Bills Digest no. 123 2007–08
Tax Laws Amendment (Budget Measures) Bill
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
Purpose
Background
Financial implications
Main provisions
Contact officer & copyright details
Passage history
Tax Laws Amendment (Budget Measures)
Bill 2008
Date
introduced: 27 May
2008
House: House of Representatives
Portfolio: Treasury
Commencement:
Royal Assent, although the
substantive provisions (other than items 6, 10 to 12 in Schedule 1)
have retrospective effect from 7.30 pm (AEST), 13 May
2008[1].
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/.
This Bill amends taxation
legislation to give effect to some of the policy initiatives
announced as part of the 2008 2009 Commonwealth budget. The
specific pieces of legislation amended are:
- the Fringe Benefits Tax Assessment Act 1986
(FBTAA)
- the Income Tax Assessment Act 1936 (ITAA36), and
- the Income Tax Assessment Act 1997 (ITAA97).
The proposed amendments affect the tax treatment
of:
- employee share schemes
- some fringe benefits provided to employees that are currently
concessionally taxed, and
- the depreciation period for computer software.
Fringe benefits tax (FBT) is a tax payable by employers on the
value of certain benefits, ( fringe benefits ), which have been
provided to employees, or to associates of those employees, in
respect of their employment. The principal legislation dealing with
FBT is the Fringe Benefits Tax Assessment Act 1986 (FBTAA)
and its regulations.
Briefly, the proposed changes in the Bill will tighten the
current exemptions under the FBTAA. It will restrict the FBT
exemption for eligible work-related items such as laptop computers
to items that are principally used for work related purposes. It
will also tighten the FBT exemption for private use of business
property by excluding meals provided as part of a salary sacrifice
arrangement (known as meal cards).
In 2000 the House of Representatives Standing Committee on
Employment, Education and Workplace Relations found that there is
no single type of employee share plan. While the plans can be
structured in different ways they do however all have three
elements in common:
- they aim to transfer equities to employees
- the transfer is on favourable terms to both employer and
employee, and
- the recipient of the equities is an employee of the person
providing the equities or other equity related securities such as
options or warrants.[2]
Employee share ownership schemes might also be thought of as
simply another instance of employers rewarding employees with
non-wage financial entitlements, a labour management practice that
stretches back well over one hundred years. While the receipt of
wages gives every employee a direct stake in the ongoing financial
success of their employer, the literature suggests that forms of
additional, non-wage financial participation in the employer
enterprise, such as profit-sharing, have been in existence since at
least the mid-eighteenth century.[3]
Briefly, the Bill proposes two amendments that affect employee
share plans. It would:
- end the current double taxation of the proceeds of employee
share plans by amending the capital gains provisions in the ITAA97
to ensure a trustee or beneficiary of an employee share trust is
not subject to capital gains tax (CGT) where an employee who
exercises employee share scheme rights becomes absolutely entitled
to the shares in the trust, and
- tighten the rules for choosing the time when the proceeds of
these plans are bought to account for personal taxation
purposes.
Under current taxation law computer software is depreciated, or
written off, over two and a half years.[4] The proposed changes extend this period
to four years. By way of comparison, computer hardware is also
depreciated over four years.
These measures were announced in the 2008 2009 Budget speech and
supporting documents and in the Treasurers media releases of 13 May
2008.[5]
By far the most controversial of the proposed changes are the
changes to the taxation of fringe benefits. Press comment has
reported several concerns about the proposed changes to the FBT
rules:
- these changes may make it more difficult to construct an
attractive employee remuneration package. This may be important in
instances where Australian companies are competing for scarce
skilled staff[6]
- a large majority of staff making use of the subsidised meals at
work (ie meal cards) are low paid workers[7]
- these changes do not contribute to the simplification of the
FBT regime,[8]
and
- the proposed measures relating to meal cards will have a
significant adverse affect on small business, mainly in inner city
commercial areas.
Further, there was some concern that the proposed
changes to the FBT regime may make salary sacrifice arrangements
non-viable. However, the balance of press opinion is that there are
still significant employer benefits that are either not subject to
FBT or are taxed at a reduced rate.[9]
The proposed changes to the taxation rules applying to employee
share plans have received mixed comment. The changes to end the
double taxation of the proceeds of these schemes have been
welcomed.[10]
However, the proposed legislative changes to force the point in
time at which those receiving securities under a employee share
scheme arrangement would be taxed has been deemed by some tax
experts to be ineffective. They argue that the changes do no more
than what the current law already does.[11]
It has been suggested that the proposed lengthening of the
period over which the cost of computer software can be deducted is
inappropriate. It has been claimed that the rapid rate of technical
innovation means that business, especially small business, now
change their software over a much shorter time period than the
proposed four years.[12]
The proposed measures will increase tax revenue and reduce
government expenditure. However, as noted above, there may be some
unintended consequences of the proposed changes.
The Coalition s views on this Bill were summarised during the
second reading speech of Mr Michael Keenan MP as follows:
- the Coalition supported the proposed changes to the rules
governing the taxation of the proceeds of employee share plans, but
noted that these changes were, in fact, current policy[13]
- the Coalition opposed the proposed changes to the FBT regime
for many of the reasons noted above. It also criticised the FBT
regime as being too complex,[14] and
- the Coalition also opposed the lengthening of the deprecation
period for computer software.[15]
During the second reading debate in the House of
Representatives, the Coalition called for the Bill to be referred
to the Senate Economics Committee for further examination.[16]
The Explanatory Memorandum notes that there will be minimal
financial consequences arising from the proposed changes to the FBT
regime and the rules governing the taxation of the proceeds arising
from employee share schemes. However, the cumulative gains in
revenue arising from the lengthening of the depreciation period for
computer software from two and a half to four years between 2008
2009 and 2011 2012 are $1.3 billion, as follows:[17]
Table 1: Revenue gains from computer software
measure
|
Year
|
2008-09
|
2009-10
|
2010-11
|
2011-12
|
|
Revenue Gain $m
|
15
|
300
|
681
|
318
|
|
Source: Explanatory
Memorandum[18]
|
|
|
A significant issue connected with the proposed changes in FBT
is that of a double tax benefit. This occurs when a person pays for
an asset, say a laptop computer, and claims a relevant tax
depreciation deduction. They then receive reimbursement by their
employer for this purchase through a salary sacrifice arrangement.
The employer then claims an FBT exemption for this expenditure. The
proposed changes in the Bill will tighten the rules so that
depreciation benefits will be removed on work related items that
are also FBT free. In addition, the FBT exemption will only apply
to work related items used primarily for employment.
As Senators and Members would be aware, if a person salary
sacrifices an amount, the amount forgone is not subject to income
tax. If it is also not subject to FBT or company tax then it is
income that is effectively not taxed. The example above of the
laptop computer illustrates how personal income that normally would
be subject to income tax has avoided that impost. It can be argued
that such procedures are undue avoidance of income tax.
Section 41 of the FBTAA provides an FBT
exemption for food and drink provided by an employer to an employee
on an employer s premises. Item 2 inserts
new subsection 41(2). Its effect is that the FBT
exemption will no longer apply to food or drink provided to an
employee as part of a salary sacrifice
arrangement. This amendment applies to food and
drink provided after 7.30 pm (AEST) on 13 May 2008, ie from the
commencement of the Treasurer s 2008 2009 Budget Speech
(item 3).
Section 58X of the FBTAA exempts from fringe benefits tax
certain employment-related benefits provided by an employer to an
employee (but not to the employee's associates). The benefits
include laptop computers, portable printers, electronic diaries and
mobile phones. Although the exemption was introduced in the
expectation that any private use of the benefits by employees would
be incidental to their employment use, the current wording of
section 58X FBTAA does not specify the amount of
employment use required for the benefits to be exempt.[19] In particular, the use
of the expression in respect of the employee's employment in the
current subsection 58X(1) appears to require a connection between
the provision of the benefit and the employment, rather than a
connection between the use of the benefit and the employment.
Item 4 repeals subsections
58X(2), (3) and (4) and
substitutes new text. The main effect of these amendments is to
redefine what an eligible work related item may be for FTBAA
purposes[20] and to
ensure that the above mentioned exemption from FBT is only
available if this item is primarily for use in the employee s
employment. These amendments apply from 7.30 pm, (AEST) on 13 May
2008 (item 5).
Item 8 amends section 40-45 of
the Income Tax Assessment Act 1997 (ITAA97). The function
of this particular section is to specify assets to which
Division 40 of the ITAA97 does not apply. Briefly,
under this Division a deduction is available to the taxpayer for
various capital expenses.
The effect of item 8 is to deny a personal
income tax deduction in respect to eligible work related items as
specified under section 58X of the FBTAA That is,
an employee would not be able to claim a deduction for the decline
in value for an eligible work related item (such as a computer)
where the item is provided as a fringe benefit and the benefit is
exempt from FBT under section 58X. This amendment applies from 7.30
pm, AEST on 13 May 2008 (item 9).
Section 139E of the Income
Tax Assessment Act 1936 provides that an employee acquiring a
share or a right in a company through an employee share scheme
(ESS) may make an election to choose between two available tax
concessions. Items 10 and 11
amend this section so that the method of election is more
transparent. Under new subsection 139(2) an
election to be taxed upfront on shares or rights is made by making
the election and including the amount of discount in the
income tax return of the year when the shares were acquired. Under
the current wording of the section such an election by the taxpayer
is not required to be lodged with the tax return or otherwise
provided to the Commissioner. The Explanatory Memorandum states
that there is a risk with the existing election mechanism whereby
taxpayers may seek to manipulate when the amount of the discount is
included as assessable income and thereby reduce their liability
for tax.[21]
Item 13 states that the
amendments in items 10 to 12
apply to the 2008 09, and later, income years. Effectively, this
means from 1 July 2008 for most taxpayers.
Item 14 repeals and replaces
subsection 130-90(3) of the ITAA97 in order to
expand the capital gains tax (CGT) relief to certain ESS. Under the
existing provision a trustee or beneficiary of an employee share
trust is provided with relief from CGT when an employee becomes
absolutely entitled to ESS shares or rights held in the trust.
However the CGT relief does not extend to shares held in the trust
that the employee acquired by exercising rights they acquired under
an ESS. Item 14 would extend CGT relief to this
category. Its effect is from 7.30 pm (AEST) on 13 May 2008
(item 15).
Item 1 amends subsection
40-95(7) of the ITAA97 to extend the period of time over
which computer software must be depreciated from two and a half to
four years. The amendment applies from 7.30 pm, (AEST) on 13 May
2008 (item 2).
Leslie Nielson
Mary Anne Neilsen
5 June 2008
Bills Digest Service
Parliamentary Library
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