-25
|
Source: Explanatory
Memorandum p. 4.
Item 2 of Schedule 2 inserts
new section 303-10 into the ITAA97. The effect of
this new section is to classify a superannuation lump sum as a tax
free amount if:
- the recipient has a terminal medical condition at the time of
payment, or
- if the recipient is diagnosed as having a terminal medical
condition within 90 days of receiving the payment.
Item 3 provides that the meaning
of the term terminal medical condition will be prescribed in
regulations. These regulations have been tabled as the
Superannuation Industry (Supervision) Amendment Regulations 2008
(No. 1).[19] These
regulations provide, in essence, that a terminal medical condition
exists where two medicinal practitioners (one of whom must be a
relevant specialist) certify that the person suffers from an
illness, or has incurred an injury, that is likely to result in the
death of the person within 12 months after the date of
certification .
Item 4 amends the Income Tax
(Transitional Provisions) Act 1997 to give the same tax
treatment for superannuation lump sums received by the terminally
ill during the 2007 2008 year only.
Item 5 applies amendments made
by this schedule to payments made on or after 1 July 2007.
Back to top
Schedule 3 amends the ITAA97 to allow a tax
deduction in respect of capital expenditure incurred in the
establishment of trees in carbon sink forests.
Similar measures were introduced into Parliament in Schedule 1
of the Tax Laws Amendment (2007 Measures No. 6) Bill 2007. This
Bill lapsed with the calling of the 2007 election.
Trees and other plants take up (sequester) carbon dioxide from
the atmosphere as they grow, through the process of photosynthesis.
While soils may lose carbon, e.g. following cultivation, the amount
of carbon in forest soils can increase over time. Forests represent
a carbon sink when they are actively growing and sequestering
carbon at a rate that exceeds any soil carbon and other
emissions.
Thus, a carbon sink forest is a forest that is established for
the primary and principal purpose of sequestering carbon from the
atmosphere. However a tax deduction in relation to the cost of
establishing such a forest will only be given if the trees in the
forest meet conditions specified in this Bill (see below).
The tax deductions available in respect of expenses for
establishing a carbon sink forest are available over a 14 years and
105 days period if the forest is established on or after 1 July
2012, which the author understands is less than the effective life
of a forest (though this is a disputed fact).[20] That is, it would be generally
uneconomic for these trees to be cut down before this period had
passed. Thus it would appear to make little sense to remove these
trees before this period had expired. It may be argued that on the
basis of these points that the expectation may be that these
forests would be in existence for at least a 14 year and 105 day
period, though this is nowhere stated in either the Bill or its
supporting documents.
Suffice to say that there is no measure in this
particular Bill that suggests that a carbon sink forest can never
be cut down. Rather, there is every expectation that the trees
would remain in the ground for at least 14 years and 105 days.
However, if such a forest was removed then the tax deductions would
cease from that point in time.
A broader issue is whether the proposed tax
deductions will encourage the further reduction of productive farm
land. That is, whether these deductions will encourage farmers to
take farm land out of production to establish carbon sink
forests?
It may be the case that larger emitters will
purchase farm land to plant carbon sink forests. However, the value
of the deductions may be such that only lower value land would be
suitable for this purpose. To the extent that this measure takes
marginal farm land out of production it may produce an additional
environmental benefit.
This measure was announced in the then Treasurer s media release
of 8 May 2007.[21]
The initial reaction from conservation groups to this initiative
was one of scepticism. In particular, the reaction of the
Conservation movement would depend on the details of the proposed
arrangements.[22]
The Australian Conservation Foundation (ACF) has not responded
to this particular initiative. But it has noted that:
Due to their impermanent nature, carbon sinks
cannot permanently offset emissions from burning fossil fuels.
Carbon sinks should only be established to replace vegetation where
it has been lost from logging and clearing. Native vegetation must
not be cleared in order to establish sinks.[23]
However, it would be a mistake to characterise the ACF s
position as being opposed to this initiative.
The National Association of Forest Industries welcomed the
announcement of this initiative.[24]
This proposal may have the following advantages:
- promote the planting of forests to absorb and store excess
atmospheric carbon dioxide
- this may be of great advantage to large carbon emitters, such
as power stations, in that they may gain tax deductions for
undertaking projects that offset their carbon emissions
- promotes the planting of forests on land that has already been
cleared. Existing forests cannot be felled to plant new carbon sink
forests
- the establishment of such forests may facilitate the flow of
carbon credits into any national emissions trading scheme
- allows tax deductions where small scale plantings are
undertaken by small business operators
- this may be of benefit to farmers and other small rural
business, such a bed and breakfasts, situated on rural properties
of sufficient size.
However, there are significant doubts whether carbon sink
forests are able to make a long term positive contribution to the
absorption of carbon dioxide from the atmosphere. These concerns
are based on the declining efficiency of forests to absorb more
carbon dioxide than they emit if the climate heats up.[25] If this is the case
then the establishment of carbon sink forests will be of limited
use in absorbing excess amounts of atmospheric carbon dioxide.
The long-term security of stored carbon is uncertain, due to
pests and diseases, land clearing, the threat of illegal logging,
forest fires, and as noted above perhaps climate change itself.
While curbing emissions of carbon dioxide by reducing consumption
of fossil fuels may well bring more certain climate change
benefits.
Further, some consider that there is a danger that the granting
of these tax deductions may be seen as an alternative to the
curbing of carbon emissions. A long-term solution to climate change
may require fundamental changes in the energy sector, with a shift
away from primary reliance on fossil fuels and toward renewable
technologies and energy sources. Tax deductions given for carbon
sequestration may, shift emphasis away from curbing carbon
emissions in the energy sector.[26] It is not clear that this is a concern held by a
significant proportion of the environmental movement.
Comment
The establishment of forests may have additional environment
benefits to that of absorbing atmospheric carbon dioxide. For
example, they may provide additional habitat for threatened
species, limit soil erosion and contribute to the factors that
prevent the spread of soil salinity. It would be a mistake to
assess the environmental benefits of such forests only in terms of
their capacity to absorb excess carbon from the atmosphere.
Furthermore, it is an unrealistic to expect that any single
response to the complex dimensions of climate change will serve as
a panacea. This initiative is perhaps more appropriately viewed as
part of a range of solutions, each tackling a particular dimension
of climate change.
Senator Milne, the Australian Greens climate and energy
spokesperson, has reportedly noted that a forest was not the same
as a plantation and that this initiative should include:
- forests planted under this initiative should stand for at least
100 years
- the amount of water used to support these trees should be first
assessed
- the resulting forest must be biodiverse, that is, be made up of
different species of tree and other vegetation
- the forest must be on land cleared before 1990
- it should not apply to forests established as a managed
investment scheme, and
- it should not apply to forests established by large
business.[27]
In commenting on the Tax Laws Amendment (2007
Measures No. 6) Bill 2007 Senator Milne repeated many of the above
points and also expressed concerns that productive farm land would
be taken out of production by the planing of forests to secure tax
benefits. The Senator suggested that this may occur if large carbon
dioxide emitters, such as cement and aluminium companies, brought
up farm land and planted trees to procure the tax benefits. The
Senator was also concerned that such practices would potentially
distort any carbon trading market established in Australia.[28]
The establishment of specific carbon sink forests
is not part of the Australian Greens policy.[29]
Also commenting on the Tax Laws Amendment (2007
Measures No. 6) Bill 2007 Senator Bartlett of the Australian
Democrats, noted that the measures relating to tax deductions for
expenses incurred in planting carbon sink forests were quite
complex. Consequently, these measures required further
consideration by a Senate Committee.[30]
The financial implications of this particular measure are
outlined in the following table.
Table 4: Projected financial impact of tax deduction for
the establishment of carbon sink forests
|
Year
|
2007 08
|
2008 09
|
2009-10
|
2010 11
|
|
Financial impact $m
|
-
|
-4.7
|
-8.5
|
-11.1
|
Source: Explanatory
Memorandum p. 4.
The main issue is whether the proposed tax deductions will
establish forests that will be of long term use in absorbing excess
carbon dioxide from the atmosphere.
Item 6 of Schedule 3 inserts
proposed Division 40-J into the
ITAA97. This proposed Division allows a tax deduction for capital
expenditure for the establishment of a carbon sink forest.
These deductions are available under proposed
section 40-1005 provided the taxpayer owns the
trees in question and the trees are on land held by the taxpayer,
either under lease or as an outright owner.
Under proposed section 40-1010
in order to claim the deductions in respect of the expenditure the
tax payer must:
- carry on a business for taxation purposes
- this prevents access to this deduction by hobby farmers with no
other business income
- plant the trees for the primary purpose of carbon sequestration
- this does not prevent the taxpayer for having a secondary
purpose in planting the trees, such as improving the biodiversity
of the property
- not plant the trees for the purposes of felling or using the
trees for commercial horticulture, and
- not incur expenditure under either a managed investment scheme
or a forestry managed investment scheme.
Comment
These last two points prevent those establishing forests for
mainly commercial harvesting or horticulture purposes to access the
proposed tax deductions. However, the Explanatory Memorandum also
notes that these rules do not prevent a commercial forestry
operator from establishing a separate carbon sink forest for the
purposes of engaging in trading carbon credits.
As noted above, only expenditure on the establishment of a
carbon sink forest will be allowed as a tax deduction. The
government has indicated that this precludes other types of related
expenditure be claimed as a deduction, such as:
- fencing,
- water facilities for trees in the carbon sink forest
- roads within the forest, and
- fire breaks. [31]
These expenditures may, or may not, be claimed as
tax deductions under other sections of the tax legislation,
depending on the taxpayer s circumstances.
Forest
quality
A significant issue is the quality of the forests that will
qualify for the proposed tax deductions. Proposed
subsection 40-1010 (item 6 also)
also requires the taxpayer to meet certain environmental guidelines
when undertaking these plantings, such as:
- the forest occupies a continuous land area in Australia of 0.2
hectares or more
- at the time the trees are established it is more likely than
not that the trees will attain a crown cover of 20 per cent or more
and reach a hight of at least 2 meters, and
- the land on which the trees are planted was, on 1 January 1990,
clear of other trees meeting the same specifications of the first
two of the above points.
The Climate Change Minister must, by legislative
instrument, make guidelines about environmental and resource
management in relation to carbon sink forests. These guidelines
will be a disallowable instrument. The establishment of the trees
must satisfy these guidelines in order for the relevant expenses to
be clamed as a tax deduction.
Proposed section
40-1020 prevents expenditure for draining swamp or low
lying land, or for clearing land, from being claimed as a tax
deduction.
Forest
quality comments
Minimum size
A hectare is 10 000 square meters or 2.471 acres.
Thus the minimum size of the land that is used for a carbon sink
forest is 20 per cent of a hectare, or 2 000 square meters.
Further, this land cannot be broken up into smaller parcels of less
than 0.2 hectares and still qualify for the proposed tax deduction.
Thus it is possible that rural residents on smaller landholdings
will be able to claim the proposed tax deductions if they also
generate income from a business.
There is no requirement that the business income,
against which the deduction is claimed, should have any connection
with the land on which the trees are planted. Thus rural residents
with offsite business income (say from a professional practice) may
claim the expenditure for establishing a carbon sink forest as a
tax deduction.
Crown cover
The term crown cover has been defined as the area
covered by the crowns of trees growing closely together, often
expressed as a percentage for the combined crown cover of trees in
a defined area.[32]
The Victorian Department of Sustainability and
Environment has suggested that a eucalypt crown cover of between 10
and 29 per cent is regarded as a sparse cover.[33]
The Commonwealth Department of Agriculture
Fisheries and Forestry (DAFF), in its National Forest Inventory has
defined a forest as:
an area, incorporating all living and non-living
components, that is dominated by trees having usually a single stem
and a mature or potentially mature stand height exceeding 2 metres
and with existing or potential crown cover of overstorey strata
about equal to or greater than 20 per cent. This definition
includes Australia's diverse native forests and plantations,
regardless of age. It is also sufficiently broad to encompass areas
of trees that are sometimes described as woodlands.
Further the definition of a forest notes that:
the minimum crown cover for forest has been set at
20 per cent. It also marks a boundary that can be mapped reliably
from satellite information in most areas.[34]
The minimum likely height of 2 meters is classed, by DAFF as a
low height for forestry purposes and the minimum likely crown cover
of 20 per cent is the minimum limit for what is classed as woodland
in forestry terms.[35] The classification of woodland appears to be the forest
with the least tree density.
On the basis of these standards it could be argued that the
quality of the proposed carbon sink forests is the minimum
acceptable quality of a forest in Australia. Given the uncertain
rainfall pattens in most of rural Australia, and the generally
degraded soil quality of a number of rural areas, this minimum
standard may be an appropriate one to apply in order to allow the
widest possible range of applicants to claim the proposed tax
deduction.
Why 1 January 1990?
Finally, by becoming a party to the Kyoto Protocol to the United
Nations Framework Convention on Climate Change the Australian
government has formally committed itself to a target of 108 per
cent of emissions over 1990 levels over the period 2008 to 2012. It
should be noted that the previous government had informally
committed itself to this target. This year (1990) is also the base
year in which the Koyto Protocol on climate change measured the
agreed emissions targets. It is interesting to note that the final
text of the Koyto Protocol allowed Australia to increase its
emissions by 8 per cent over its 1990 levels.[36]
On the basis of set Australian policy, and in conformity with
the Koyto Protocol, it appears appropriate to only allow the
proposed tax deduction on land that was clear of trees as at 1
January 1990.
Can ground be cleared for the purpose of establishing carbon
sink forests?
These provisions also prevent a tax deduction being claimed for
expenditure establishing a carbon sink forest planted on ground
that was cleared for the purposes. As noted above, expenditure made
to clear or drain the ground cannot be claimed as a tax deduction.
Further, ground that has to be cleared in order to plant a carbon
sink forest is most likely not to have been clear of trees as at 1
January 1990 (see proposed subsection 40-1010(2)(c) Item 6,
Schedule 3).
Biodiversity?
While the proposed legislation does not specify that the trees
must be of different types (i.e. not a monoculture forest) the
proposed guidelines may address this issue.
Item 11 of Schedule 3 applies
the changes in Part 1 of this
Schedule to the 2007 08 and later income
years.
Item 12 repeals proposed
subsections 40-1005(1), (2),
(3) and (4) ITAA97 and replaces
them with new provisions, from 1 July 2012. This section is
inserted under Item 6 of the Bill (see above).This
change takes effect for the 2012 13 and later income years under
Item 2 of the Bill (see commencement dates
above).
The main change is contained in proposed subsection
40-1005(2) applying after 1 July 2012, which inserts a
formula for calculating the amount of expenditure allowed as a tax
deduction in the 2012 and later income years.
Under the provision of Item 6 above, 100 per
cent of the expenditure incurred in establishing a carbon sink
forest in the years from 1 July 2007 to 30 June 2012 will be
allowed as a deduction in the year in which the expenditure
occurred.
Under these changes the allowable expenditure is reduced to a
fraction of the yearly establishment expenditure. The amount is
reduced in accordance with the number of days the land is actually
used for carbon sequestration, as measured from the actual date of
forest establishment. Further, the allowable establishment
expenditure deduction is:
- 7 per cent of this total a year, and
- spread over a period of 14 years and 105 days from the date the
day the trees are established.
Comment
This provision is a very strong incentive for carbon sink
forests to be established in the period between 1 July 2007 and 30
June 2012. That is, the proposed deduction encourages the rapid
establishment of these forests during the next few years.
Further, if the trees are removed at any time during the year
then the tax deduction in respect of the remaining part of the year
(and the remaining part of the 14 years and 105 days period) is no
longer available. This is an incentive to keep the trees in the
ground for at least 14 years and 105 days if they are established
on or after 1 July 2012.
Proposed section 40-1030 allows deductions for
carbon sink forests destroyed (say by fire) during the income year
in which they were destroyed. However, the deduction is not
allowable for the remaining time of the 14 year period referred to
above.
Proposed section 40-1035 allows a person or
entity buying a carbon sink forest, on or after 1 July 2012, to
gain access to the unexpired portion of the allowable yearly tax
deductions. This will allow landholders or lease holders to sell
their interests in a carbon sink forest to another person or
entity.
Item 21 applies the provisions of Part
2 of this Schedule from 1 July 2012.
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Schedule 4 of this bill amends the ITAA97 and
the Income Tax Assessment Act 1936 (ITAA36) so that
recipients of the Equine Workers Hardship Supplement Payment (the
Supplement) are eligible for the beneficiary tax offset.
The Supplement is an ex-gratia payment directly assisting
workers involved in commercial horse industries who lost their job,
or most of their income, and sole-traders whose incomes have
effectively ceased, as a direct result of the Equine Influenza
quarantine and movement restrictions. Eligible applicants received
the equivalent of the Newstart Allowance rates - for a single,
couple, or single with dependent child(ren) - for up to 12 weeks
from 25 August 2007. This assistance was extended after the end of
the first 12 week period and ended on 8 February 2008.[37]
These payments were part of an initial $114 million package of
measures for people, businesses and equine organisations facing
additional costs and significant hardship, as a direct result of
the Equine Influenza quarantine and the movement restrictions
currently in place.[38]
Taxpayers whose assessable income includes certain government
benefits are entitled to a rebate of tax known as the ``beneficiary rebate'' under ITAA36 subsections
160AAA(1) & (3). A tax offset and a tax rebate are different
names for the same tax benefit. Examples of government payments
that entitle a taxpayer to the beneficiary
rebate are:
- certain Australian social security payments i.e. Newstart
allowance, sickness allowance, special benefit, partner allowance,
mature age allowance and widow allowance
- the parenting payment (partnered) to the extent that it is not
already tax exempt
- exceptional circumstances relief payments or payments of
restart income support (formerly called drought relief payments),
and
- income support payments for those affected by Cyclone Larry or
Cyclone Monica (for the 2005 06 to 2007 08 years only).[39]
There have been no new cases of equine influenza since Christmas
2007 with no known infected properties in New South Wales and
Queensland. However, some restrictions on the movement of horses
remain in place.[40]
The Explanatory Memorandum notes that the availability of this
tax offset was announced by the then Minister for Agriculture,
Fisheries and Forestry on 9 September 2007.[41] However this particular press release
does not contain a specific announcement concerning this particular
tax offset. It is not otherwise clear when the application of the
beneficiary tax offset to recipients of the Supplement was first
announced.
To date no comment has been made on the application of the
beneficiary tax offset to recipients of the Supplement.
The Supplement is essentially the payment of a NewStart
Allowance to those whose income has either ceased, or been severely
affected by the outbreak of equine influenza. The extension of the
beneficiary tax offset to this group puts them on the same footing
in relation to tax matters as those receiving other Commonwealth
government payments. Thus, it is an equity, as much as a welfare,
measure.
The Explanatory Memorandum notes that this measure will have a
negligible financial impact.[42]
Item 1 of Schedule 4 amends
subsection 160AAA(1) ITAA36 so that the Supplement
is a benefit payment that qualifies the recipient to claim a
beneficiary tax rebate.
Items 2 and 3 amend the list
of payments in section 13-1 ITAA97 that qualify
the recipient to claim a tax offset.
Item 4 applies the provisions of
Schedule 4 to the 2007 08, and later, income
years.
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This schedule amends the ITAA97 to provide tax free grants under
the Tobacco Growers Adjustment Assistance Program 2006 to tobacco
growers who undertake to leave all agricultural enterprises for at
least 5 years. This measure previously came before Parliament in
Schedule 2 of the Tax Laws Amendment (2007 Measures No. 6) Bill
2007. As noted above, this particular Bill lapsed with the calling
on the 2007 election.
In recent years, the tobacco growing industry, centred in
Mareeba (Queensland) and Myrtleford (Victoria), has faced
significant adjustment pressures from deregulation and the decision
of tobacco manufacturers to scale back their purchases of
Australian tobacco leaf.
Producer licenses were cancelled following the withdrawal of
major tobacco manufacturers as buyers of Australian grown tobacco.
The excise licences of tobacco growers in Northern Queensland were
cancelled by the Australian Taxation Office in February 2004, and
tobacco growers in Victoria and southern Queensland had their
licences cancelled in October 2006, when the manufacturers ceased
purchases from these regions.
In October 2006, the Australian Government announced a funding
package to assist tobacco growers to restructure and move into
alternative business activities. As of February 2007, the package
comprises funding of $45.9 million. Former tobacco growers in
Northern Queensland are to be eligible for up to $23.2 million,
with those in Victoria and Southern Queensland eligible for up to
$21.8 million and $900 000, respectively. The maximum grant will be
$150 000 per grower.[43]
The package of measures to enable farmers to exit the tobacco
growing industry is similar to other packages that allowed farmers
to exit the sugar and dairy industries.
These grants are not classed as income for social security
purposes.[44]
Generally, government grants paid to assist business to exit an
industry are assessable under the capital gains tax (CGT)
provisions rather than under the ordinary or statutory income tax
laws. The former government decided to make these particular grants
tax free for tobacco growers who undertake to exit all agricultural
enterprises for at least 5 years.[45]
The proposal to class these grants as tax free income was
announced as part of the
2007 08 budget.[46]
To date little comment has been made on the proposed
measure.
This measure gives the same tax treatment to these grants as was
given to grants made Sugar Industry Reform Program to those who
left the agricultural industry altogether.
The financial implications of this particular measure are
outlined in the following table.
Table 5: Projected financial impact of tax free grants
for certain tobacco growers
|
Year
|
2007 08
|
2008 09
|
2009-10
|
2010 11
|
|
Financial impact $m
|
-1.3
|
-1.3
|
-
|
-
|
Source: Explanatory
Memorandum p. 5.
Item 2 of Schedule 5 amends
the list of ordinary or statutory income which is exempt income
(and therefore not taxable income) if derived by certain entities
in section 11-15 ITAA97 to include tobacco
industry exit grants paid under the Tobacco Growers Adjustment
Assistance Program 2006.
Item 3 amends section 53-10
ITAA97. The effect of this amendment is to exempt a grant made to a
person under the Tobacco Growers Adjustment Assistance Program if
they enter into an undertaking not to become the owner or operator
of any agricultural enterprise within 5 years after receiving the
grant.
Item 4 exempts these grants from the Goods and
Services Tax (GST), under the same condition.
Item 5 applies these amendments to the 2007 08
income year and later years.
Comment
The tax free status of these grants is not jeopardised if a
recipient simply continues to work in the rural sector.
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This Schedule amends the Farm Management Deposits (FMD) Schedule
in the Income Tax Assessment Act 1936 (ITAA36) so that tax
law is aligned with guidelines for declaring either:
- all primary producers in a geographical area, or
- a specified classes of primary producers in a geographical
area
to be in exceptional circumstances.
The effect of these changes will be to allow
primary producers who made an FMD before their area was declared to
be in exceptional circumstances to draw upon those deposits within
a 12 month period once an exceptional circumstances declaration has
been applied to them, without losing the tax advantages of
initially making the FMD.
Under existing legislation, if a primary producer
has made an FMD before an exceptional circumstances (EC)
declaration for their area was made, they cannot draw on that
deposit before a 12 month period has expired and retain the tax
advantages of doing so.
The proposed amendments to the ITAA36 base the
eligibility to retain the relevant tax deductions if withdrawals
are made on when the EC declaration applies to a person making the
withdrawal, rather on when the EC declaration applies to the
relevant geographic area.
This measure was also previously considered by Parliament in the
Tax Laws Amendment (2007 Measures No. 6) Bill 2007. Again as
previously noted, this particular Bill lapsed with the calling of
the 2007 election.
The FMD scheme is designed to allow primary producers to, in
effect, shift income from good to bad years in order to deal with
adverse economic events and seasonal fluctuations
The FMD scheme allows primary producers (with a limited amount
of non-primary production income) to claim tax deductions for
FMDs made in
the year of deposit. When an FMD is withdrawn, the amount of the
deduction previously allowed is included in both their tax
assessable income in the repayment year.[47]
While deposits can be held in accounts of any terms (including
at call accounts), the general rule is that the deposit must not be
repaid within 12 months (other than because the owner dies, becomes
bankrupt, ceases to be a primary producer or the amount is
transferred to another financial institution).
There is an exception to the 12-month rule for persons in
exceptional circumstances areas. In such cases, persons cannot make
other deposits in the same tax year. Such areas are declared by the
Minister for Agriculture, Fisheries and Forestry. An exceptional
circumstances certificate must be obtained within three months
after the end of the income year of the withdrawal. The amount
withdrawn is tax assessable in the income year of the
withdrawal.
Failure to comply with this rule may result in the deposit not
being treated as an FMD from the time the deposit was made.
[48] This would
result in a denial of the claimed tax deduction in respect of the
FMD made.
Exceptional circumstances (EC) are those climatic and other
events of sufficient rarity and severity as to be considered
outside the scope of reasonable and responsible risk management
strategies. Relatively short periods of income decline, due to
fluctuations in both seasonal and market conditions are not
included, as farmers are expected to have strategies in place to
deal with these. This means, for example, that a drought as defined
in meteorological terms does not automatically qualify for EC.
For a region or industry to be declared eligible for EC
assistance the event must be rare and severe. The effects of the
event must result in a severe downturn in farm income over a
prolonged period and the event must not be a predictable part of
the process of structural adjustment.
An area or region becomes declared as experiencing an EC event.
The EC declaration triggers short-term support for farmers in
situations beyond the scope of normal risk management, and when the
future of significant numbers of farmers in a region is at risk.
Support is also available to agriculture-dependent small
businesses.
An area or region is said to be prima facie declared when the
Australian Government Minister for Agriculture, Fisheries and
Forestry receives an application for EC, agrees that a prima facie
case has been established and refers the application to the
National Rural Advisory Council (NRAC) for advice. The prima facie
declaration triggers interim income support for farmers and
agriculture-dependent small businesses while the EC application is
being assessed.[49]
The proposed amendments will enable a wider range of farmers to
draw on their FMDs, without losing the tax advantages of first
making the deposit.
The Explanatory Memorandum notes that the revenue of this
measure is expected to be nil. However, there may be a small cost
to revenue if taxpayers need to amend their prior tax
assessments.[50]
Item 1 of Schedule 6 amends
paragraphs 393-37(3)(b) and (c)
in Schedule 2G ITAA36. The effect of these
amendments is to allow a person to retain the tax benefits of
making an FMD, if it is withdrawn within a 12 month period of first
making that deposit, when
- the deposit was made before they were subject to an EC
declaration, and at the time of the withdrawal they are eligible to
be subject to such a declaration, or
- an EC declaration applies to them within a 3 month period after
the end of the income year in which such a withdrawal is made.
Item 2 applies the provisions of this Schedule
to income tax assessments for the 2002 03 and later income
years.
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Leslie Nielson
29 February 2008
Bills Digest Service
Parliamentary Library
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