Bills Digest no. 53 2008–09
Tax Laws Amendment (2008 Measures No. 5) 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
Schedule 1 Goods and services tax and real
property
Schedule 2 Thin capitalisation and international
financial reporting standards
Schedule 3 Interest withholding tax and state
government bonds
Schedule 4 Fringe benefits tax
Schedule 5 Eligible investment business
rules
Concluding comments
Attachment A
Contact officer & copyright details
Passage history
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ADIs
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authorised deposit-taking
institutions
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AEST
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Australian Eastern Standard Time
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AIFRS
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Australian equivalents to
International Financial Reporting Standards
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Commissioner
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Commissioner of Taxation
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Corporations Act
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Corporations Act 2001
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FBT
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fringe benefits tax
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FBTAA 1986
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Fringe Benefits Tax Assessment Act
1986
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GST
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goods and services tax
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GST Act
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A New Tax System (Goods and
Services Tax) Act 1999
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ITAA 1936
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Income Tax Assessment Act
1936
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ITAA 1997
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Income Tax Assessment Act
1997
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IWT
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interest withholding tax
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NAB case
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National Australia Bank Ltd v FC
of T 93 ATC 4914
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Tax Laws Amendment (2008 Measures
No. 5) Bill 2008
Date
introduced: 25
September 2008
House: House of Representatives
Portfolio: Treasury
Commencement:
The Act commences on Royal
Assent. The commencement of the measures in each Schedule is given
in the Application sections of this Bills Digest.
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 Bill has five Schedules and the purpose of the amendments in
each Schedule is briefly set out below:
- Schedule 1 seeks to amend the A New Tax System (Goods and
Services Tax) Act 1999 (the GST Act) to overcome tax
minimisation involving the use of the margin scheme and the sale of
real property. This is a tax integrity measure, Schedule 1 also
seeks to align the anti-avoidance provisions in the GST Act with
the anti-avoidance provisions in Part IVA of the Income Tax
Assessment Act 1936 (ITAA 1936).
- Schedule 2 seeks to effect changes to the thin capitalisation
regime in Australian tax law to recognise changes in Australian
Accounting Standards on the adoption in 2005 of the Australian
equivalents to International Financial Reporting
Standards.
- Schedule 3 seeks to extend the Interest Withholding Tax (IWT)
exemption to State and Territory Government bonds to bring about a
better functioning State and Territory bond market.
- Schedule 4 seeks to ensure that the full value of a benefit
that has been provided to an employee and an associate in relation
to a jointly held asset will be subject to fringe benefits tax
(FBT) under the Fringe Benefits Tax Assessment Act 1986
(FBTAA 1986). This is a tax integrity measure.
- Schedule 5 seeks to change the eligible investment business
rules in Division 6C of the ITAA 1936 to remove impediments to
commercial practice in respect of public unit trusts that focus on
real estate investments.
The Bill was referred to
the Senate Standing Committee on Economics on 25 September 2008.
The Committee has been given an extended reporting date of 10
November. Details of the committee can be found at
http://www.aph.gov.au/senate/committee/economics_ctte/tlab_5_08/index.htm.
Background
As there is no central theme to the Bill, the background to the
various measures will be discussed in the commentary on each
Schedule.
One of the integrity measures proposed in Budget
Paper No. 2, 2008-09 was that relating to the goods and
services tax (GST) and the sale of real property. The integrity
measure was directed at ensuring that the interactions between a
number of provisions in GST law do not allow real property
transactions to be structured to reduce the GST liability using the
margin scheme. Basically, a tax integrity measure is one to prevent
tax avoidance.
Budget Paper No. 2 gave the scope of the proposed changes as
follows:
The GST provisions dealing with real property
are intended to ensure that GST is payable on the value added to
land once it enters the GST system. The margin scheme achieves this
outcome by applying GST to the 'margin', that is, the difference
between the purchase price paid by the seller and the price paid by
the buyer. This measure provides that, where the margin scheme is
used after a GST free or non‑taxable supply, the value added
by the registered entity which made that supply is included in
determining the GST subsequently payable under the margin scheme.
The measure will also strengthen the GST anti‑avoidance
provisions to ensure that they can apply to contrived arrangements
entered into to avoid GST.
Division 75 of the A New Tax System (Goods and Services Tax)
Act 1999 (the GST Act) allows an entity to use a margin scheme
to bring within the GST system the entity s supply of freehold
interests in land, of stratum units and of long-term leases
(referred to as real property ). Subsection 75-5(1) provides that
the margin scheme can only apply if the supplier and the recipient
of the supply have agreed in writing that the margin scheme is to
apply.
The basic margin scheme rule is in subsection 75-10(2) of the
GST Act. The margin scheme allows the seller to pay the GST equal
to 1/11 of the margin rather than 1/11 of the sale price. The
margin can be generally defined as the difference between the
amount the seller paid for the property and the amount the property
is sold for.
This contrasts with GST payable under the basic GST rule, which
is 1/11 of GST inclusive price of the taxable supply under sections
9-70 and 9-75(1) of the GST Act.
Section 75-11 of the GST Act provides for working out the
margins for supplies of real property in particular
circumstances.
Thus:
- subsections 75-11(1) and (2) provide for working out the margin
for supply of real property acquired from a fellow member of GST
group,
- subsections 75-11(2A) and (2B) provide for working out the
margin for supply of real property acquired from joint venture
operator of a GST joint venture,
- subsections 75-11(3) and (4) provide for working out the margin
for supply of real property acquired from a deceased estate,
and
- subsections 75-11(7) and (8) provide for working out margin for
supply of real property acquired from an associate.
The reader is referred to the Australian Taxation Office (ATO)
publication
GST and the margin scheme which
provides basic information about the margin scheme and contains
references to additional sources of related information (NAT
15145).
The Explanatory Memorandum to the Bill in paragraphs 1.1 and 1.2
gives an outline of the purpose of the amendments in
Schedule 1. Basically, they are intended to ensure
that the margin scheme provisions and the going concern, farmland
and associates provisions are not used in a manner to allow
property sales to be so structured that GST does not apply to value
added to real property on or after 1 July 2000.
It must be noted that the supply of a going concern is GST-free
under Subdivision 38-J of the GST Act. Also Subdivision 38-O
provides that the supply of subdivided farm land and farm land
supplied for farming are GST-free. Supply as defined in sections
9-10 of the GST Act means any form of supply, including a supply of
goods, services, a grant, assignment, or surrender of real
property.
Item 2 of Schedule 1 inserts
proposed paragraph 75-5(3)(e) to subsection
75-5(3) to make a supply of real property ineligible for the margin
scheme if:
- the real property was acquired by the supplier from an entity
as or part of a supply of a going concern that was GST-free under
Subdivision 38-J, and
- the supplier was registered or required to be registered at the
time of the acquisition, and
- the supplier had acquired the real property through a taxable
supply on which GST was worked out without applying the margin
scheme.
This last condition ensures that a supply of real property that
was ineligible for the margin scheme previously because it was
acquired as a going concern which was GST-free does not become
eligible to the margin scheme subsequently.
Item 2 of Schedule 1 inserts
proposed paragraph 75-5(3)(f) to subsection
75-5(3) to make a supply of real property ineligible for the margin
scheme if:
- the real property was acquired by the supplier from an entity
as or part of a supply of a going concern that was GST-free under
Subdivision 38-O,and
- the supplier was registered or required to be registered at the
time of the acquisition, and
- the supplier had acquired the real property through a taxable
supply on which GST was worked out without applying the margin
scheme.
Here again, this last condition ensures that a supply of real
property that was ineligible for the margin scheme previously
because it was acquired as farmland which was GST-free does not
become eligible to the margin scheme subsequently.
Item 2 of Schedule 1 inserts
proposed paragraph 75-5(3)(g) to subsection
75-5(3) to make a supply of real property ineligible for the margin
scheme if:
- the real property was acquired by the supplier from an
associate who was registered or required to be registered at the
time of the acquisition, and
- the acquisition from the associate was without consideration,
and
- the supply from the associate was not a taxable supply,
and
- the associate made the supply in furtherance of an enterprise
carried on by the associate, and
- the associate had acquired the real property through a taxable
supply on which GST was worked out without applying the margin
scheme.
Here again, this last condition ensures that a supply of real
property that was ineligible for the margin scheme previously
because it was acquired from an associate for no consideration does
not become eligible to the margin scheme subsequently.
Item 3 of Schedule 1 inserts
proposed subsection 75-5(3A) which provides that
the last two conditions in proposed paragraph
75-5(3)(g) do not apply if the acquisition from the
associate was not by means of a supply by the associate.
At present, Division 75 does not apply to transactions between
associates for no consideration. Item 1 of
Schedule 1 inserts proposed subsection
75-5(1B) so that a supply to an associate is taken for the
purposes of subsection 75-5(1) to be a sale whether or not the
supply is for a consideration. Item 8 of
Schedule 1 makes a consequential amendment to
section 75-13 to enable the margin to be worked out for supplies
between associates, whether or not the supply was for
consideration.
Under current law an entity that acquires real property and
subsequently sells it under the margin scheme, it only pays GST on
the valued added by itself. The value added by the entity from
which that real property was acquired is not subject to GST.
Item 4 and item 9 of
Schedule 1 make provisions to ensure that an
entity which sells real property under the margin scheme will pay
GST on both the value added by itself and the entity from whom it
was acquired, in situations where no GST had been paid on the value
added by that entity.
The reader is referred to paragraphs 1.41 to 1.51 on pages 20 to
26 of the Explanatory Memorandum to the Bill for details of these
provisions with examples of their operation.
Division 165 of the GST Act contains the general anti-avoidance
provisions in the GST Act. This Division is aimed at artificial or
contrived schemes to give entities benefits by reducing GST,
increasing refunds or altering the timing of payment of GST or
refunds. Section 165-40 provides that the Commissioner may negate
the avoider s GST benefits from such schemes.
Division 165 is not intended to apply where parties merely take
advantage of concessions such as the margin schemes. Currently,
paragraph 165-5(1)(b) provides that the GST benefit which could be
negated by the Commissioner should not be attributable to the
making by an entity of a choice, election, application or agreement
that is expressly provided by GST law.
Item 11 of Schedule 1 inserts
proposed subsection 165-5(3) to provide that a GST
benefit which an avoider gets from a scheme is not taken to be
attributable to a choice, election or application or agreement
referred to in paragraph 165-5(1)(b) if:
(a) the scheme, or part of the scheme was
entered into or carried out for the sole or dominant purpose of
creating a circumstance or state of affairs; and
(b) the existence of the circumstance or state of
affairs is necessary to enable the choice, election, application or
agreement to be made.
The Explanatory Memorandum to the Bill in paragraph 1.55 on page
27 cites a similar concept in the general anti-avoidance provisions
of Part IVA of the ITAA 1936 in relation to income tax. It
adds:
1.56 For the avoidance of doubt, new subsection
165-5(3) introduces into the GST Act a concept that is already
found in subparagraph 177C(2)(a)(ii) of the ITAA 1936, so that if a
GST benefit is attributable to the making of a choice, election,
application or agreement, then consideration needs to be given to
the purpose of creating any circumstance or state of affairs which
enable such a choice, election, application or agreement.
1.57 This exception is not limited to schemes
involving real property and the margin schemes and applies to other
schemes to which GST general anti-avoidance provisions may
apply.
The limits to the application of the proposed subsection
165-5(3) is that the scheme must be for the sole or
dominant purpose of deriving a GST benefit.
According to the Explanatory Memorandum to the Bill the measures
in Schedule 1 will have the following positive revenue
implications.
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Nil
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$43m
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$135m
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$160m
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$185m
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Generally, the amendments made in Schedule 1 will apply to new
supplies made on or after the date of commencement (Royal
Assent).
On 13 May 2008, the Treasurer and the Assistant Treasurer
announced in a joint media release that the Government will
amend the thin capitalisation regime in Australian tax law to
recognise changes that were effected by the adoption in 2005 of
Australian equivalents to the International Financial Reporting
Standards (AIFRS).[1] The attachment to the joint media release stated:
The Government will amend the thin
capitalisation regime to accommodate certain impacts arising from
the 2005 adoption of Australian equivalents to International
Financial Reporting Standards. These amendments will allow entities
subject to thin capitalisation to depart from the current
accounting treatment in relation to certain intangible assets and
to exclude both deferred tax assets and liabilities and surpluses
and deficits in defined benefit superannuation funds from such
calculations.
Division 820 of the Income Tax Assessment Act 1997
(ITAA 1997), which sets out the thin capitalisation rules, applies
to foreign controlled Australian entities, Australian entities that
operate internationally and foreign entities that operate in
Australia. The object of Division 820 is to ensure that these
entities do not reduce their Australian tax liabilities by using an
excessive amount of debt capital to finance their Australian
operations.
Financing expenses that an entity can otherwise deduct from
assessable income, such as interest, may be disallowed under
Division 820 under certain circumstances when the entity is thinly
capitalised.
If an entity is not an authorised deposit-taking institution
(ADI) for the purposes of the Banking Act 1959 and the
entity s debt exceeds the prescribed level, the entity is thinly
capitalised .
If an entity is an ADI and the entity s capital is less than the
prescribed level, the entity is thinly capitalised .
Subsections 820-680(1) and (1A) of the
ITAA 1997 require compliance with accounting standards in relation
to the recognition of assets and liabilities of an entity and in
calculating:
- the value of an entity s assets (including revaluation of
assets),
- the value of an entity s liabilities (including its debt
capital), and
- the value of an entity s equity capital.
Item 5 of Schedule 2 inserts
proposed section 820-682 to modify the application
of accounting standards in the recognition of deferred tax assets
and deferred tax liabilities.
Proposed subsection 820-682(1) provides that an
entity must not recognise deferred tax liabilities and deferred tax
assets for the purposes of Division 820 in working out the
application of thin capitalisation rules. Australian accounting
standard AASB 112 Income Taxes would have otherwise
required the recognition of these deferred tax liabilities and
deferred tax assets.
Proposed subsection 820-682(3) provides that
proposed section 820-682 does not apply to an
outward investing entity ADI or an inward investing entity ADI.
According to subsection 820-300(2) of the ITAA 1997, an entity
will be an outward investing ADI if:
- it controls one or more controlled foreign entities (whether an
entity is controlled by a foreign interest is to be determined in
accordance with the rules applying in relation to controlled
foreign corporations - generally 50% control),
- it has a permanent establishment overseas,
- it is an Australian entity and an associate of another entity
that is an outward investing entity(non-ADI) or an outward
investing entity (ADI).
The expression inward investing ADI is defined in
subsection 820-395(2) of the ITAA 1997 and applies if the entity is
a foreign bank that carries on its banking business in Australia at
or through one or more of its Australian permanent
establishments.
Proposed section 820-682(2) provides that an
entity must not recognise an amount relating to a defined benefit
plan as a liability or an asset for the purposes of Division 820 in
working out the application of thin capitalisation rules.
Australian accounting standard AASB 119 Employee Benefits
would have otherwise required the recognition of these amounts.
Proposed subsection 820-683(2) provides that an
entity may choose to recognise an internally generated asset
referred to in proposed subsection 820-683 (1)
notwithstanding that its recognition is precluded by Australian
accounting standard AASB 138 Intangible Assets.
Proposed subsection 820-683(1) applies to
internally generated intangible assets, other than internally
generated goodwill, that cannot be recognised under AASB
138. These include internally generated brands, mastheads,
publishing titles, customer lists and items listed in paragraph 63
of AASB 138 Intangible Assets.
Proposed subsection 820-683(6) provides that
the choice is not available to an entity that is an outward
investing entity ADI or an inward investing entity ADI.
Proposed section 820-684 provides that
notwithstanding the prohibition in Australian accounting standard
AASB 138 Intangible Assets from revaluing certain
intangible assets, an entity may choose to revalue such assets.
Proposed subsection 820-684(6) provides that
the choice is not available to an entity that is an outward
investing entity ADI or an inward investing entity ADI.
The Explanatory Memorandum to the Bill on page 8 states that the
financial impact is unquantifiable .
Item 9 of Schedule states that the amendments
made by this Schedule, apply to assessments for each income year
starting on or after the commencement of this Schedule. Under
clauses 2 and 3 of the Bill
Schedule 2 will commence on the day the Act
receives Royal Assent.
Interest withholding tax (IWT) is deductible under subsection
128B(2) of the ITAA 1936 where interest is payable by a resident to
a non-resident unless an exemption applies. IWT is imposed under
the
Income Tax (Dividends, Interest and Royalties Withholding Tax)
Act 1974 at a flat rate of 10 per cent of the gross amount
of interest paid unless a different rate is specified under
Australia s double tax agreements (DTAs). For payments made after
30 June 2000, sections 12-245, 12-250 and 12-255 of Subdivision
12-F, Schedule 1, of the Taxation Administration Act1953
require a person to withhold amounts from payments of interest and
pay such withheld amounts to the Commissioner of Taxation.
Subsection 11-5(1) of the same Schedule deems an amount to have
been paid when the paying entity applies or deals with the amount
in any way on the other s behalf or as the other directs. Under
current tax law there is no IWT exemption on interest paid on State
and Territory Government bonds.
On 20 May 2008, the Treasurer, the Hon Wayne Swan in Press
Release No 058
announced a package of measures to bolster Australia s
financial markets. These measures included the proposal to provide
interest withholding tax (IWT) exemption for State and Territory
Government bond issuance:
The final element of this package is to change
the Interest Withholding Tax (IWT) arrangements for State
Government bond issuance. Bonds issued by State Governments will be
eligible for exemption from IWT.
This change is expected to improve depth and
liquidity in State Government bond markets and improve price
discovery. A better functioning State bond market will add to the
attractiveness of these bonds, and allow them to make a greater
contribution to financial market stability, while resulting in only
a small reduction in revenue received by the Australian
Government.
This suite of initiatives would be progressed
quickly, with a view to legislation being introduced and passed in
the current sitting of Parliament.
This demonstrates the Government's
determination to ensure the efficient operation of Australia's
financial markets.[2]
The possible exemption of government securities from interest
withholding tax was originally discussed in the 1999 Review of Business Taxation
(the Ralph Review). However, the review recommended that the tax
continue to apply to bonds.
In the context of the revenue neutrality
constraint applying to its recommendations, the Review does not
consider extending the IWT exemption of sufficient priority to
recommend the exemption.
Division 11 of Part 111 of the Income Tax Assessment Act
1936 (ITAA 1936) deals with dividends, interest and royalties
paid to non-residents and to certain other persons.
IWT is payable on interest derived by a non-resident unless an
exemption applies under subsection 128B(2) of Division 11 of the
Income Tax Assessment Act 1936 (ITAA 1936). IWT is imposed
at a flat rate of 10% on the gross amount of interest, without
deductions for expenses incurred in deriving that interest.
Section 128F provides that Division 11 does not apply to
interest on certain publicly offered company debentures or debt
interests.
Subsection 128F(5A) provides that section 128F does not apply in
relation to a debenture or debt interest issued in Australia by a
company that is covered by subsection (7) or is a central borrowing
authority of a State or Territory.
Subsection 128F(5A) further provides that a central borrowing
authority is a body established for the purpose of raising finance
for the State or Territory. The following are examples of central
borrowing authorities:
(a) the Tasmanian Public Finance Corporation;
(b) the Queensland Treasury Corporation;
(c) the South Australian Government Financing Authority;
(d) the Western Australian Treasury Corporation;
(e) the New South Wales Treasury Corporation;
(f) the Treasury Corporation of Victoria;
(g) the Northern Territory Treasury Corporation.
In consequence, IWT is at present payable on interest paid to
non-residents by central borrowing authorities of State and
Territory Governments.
Item 1 of Schedule 3 inserts
proposed subsection 128F(5B) into the ITAA 1936 to
provide that subsection 128F(5A) does not apply to a bond issued in
Australia by a central borrowing authority of a State or Territory.
Proposed subsection 128F(5B) further provides that
in this subsection bond includes debenture stocks and notes.
The Explanatory Memorandum to the Bill at page 9 states that
this measure will have the following revenue implications.
Item 2 of Schedule 3 provides
that this Schedule applies to interest paid after its commencement.
Under clauses 2 and 3 of the Bill
Schedule 3 will commence on the day the Act
receives Royal Assent.
There are two Parts to this schedule.
In the Budget
Paper No 2, 2008-09 on page 23 it was indicated that the
Government intended to amend the fringe benefits tax (FBT) law to
ensure that the full value of a benefit that has been provided to
both an employee and an associate in relation to a jointly held
asset will be subject to FBT.
Budget Paper No 2 added that this was an integrity measure and
will re-establish the principle that income and deductions arising
from jointly held assets should be allocated between joint owners
according to their legal interests.
Currently, subsection 138(3) of the Fringe Benefits Tax
Assessment Act 1986 (FBTAA 1986) provides that for the purpose
of the Act, where an employer provides a benefit jointly to an
employee and one or more associates of the employee, the benefit
shall be deemed to be provided to the employee only.
Section 24 of the FBTAA 1986 provides for the reduction of
taxable value of a benefit granted to an employee for FBT purposes,
where the employee concerned, had he or she incurred the
expenditure, would have been entitled to claim a deduction from
assessable income for income tax purposes. For this reason the rule
in section 24 is referred to as the otherwise deductible rule and
this is acknowledged in the title to section 24 which is:
Reduction of taxable value Otherwise deductible
rule. Section 24 sets out the formula
for working out the notional deduction (ND) to be allowed to the
employer from the taxable value of the benefit for FBT purposes in
such situations where the employee could have claimed a deduction
for income tax had he or she incurred the expenditure instead of
relying on a benefit granted by the employer.
The anomaly caused by the Federal Court decision the
NAB Case[3]
on the interaction of subsection 138(3) and the otherwise
deductible rule in which the amendments proposed in
Schedule 4 seek to remedy, is succinctly set out
in the following paragraphs of the Explanatory Memorandum to the
Bill.
4.4 The operation of subsection 138(3) and the
otherwise deductible rule was considered by the Federal Court of
Australia in National Australia Bank Ltd v FC of T 93 ATC
4914 (NAB case). In the NAB case, an employer
provided low interest loans jointly to the employee husband and his
wife which were invested in a jointly held investment property (a
loan fringe benefit).
4.5 The Federal Court held that as a result of
subsection 138(3), the employee was the sole recipient of the loan
fringe benefit. It further held that as sole recipient of the loan
and sole investor of the proceeds, if the employee husband had
incurred and paid unreimbursed interest on the loan, he would have
been entitled to a deduction for the expense. Thus, under the
otherwise deductible rule in section 19 of the FBTAA 1986, the
taxable value of the loan fringe benefit is reduced to nil so that
the employer had no FBT liability arising from the loan fringe
benefit provided to both the employee and his spouse.
4.6 This outcome is inconsistent with the
operation of the otherwise deductible rule as it would apply where
a benefit is provided solely to an associate. In these cases, the
otherwise deductible rule does not apply to reduce the employer s
FBT liability for the fringe benefit, as the otherwise deductible
rule does not apply where fringe benefits are provided to a spouse
(associate).
4.7 This outcome is also in conflict with the
income tax position as determined by the courts that income and
deductions arising from jointly owned rental property should be
allocated between joint owners in accordance with their interest in
the property (eg, joint tenants in a rental property would include
50 per cent of the rental income in their assessable income and
claim 50 per cent of the rental property expenses).
4.8 The anomaly has also led to arrangements
involving expense payment fringe benefits where a spouse on a
higher marginal tax rate salary sacrifices their income by an
amount equivalent to the joint rental expenses. This allows the
spouse on the higher marginal tax rate through a salary reduction
to effectively claim a deduction for the entirety of the rental
expenses despite owning only a share in the property.[4]
The amendments in Schedule 4 to the otherwise
deductible rule in the FBTAA 1986 to eliminate the above anomaly
are proposed in relation to loan fringe benefits (item
7 and 8), expense payment fringe benefits
(items 17 and 22), property
fringe benefits (items 30 and 31)
and residual fringe benefits (items 39 and
40).
The notional deduction (ND) in respect of loan fringe benefits,
expense payment fringe benefits, property fringe benefits and
residual fringe benefits (referred to as the Unadjusted ND) is
adjusted further by the employee s percentage of interest in
proposed subsections 19(5),
24(9), 44(5) and
52(5) respectively. The effect of this further
adjustment is to ensure that the taxable value of the benefit is
only reduced by the employee s share of the benefit in each
case.
The Explanatory Memorandum to the Bill at paragraph 4.16 on page
55 states that the amendments in items 42 to
75 will correct certain cross references and, in
line with current drafting practice, improve the readability of the
provisions that are amended.
According to the Explanatory Memorandum to the Bill on page 10,
the measures in Schedule 4 will have the following revenue
implications.
The amendments made by Schedule 4 apply to
benefits provided from 7:30 pm Australian Eastern Standard Time
(AEST) on 13 May 2008 (the commencing time) (items
9(1), 23(1), 32(1) and
41(1)).
Item 9(2) provides that the amendments do not
apply to a loan benefit after the commencing time and before 1
April 2009, if the loan was entered into before the commencing
time.
Items 23(2), 32(2) and
41(2) provide that that for expense payment
benefits, property benefits and residual benefits, the current law
will not apply to agreements in respect of these benefits entered
into between the commencing time and 1 April 2009.
On 22 February 2008, the Hon Chris Bowen MP, Assistant Treasurer
and Minister for Competition Policy and Consumer Affairs,
announced in media release no. 010 that the Board of Taxation
(the Board) would examine options for the introduction of a
specific tax regime for managed investment trusts. The media
release added that the review would include options to reform the
trading trust rules in Division 6C of the Income Tax Assessment
Act 1936 (ITAA 1936) which particularly affect real estate
investment trusts.
The Media Release further added that pending the release of the
Board s report expected in mid 2009, the Hon Chris Bowen had
released a
consultation paper on the interim measures to remove the more
burdensome features of Division 6C. This was a pre-election
commitment of the Government.
The introduction in the consultation paper on page 1 gives a
brief overview of Division 6C as well as the concerns of industry
on the restrictive nature of its operations in relation to
commercial practice.
Division 6C was introduced in 1985 to ensure
that any public unit trust carrying on active business activities
would be taxed in the same way as a company. The intention was to
ensure that trusts were not used to conduct trading businesses
normally undertaken in a company and thus protect the corporate tax
base. Provided widely held trusts limit their investments to
certain traditional passive investments, they retain trust taxation
under Division 6 and do not trigger company taxation. This is
important because trusts often have certain taxation advantages
over companies. In particular, they may have the ability to
distribute tax preferred income and provide access to the capital
gains tax discount to beneficiaries on trust assets, which is not
available to equity holders of a company. Appendix 1 summarises the
eligible investment rules in Division 6C.
Industry is concerned that the existing
Division 6C rules are overly restrictive and unduly impede
commercial practice, especially in respect of public unit trusts
that focus on real estate investments (that is, Australian listed
property trusts). Australia does not have separate tax regimes for
managed funds and REITs (Real Estate Investment Trusts). REITs are
collective investment vehicles that invest in property for rent.
Other countries have created specialised taxation regimes for these
vehicles. REITs are so named because of the USA structure of that
name, taxed there only as a company and benefiting from
tax‑deductible dividends in the context of the general USA
system of taxing companies without giving credit to equity holders
for that company tax.
This consultation paper considers a number of
potential changes to Division 6C that could be put in place
relatively quickly. The reforms would modernise and clarify the
definition of eligible investment business within Division 6C
by:
- providing rules clarifying the scope and meaning of the
requirement that the investment in land be for the purpose of
deriving rent;
- providing a safe harbour rule to permit up to 25 per cent for
gross non‑rental income from an individual investment in
land, and from other investments directly related to such an
investment in land without loss of trust status. This would replace
the requirement that the investment in land be primarily for the
purpose of deriving rent;
- expanding the range of financial instruments included in the
definition of eligible investment business that the trustee can
invest or trade in.
For ease of reference, the Appendix 1 of the consultation paper
which summarises the eligible investment rules in Division 6C is
included in the Attachment A to this Bills Digest.
The measures in the Bill seek to implement these reforms.
Section 102M of Division 6C of Part 111 of the ITAA 1936
contains the interpretation provisions and the definition of
eligible investment business .
An eligible investment business means either or both of:
(a) investing in land for the
purpose, or primarily for the purpose, of deriving rent, or
(b) investing or trading in any or
all of the financial instruments listed in paragraph of the
definition of eligible investment business
Item 4 of Schedule 5 amends
the definition of eligible investment business by adding paragraph
(c) to include investing or trading in financial instruments (not
covered by paragraph (b)) that arise under financial arrangements,
other than arrangements excepted by proposed section
102MA.
Although there is no definition of financial instrument in
section 102M, the Explanatory Memorandum to the Bill in paragraph
5.19 on page 63 states:
This amendment is to include certain financial
instruments not already included in the existing list of financial
arrangements in the definition of eligible investment business .
The meaning of a financial instrument is discussed in the
Australian Accounting Standards AASB 132 Financial Instruments:
Disclosure and Presentation and AASB 139
Financial Instruments: Recognition and Measurement.
Item 8 of Schedule 5 inserts
proposed section 102MA to exclude certain
arrangements referred to in proposed paragraph (c)
of the definition of eligible investment business . Generally, the
exclusions cover:
- leasing or property arrangements (proposed subsection
102MA(2)),
- interest in partnership or trust estate (proposed
subsection 102MA(3)),
- general insurance policies (proposed subsection
102MA(4)),
- guarantees and indemnities (proposed subsection
102MA(5)),
- superannuation and pension income (proposed subsection
102MA(6)), and
- retirement village arrangements (proposed subsection
102MA(7)).
The reader is referred to paragraphs 5.18 to 5.38 on pages 62 to
67 of the Explanatory Memorandum for a detailed explanation of the
proposed law which are illustrated with examples.
Item 7 of Schedule 5 adds and
fixtures on land at the end of the definition on land in section
102M.
Item 8 of Schedule 5 also
inserts proposed subsection 102MB(1) to include
moveable property that is:
(a)
incidental and relevant to the renting of land; and
(b) customarily
supplied or provided in connection with the renting of land;
and
(c) ancillary
to the ownership and use of land;
as being investments in land.
Item 8 of Schedule 5 also
inserts proposed subsection 102MB(2)to provide a
safe harbour rule. Under this rule an entity s investments in land
are taken to be for the purpose, or primarily for the purpose, of
deriving rent during a year of income, if:
(a) each of those investments
is for purposes that include a purpose of deriving rent, and
(b) at least 75% of the gross
revenue from those investment for the year of income consists of
rent (except excluded rent), and
(c) none of the remaining
gross income from those investment for the year of income is:
(i) excluded rent, or
(ii) from the carrying on of a business
that is not incidental and relevant to the renting of the land.
Basically, proposed subsection 102MB(2)
introduces a 25 per cent safe harbour allowance for non-rental
income where that income is not derived from carrying on a business
that is not excluded rent and not incidental to the renting of
land.
Trading business as defined in section 102M of Division 6C means
a business that does not consist wholly of eligible
investment business . This definition does not allow a unit trust
any margin to deviate from carrying on only eligible investment
business as at present there is no safe harbour provision to permit
such a deviation.
Item 8 of Schedule 5 inserts
proposed section 102MC to provide that a trustee
of a unit trust is taken not to carry on a trading business if:
- not more than 2 per cent of the gross revenue of the trustee
(as a trustee of a unit trust) was income from things other than
eligible investment business , and
- that was incidental and relevant to carrying on the eligible
investment business .
The Explanatory Memorandum to the Bill on page 10 states that
this measure has an unquantifiable revenue cost impact that is not
expected to be significant.
Item 9 of Schedule 5 provides
that the amendments made by this Schedule apply to assessments for
the income year (the application year) in which this Act receives
Royal Assent and later income years.
Item 10 of Schedule 5 that the
25 per cent safe harbour provisions in proposed subsections
102MB(2), (3) and (4) as
well as the 2 per cent safe harbour provision in proposed
section 102MC will not apply for the application year
referred to in item 9, if the trustee chooses that
those provisions are not to apply for that year.
The integrity measures in relation to GST and the sale of real
property (Schedule 1) have drawn adverse comments from the Urban
Development Institute of Australia (UDIA) on their impact on
housing affordability.[5] UDIA make the following comments on the consequences of
the GST integrity measures:
The proposed legislative change will have a
significant impact on the future costs of housing developments,
which is at odds with the Federal Government s stated policy and
programs to improve housing affordability in Australia.
It is, in effect, an increased tax on new
housing developments, which will be passed onto homebuyers through
increased prices.
As the exemptions have not been applied to all
land transactions, it is difficult to estimate that percentage of
development projects will be impacted by this change. However a
major developer has calculated the cost impact of the measure where
it applies will be in the order of:
- $11,000 additional per lot on a 60 lot infill development;
and
- $4,800 additional per lot on a 717 lot mixed townhouse &
land development.
Since this submission was made by UDIA the Federal Government
has announced a temporary increase in the First Home Owners Grant
(FHOG) from $7 000 to $21 000 for new homes. While the
announcement did not explicitly link the FHOG increase to the new
GST integrity measures it would appear that new home buyers will be
compensated for the projected increase in new housing development
costs.
On the other hand, the Treasury in its submission to the Senate
Standing Committee on Economics does not expect the GST integrity
measures in relation to the sale of real property to have a
significant impact on housing prices. Commenting on the impact on
the housing sector in the current economic climate it states:
The housing industry is currently experiencing
difficult conditions. Approvals for new dwelling construction have
fallen by 8.6 per cent over the year to August, and 16.7 per cent
since their peak last November. Nonetheless, the downturn has so
far been relatively moderate by past standards. Approvals remain
around 20 per cent above the troughs reached in previous housing
downturns.
The downturns in the housing sector has been
caused primarily by the impact of cumulative interest rate rises
over recent years due to tighter monetary policy and the effects of
the turmoil in global financial markets. As such, the key
constraint on the industry at present is lack of demand, which is
highly sensitive to interest rates. On the positive side, past
experience indicates that housing activity recovers reasonably
quickly once mortgage interest rates begin to fall.
The proposed integrity measure would have no
effect on the cost or availability of finance, so it has no
relevance to the problem of lack of demand. The measure could have
an impact only to the extent that it contracts supply
(independently of the contraction in demand). However, the supply
of housing is highly inelastic in the short run. That is, supply
does not change much in response to changes in the return to
developers. Therefore, this measure is unlikely to impact on
supply.
One reason for this is that once the developer
owns the land, there is a strong incentive to proceed with
development because of the holding costs of capital locked up in
the property. Selling the land for an alternative use is unlikely
to be an option. The price of land zoned for housing on the urban
fringe commands a substantial premium over the price of
agricultural land, which is generally its only feasible alternative
use. Of course, development will not proceed if there is not
expected to be a buyer, but the level of demand is not affected by
this proposal.[6]
With the full effect of the Reserve Bank s reduction in cash
rates by 1 per cent on 7 October 2008 now having been passed on to
borrowers by the commercial banks and forecasts of further
reductions in interest rates in the near future, all other things
being equal, home loan affordability can be expected to improve and
the demand for housing increase as a consequence. This is in
addition to the likely impact of the much higher FHOG on increasing
demand for new housing. Further, with a continuing strong
underlying requirement for new housing, due mainly to population
growth, there are distinct prospects for an increase in housing
construction activity.
It may reasonably be concluded that any disincentive to
developers arising from the GST integrity measures will be
outweighed by the expected strengthening in demand resulting from
recent changes in monetary policy and other measures that have been
implemented.
As mentioned earlier, the Treasury submission emphasises the
need for the integrity measures to prevent further erosion of the
GST base by tax minimisation practices in relation to the sale of
real property and does so in its concluding comments:
The current provisions in the GST law dealing
with real property allow tax minimisation opportunities. These
opportunities are inconsistent with the policy intent that the GST
should apply to the value added to real property by registered
entities from 1 July 2000.
If these unintended tax minimisation
opportunities are not addressed, there will continue to be
distortions in the GST treatment between entities that structure
their activities to take advantage of the deficiencies in the law
and those entities that do not structure their activities in this
way.
Further, if not addressed, these opportunities
would be expected to be increasingly taken up by entities in the
property development sector which would represent a significant and
growing risk to the revenue. The GST and sale of real property
integrity measure will ensure that the GST that was always intended
to be collected is actually collected. It is not anticipated that
the measure will have any significant effect on housing
affordability.[7]
Appendix 1 to the consultation paper titled:
Industry consultation paper
Outline of Division 6C
Under Division 6C, a unit trust becomes a public trading trust
if, at any time during a year of income, it operates a trade or
business and is also a public unit trust . In general terms, a
trust will be a public unit trust in relation to a year of income
if it is widely held, listed or publicly offered for at least part
of the year: that is, where its units are listed on a stock
exchange, are held by 50 or more persons or are available for
investment by the public. A unit trust will not be regarded as a
public unit trust if 20 or fewer persons hold 75 per cent or more
of the beneficial interests in the income or property of the
trust.
Where one or more persons or bodies exempt from income tax
(including governments and complying superannuation funds) hold
units in a trust carrying entitlement to 20 per cent or more of the
beneficial interest in the income or property of the trust, a unit
trust will be taken to be a public unit trust, even though it would
not otherwise be one, for example, because the number of unit
holders is less than 50, because it is unlisted or because it is
not publicly offered, or because it is held by 20 or fewer persons
with 75 per cent or more of the beneficial interests.
The income of a unit trust which, in relation to a year of
income, meets the tests to become a public trading trust is subject
to tax at the general company tax rate of 30 per cent.
Distributions (referred to as unit trust dividends ) made to unit
holders out of income or other profits derived by the trustee
during a year of income for which the trust has been or will be
taxed as a company constitute assessable income in the hands of the
unit holders as if they were dividends paid by a company and will
be frankable accordingly.
To avoid becoming a public trading trust in a year, a public
unit trust must engage only in eligible investment business for
that year. Eligible investment business is defined in section 102M
(and needs to be read in conjunction with section 102N and the
definition of trading business) and means either or both of:
(a) investing in land for the
purpose, or primarily the purpose, of deriving rent; or
(b) investing or trading in any or
all of the following:
(i) secured or unsecured notes
(including deposits with a bank or other financial
institution);
(ii) bonds, debentures, stock or
other securities;
(iii) shares in a company;
(iv) units in a unit trust;
(v) futures contracts;
(vi) forward contracts;
(vii) interest rate swap
contracts;
(viii) currency swap contracts;
(ix) forward exchange rate
contracts;
(x) forward interest rate
contracts;
(xi) life assurance policies;
(xii) a right or option in respect
of such a loan, security, share, unit, contract or policy;
(xiii) any similar financial
instruments.
By the operation of section 102N, a
public unit trust will become a public trading trust in relation to
a year of income if, at any time of the year of income, the trustee
either carried on a trading business, or controlled, or was able to
control, directly or indirectly, the affairs or operations of
another person in respect of the carrying on by that other person
of a trading business.
Bernard Pulle
3 November 2008
Bills Digest Service
Parliamentary Library
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