Bills Digest no. 39, 2017–18
PDF version [672KB]
Jaan Murphy
Law and Bills Digest Section
9
October 2017
Contents
Purpose of the Bill
Structure of the Bill
Background
Access to previous years’ tax losses
Depreciation of intangible assets
Table 1: current statutory effective
life of depreciating intangible assets
National Innovation and Science
Agenda
Consultation process
Committee consideration
Senate Standing Committee for the
Scrutiny of Bills
Senate Standing Committee for the
Selection of Bills
Policy position of non-government
parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Key issues and provisions: improving
access to previous year tax losses
Current law
Same business test requirements
Anti-avoidance mechanisms
Other uses of the same business test
Summary of proposed changes
Overview of the proposed ‘similar
business test’
Business continuity test period and
test time
Factors taken into account when
applying the proposed ‘similar business test’
The use of assets to generate
assessable income
The extent of activities and operations
used to generate assessable income
The identity of the current business
and former business
Relationship of changes to
development or commercialisation of previous aspects of the business
Absence of negative limbs from the
‘similar business’ test
Existing integrity measures
Use of company’s tax losses to avoid
income tax
Use of company’s net capital losses
to avoid income tax
Use of company’s bad debts to avoid
income tax
Proposed integrity measures
Retrospective commencement
Key issues and provisions:
depreciation of intangible assets
Current law
Factors to be considered when
self-assessing the effective life of a depreciating asset
Associate and same user rules
Recalculating the effective life of a
depreciating asset
Summary of proposed changes
Eligible intangible assets
Self-assessment of the effective life
of intangible depreciating assets by taxpayers
Restrictions on timing of
self-assessment
Application of associate and same
user rules
Application of recalculation rules
Retrospective commencement
Concluding comments.
Date introduced: 30
March 2017
House: House of
Representatives
Portfolio: Treasury
Commencement: The
first 1 January, 1 April, 1 July or 1 October to occur after Royal
Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at October 2017.
Purpose of
the Bill
The purpose of the Treasury Laws Amendment (2017
Enterprise Incentives No. 1) Bill 2017 (the Bill) is to amend the Income Tax
Assessment Act 1997 (the ITAA 1997) and the Income Tax Assessment
Act 1936 (the ITAA 1936) to:
- improve
access to previous year tax losses for companies and listed widely held trusts
by introducing a ‘similar business test’ that will allow those that have
changed ownership but conduct substantially the same business after that change
of ownership, to access those tax losses (which the application of the existing
‘same business test’ would prevent) and
- provide
taxpayers with the choice to self-assess the effective life of certain
intangible depreciating assets (such as patents, in-house software, registered
designs and certain copyrights and licences) that they start to hold on or
after 1 July 2016, rather than using the existing specified statutory effective
life.[1]
Structure
of the Bill
The Bill is divided into two Schedules.
- Schedule
1 deals with improving access to previous year tax losses, and is divided into three
Parts:
- Part
1 deals with companies
- Part
2 deals with listed widely held trusts and
- Part
3 deals with consequential amendments
- Schedule
2 deals with the ability of tax payers to self-assess the effective life of
certain intangible depreciating assets.
Background
Access to
previous years’ tax losses
For ease of reading, in this digest the term ‘entity’ is
used to refer to companies and listed widely held trusts unless a particular
measure only applies to companies or listed widely held trusts.
Where a taxpayer has more deductions for an income year than
assessable income and net exempt income, the result is a tax loss.[2] Tax losses from previous income years can only be carried forward and deducted
from assessable income in future income years by companies and listed widely
held trusts in certain circumstances.
Firstly, the entity can access a previous year’s tax loss
if it passes the ‘continuity of ownership test’. Alternatively, if the entity
fails the continuity of ownership test (for example, if the company underwent a
substantial change of ownership or control) it can only access previous years’
tax losses if it passes the ‘same business test’.[3]
If, however, the entity derives income from new kinds of
business or transactions, the same business test is failed and the entity
cannot access previous years’ tax losses.[4]
Depreciation of intangible assets
The cost of depreciating assets (including certain
intangible assets) is generally of a capital nature and hence is not
immediately deductable as an ordinary business expense. However, in some circumstances
deductions are available for the decline of the value of depreciating assets
(including certain intangible assets) to the extent that the asset is used for
a taxable purpose.[5]
Division 40 of the ITAA 1997 creates a uniform
capital allowance system that, amongst other things, deals with deductions for
the decline in the value of depreciating assets. Currently the tax law
recognises a number of different types of intellectual property and other
intangible assets as depreciating assets and provides special rules for their
effective life.[6]
Currently, the decline in value for intangible assets (and
hence the amount of a deduction) is calculated by spreading the cost of the
asset over its ‘effective life’, which in this case is the ‘statutory effective
life’ set out in the table in subsection 40-95(7) of the ITAA 1997, and
reproduced below.
Table 1: current statutory effective life of depreciating intangible assets
Type of intangible asset |
Effective life |
Standard patent |
20 years |
Innovation patent |
8 years |
Petty patent |
6 years |
Registered design |
15 years |
Copyright (other than film copyright) |
The shorter of: (a) 25 years from acquisition of copyright; and (b) the period until the copyright ends |
A licence (not relating to a copyright or in-house
software) |
The term of the licence |
A licence relating to copyright (except copyright in a
film) |
The shorter of: (a) 25 years from when the taxpayer became licensee; and (b) the period until the licence ends |
In-house software |
5 years if first used, or installed ready for use, from
1 July 2015; otherwise 4 years |
Spectrum licence |
The term of the licence |
Datacasting transmitter licence |
15 years |
Telecommunications site access right |
The term of the right |
Source: ITAA 1997, subsection 40-95(7); CCH Australia, Australian
master tax guide, Wolters Kluwer, Sydney, 2017, pp. 1075–1109, paras
[¶17-005] and [¶17-370] in particular.
National
Innovation and Science Agenda
On 7 December 2015, the Government announced a package of
measures designed to incentivise and reward innovation as part of its National
Innovation and Science Agenda (the Agenda). Relevantly to the Bill, the
Agenda stated ‘we will provide new tax breaks to remove the bias against
businesses that take risks and innovate’.[7] The Agenda stated that as part of an overall initiative of ‘aligning our tax
system and business laws with a culture of entrepreneurship and innovation’ the
Government intended to:
- relax
the ‘same business test’ that denies tax losses if a company changes its
business activities and introduce a more flexible ‘predominantly similar
business test’ on the basis it would ‘allow a startup to bring in an equity
partner and secure new business opportunities without worrying about tax penalties’
and
- remove
rules that limit depreciation deductions for some intangible assets (like
patents) to a statutory life and instead allow them to be depreciated over
their economic life as occurs for other assets.[8]
Consultation
process
Treasury released an exposure draft of the Bill (as it
relates to depreciating intangible assets) in April 2016 for consultation.[9] Five submissions were received, of which four were generally supportive of
(whilst raising specific issues around the drafting of) the measure.[10] One submission was critical of the proposal to allow depreciation of
non-innovative intangible assets, such as telecommunications site access
rights, datacasting transmitter licences and spectrum licences.[11]
Treasury also released an exposure draft of the Bill (as
it relates to increasing access to company losses) in April 2016 for
consultation.[12] Ten submissions were received, most of which whilst supportive of the policy
intent, provided constructive criticism regarding the drafting of the measures,
which resulted in the proposed legislation being revised.[13]
Committee
consideration
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of
Bills had no comment on the Bill.[14]
Senate
Standing Committee for the Selection of Bills
The Senate Standing Committee for the Selection
of Bills recommended that the Bill not be referred to a committee for inquiry
and report.[15]
Policy
position of non-government parties/independents
The position of the Opposition in relation to the Bill is
as follows:
- it
will support Schedule 1 of the Bill (which deals with improving access to
previous year tax losses)
- it
will oppose Schedule 2 of the Bill (which deals with the ability of tax payers
to self-assess the effective life of certain intangible depreciating assets).[16]
In outlining why the Opposition would not support Schedule
2 of the Bill, the Shadow Assistant Treasurer stated:
Schedule 2—which, as I have said, Labor will not be
supporting—gives taxpayers the choice to self-assess the effective life of
certain intangible depreciating assets rather than using the statutory
effective life, in working out decline in value. The effective life of an asset
is used to calculate the decline in value of the intangible asset, and this Bill
applies to assets such as patents, copyrights and licences, and only applies to
assets the taxpayer starts to hold on or after 1 July 2016. The argument that
has been made for this in submissions to the Re:think tax discussion paper is
the way in which such intangible assets are depreciated in Britain and the
United States. But Labor does not feel that a sufficiently strong policy
case has been made for the measures in schedule 2. Were the government to
split the bill, Labor would be pleased to support what is currently schedule 1,
but we cannot support schedule 2.[17] (Emphasis added.)
The above is consistent with the Opposition’s previous
criticism of the proposed changes to the tax deduction and depreciation
arrangements for intangible assets in late 2015:
Currently, these assets must be claimed as tax deductions
according to a timetable set by the Australian Tax Office— meaning their value
can only be claimed back over either 8 or 20 years. The Government now wants to
let companies choose their own depreciation schedules instead. This means they
may claim tax breaks over a much shorter period and dramatically boost their
profits in the process ... Any company doing business here which acquires
intangible assets will be able to write them off this way—including the world’s
biggest technology firms and other corporate behemoths.
As the Senate’s corporate tax inquiry has heard, shifting
money around from one arm of a company to another under the guise of paying for
intangible assets is already a standard trick in the tax avoidance toolkit.
Adding another tax incentive into this mix will likely lead to even more money
draining away offshore.[18]
The position of other non-government parties and
independents in relation to the specific measures in the Bill was not clear at
the time of writing.
Position of
major interest groups
Most major interest groups were generally supportive of the
policy intent of the measures contained in the Bill.
As noted above, four of five submissions received by
Treasury during the exposure draft consultation phase were supportive of the
reforms in Schedule 2 to the Bill (which deals with the ability of tax payers
to self-assess the effective life of certain intangible depreciating assets).
However, these submissions originated from professional organisations and
businesses that are likely to be significant beneficiaries of the reforms. The
only submission that was received that was not from a potential beneficiary was
critical of the reforms, and whether they would achieve the stated aim. Outside
of formal submissions, other stakeholders expressed support for the changes
proposed in relation to the tax deduction and depreciation arrangements for
intangible assets with accounting firm Deloitte stating:
Innovative companies growing in today’s economy are far more
likely than other traditional companies to have intangible or knowledge-based
assets—including patents, trademarks, copyrights and business models.
Since the Government recognises that investment in these
assets is crucial to innovation and growth, changes will be introduced to allow
faster tax depreciation where appropriate, providing more immediate tax
benefits. A new option to self-assess the tax effective life of intangible
assets will align the tax treatment of intangible assets with other types of
assets and assist innovative companies in exploiting their intellectual
property and other intangible assets.[19]
In the consultation conducted by Treasury in relation to
Schedule 1 of the Bill (which deals with improving access to previous year tax
losses) 10 submissions were received, the majority of which were supportive of the
underlying policy of the Bill as drafted.[20] KPMG noted that whilst ‘relaxing the loss recoupment rule is a welcoming change
to encourage not only start-up businesses but also business generally to
innovate and grow’, given that ‘it is a question of degree and fact as to how
similar is “similar”’ it was likely that ‘further ATO guidance and revisiting
existing tax rulings on the same business test may be needed’.[21]
Financial
implications
In relation to improving access to previous years’ tax
losses, the Explanatory Memorandum states that the reforms proposed by the Bill
‘will have an unquantifiable financial impact’.[22] Increasing access to previous years’ tax losses would undoubtedly reduce
revenue, as it would increase the use of such tax losses to off-set taxable
profits. However, the fact that the Explanatory Memorandum does not quantify
the financial impact of increasing access to previous years’ tax losses may
suggest that some difficulty in modelling the behaviour of businesses
(including those with previous years’ tax losses) in response to the reforms,
and hence accurately quantifying the financial cost to the Commonwealth over
the forward estimates.
In relation to the financial impact of the proposal to allow
tax payers to self-assess the effective life of certain intangible depreciating
assets, the Explanatory Memorandum states that the reforms will cost $80 million
in the period to 30 June 2019.[23]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible, as it ‘does not engage any of
the applicable rights or freedoms’.[24]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights considers
that the Bill does not raise human rights concerns.[25]
Key issues
and provisions: improving access to previous year tax losses
Current law
As noted above, where a taxpayer has more deductions than
assessable income and net exempt income, the result is a tax loss.[26] Tax losses from previous income years can only be carried forward and deducted
from assessable income in future income years by companies and listed widely
held trusts in certain circumstances (a listed widely held trust is a widely
held unit trust whose units are listed on an approved stock exchange).[27]
The first option for accessing previous years’ tax losses
is for the entity to pass the ‘continuity of ownership test’. If the entity fails
the continuity of ownership test (for example, if the company underwent a
substantial change of ownership or control) it can only access previous years’
tax losses if it passes the ‘same business test’.[28]
In general terms, and subject to some qualifications in
the case of listed public companies, the existing same business test requires
that there be a level of sameness between:
- the
company’s business activities before the time of the change of ownership
or control (the ‘test time’) and
- the
company’s business activities after the test time and during the
income year for which the deduction is claimed (the ‘same business test
period’).
Same
business test requirements
Currently, to satisfy the same business test the entity must
satisfy all of the following requirements:
- throughout
the same business test period, the entity carried on the same business as it
did immediately before the test time[29]
- the
entity did not, at any time during the same business test period, derive assessable
income from a business of a kind which it did not carry on before the test time[30] and
- the
entity did not, at any time during the same business test period, derive assessable
income from a transaction of a kind that it had not entered into in the course
of its business operations before the test time.[31]
This means that (subject to the anti-avoidance mechanisms
discussed below) an entity will satisfy the same business test if it carries on
the same business in the income year when it wants to use a tax loss as it
carried on immediately before the change of ownership or control that caused
the company to fail the continuity of ownership test.[32]
Anti-avoidance
mechanisms
In addition to the above, the entity must not have
commenced certain business activities before the test time for the purpose of
satisfying the same business requirement. This is an anti-avoidance measure designed
to counter arrangements that are aimed at exploiting the same business test, such
as where an entity changes the nature of its business before a change of
ownership, so that the business is the same as the business which it intends to
carry on after the change of ownership for the purpose of being able to
access existing previous year tax losses. In such situations the anti-avoidance
provisions provides that the same business test will not be satisfied.[33] In addition, if the entity incurs expenditure in carrying on a business that it
did not carry on before the test time, or as a result of a transaction of a
kind that it did not enter into before the test time, it will also fail the
same business test.[34]
It flows from the above that if an entity derives income
from new kinds of business or transactions, or incurs expenditure on new kinds
of business or transactions, the same business test is failed and the entity
cannot access previous years’ tax losses.
Other uses
of the same business test
The same business test not only determines whether tax
losses from previous income years can be used by an entity[35],
it is also used for determining:
- whether
a company can use a net capital loss from a previous year against current year
capital gains[36]
- whether
a company can use losses to offset capital gains arising from capital gains tax
(CGT) events that happen to CGT assets that it acquired prior to a change of
ownership or control[37]
- whether
an entity can deduct a debt written off as bad in an income year, where the
debt was initially incurred prior to a change of ownership or control[38]
- whether
special rules about how to calculate an entity’s taxable income and tax loss,
and net capital gains and losses, apply to an entity for an income year during
which it has undergone a change of ownership or control[39] and
- whether
a company joining a consolidated group can transfer its losses to the head
company of the consolidated group.[40]
The proposed ‘similar business test’ will also apply for
these purposes and will therefore impact on a range of other taxation issues
beyond accessing previous years’ tax losses.
Summary of
proposed changes
The Bill will supplement (rather than replace) the ‘same
business test’ with a more flexible ‘similar business test’, which will be used
to determine if an entity’s tax losses and net capital losses from previous
income years can be used, as well as whether a debt written off as bad can be
deducted in an income year.[41]
Overview of
the proposed ‘similar business test’
The ‘similar business test’ is modelled off the existing
‘same business test’ in that it involves determining whether the business
carried on immediately before the test time (the former business) is similar to
the business carried on in an income year during which the entity wants to use a
tax loss (the current business). Unlike the ‘same business test’, the proposed
‘similar business test’ in some circumstances allows access to tax losses by an
entity that has entered into new business or transactions, provided the current
business is similar to the former business.
Importantly, however, as with the existing same business
test, whether the current business is similar to the previous business is a
question of fact determined by considering a number of factors. These are
discussed below.
Generally, however, an entity will satisfy the similar
business test if the business it carries on throughout the income year when it
wants to use a tax loss to reduce assessable income (the ‘business continuity
test period’) is similar to the business it carried on at the time immediately
before the change of ownership or control that caused the entity to fail the
continuity of ownership test (the ‘test time’).
Business
continuity test period and test time
To satisfy the similar business test, the entity must
carry on its current business throughout the ‘business continuity test period’
(the period in which the entity seeks to access (or ‘recoup’) previous years’
tax losses).[42] That business must be similar to the business carried on immediately before the
‘test time’ (the time of the change of ownership or control, which triggered
the requirement that the similar business test be passed in order for the
entity to access previous years’ tax losses).[43]
Factors
taken into account when applying the proposed ‘similar business test’
In order for an entity to pass the similar business test,
the (non-exhaustive) list of factors set out in proposed subsection
165-211(2) of the ITAA 1997, at item 8 of Schedule 1 to the
Bill (for companies) and 269‑105(3) of Schedule 2F to the ITAA
1936, at item 21 of Schedule 1 to the Bill (for listed widely held
trusts) must be considered in order to determine whether the entity’s current
business is similar to its former business.[44] The focus of the similar business test is on the ‘identity’ of the business.
The Explanatory Memorandum notes:
It is not sufficient for the current business to be of a similar
‘kind’ or ‘type’ to the former business. For example, it is not enough to say
that the former business was in the hospitality industry and the current
business is in the hospitality industry. Instead, the test looks at all of the
commercial operations and activities of the former business and compares them
with all the commercial operations and activities of the current business to
work out if the businesses are similar.[45]
The factors considered when applying the similar business
test are discussed below. However, as noted in the Explanatory Memorandum, the
factors must be ‘considered in light of the overarching question of whether the
current business is a similar business to the former business’ and hence in
cases ‘a factor may suggest that the similar business test is satisfied’ while
another factor may suggest that it is not and hence ‘the relative importance of
each of the factors depends on the facts and circumstances of each particular
case’.[46]
The use of
assets to generate assessable income
The first factor considered in applying the proposed
similar business test is:
... the extent to which the assets (including goodwill) that
are used in [the entity’s] current business to generate assessable income
throughout the business continuity test period were also used in its former
business to generate assessable income.[47]
This factor involves determining the extent to which the
assets (including goodwill) used in the former business to generate assessable
income are used in the current business to generate assessable income. In the
context of the Bill, ‘assets’ includes both physical and intangible assets such
as goodwill, patents, trademarks or other intellectual property rights of the
entity.[48]
As noted in the Explanatory Memorandum, goodwill will
often be an important aspect of this factor, as it is:
... the product of combining and using the tangible, intangible
and human assets of a business for such purposes and in such ways that custom
is drawn to the business. The attraction of custom is central to the legal
concept of goodwill. Goodwill is a quality or attribute that derives from,
among other things, using or applying other assets of a business. It may derive
from a site, personality, service, price or habit that obtains custom ...[49]
The extent
of activities and operations used to generate assessable income
The second factor considered in applying the proposed
similar business test is:
... the extent to which the activities and operations from
which [the entity’s] current business generated assessable income throughout
the business continuity test period were also the activities and operations
from which its former business generated assessable income.[50]
This factor involves determining the extent to which the
activities and operations that generated assessable income in the former
business also generate assessable income in the current business. The
Explanatory Memorandum provides the following example:
... if a company ran an Italian restaurant and then opened up a
takeaway fish and chips shop, the takeaway fish and chips shop would amount to
a new activity or operation that produced the company’s assessable income.[51]
The
identity of the current business and former business
The third factor considered in applying the proposed
similar business test is ‘the identity of [the entity’s] current business and
the identity of its former business’.[52]
This factor involves a comparison between the ‘identity’
of the former business and the current business. The Explanatory Memorandum
notes:
The comparison will show which characteristics of the former
business have been retained and which characteristics have changed or
disappeared. In addition, the comparison will show which characteristics of the
current business are derived from those of the previous business and which
characteristics are new additions.[53]
Determining the identity of the former and current
business will involve a broad-ranging enquiry, not limited to ‘matters of mere
branding and public recognition’.[54] Instead, what will be required is an analysis of ‘the cumulative effect of all
changes that are reflected in the identity of the current business compared to
the identity of the former business’.[55] The Explanatory Memorandum notes:
The relative importance of particular business
characteristics (for example products and services offered, type of activities
performed and identity of suppliers and consumers) will depend on the nature of
the previous business and current business in each case. In particular, a
comparison between the core functions of the current business and those of the
former business is of most significance.[56]
This would suggests that in situations where the ‘core’
functions of a business change, it may be more difficult for the entity to
satisfy the ‘similar business’ test and therefore access previous years’ tax
losses compared to situations where the ‘new’ aspects of the business do not
represent an alteration to the ‘core’ functions of the business.
Relationship
of changes to development or commercialisation of previous aspects of the
business
The fourth factor considered in applying the proposed
similar business test is:
... the extent to which any changes to [the entity’s] former
business result from development or commercialisation of assets, products,
processes, services or marketing or organisational methods of the former
business.[57]
This factor focuses on the degree of continuity and
connection between the current business and the former business as a result of
the development or commercialisation of assets, products, processes, services,
marketing or organisational methods of the former business. The Explanatory
Memorandum notes:
It is not sufficient that the change is a reasonable business
decision in that it makes commercial sense, or is a good business opportunity.
Rather, there must be something in the activities or operations of the former
business that make the change a natural organic development of the former
business.[58]
This would suggest, for example, that a residential
property developer applying its market research process and marketing methods
to commercial property development may be a ‘natural organic development of the
former business’ (being residential property development and sales) but
applying its market research process and marketing methods to residential
mortgage sales may not be a ‘natural organic development of the former
business’ (even though it may be a good business opportunity with synergy with
the former business).
Absence of
negative limbs from the ‘similar business’ test
The proposed similar business test does not incorporate
the negative limbs of the same business test, which provides that an entity
does not meet the test if it derives assessable income from:
- a
business of a kind which it did not carry on before the test time or
- a
transaction of a kind that it had not entered into in the course of its
business operations before the test time.[59]
This means that an entity is able to derive assessable income
from new business activities and to enter into new transactions without
automatically failing the business continuity test, and therefore the similar
business test. However, deriving assessable income from new kinds of business
or transactions will still be ‘relevant when considering whether the similar
business test is satisfied’.[60]
Existing integrity
measures
Currently Division 175 of the ITAA 1997 contains
integrity rules for tax losses, net capital gains and bad debts that prevent
tax avoidance or income injection schemes that seek to use a company’s tax
losses or deductions. To give context to the amendments, these are briefly
outlined below.
In relation to listed widely held trusts, the Bill makes
no amendments to the existing applicable integrity rules in Division 270 of Schedule
2F of the ITAA 1936, as it appears that (due to differences in drafting)
those existing integrity measures will continue to apply and prevent tax
avoidance or income injection schemes that seek to use a listed widely held
trust’s tax losses or deductions, despite the introduction of the similar
business test.
Use of
company’s tax losses to avoid income tax
Subdivision 175-A of the ITAA 1997 contains two
integrity rules that prevent income injection schemes by allowing the
Commissioner of Taxation to disallow a tax loss:
- if
an amount is injected into a company that would not have been injected if the
loss had not been available[61] or
- if
a person obtains a tax benefit in connection with a scheme, and the scheme
would not have been entered into or carried out if the loss had not been
available.[62]
Use of
company’s net capital losses to avoid income tax
Subdivision 175-CA of the ITAA 1997 contains two
integrity rules that prevent income injection schemes by allowing the Commissioner
of Taxation to disallow net capital losses from earlier income years where:
- the
company made a capital gain some or all of which (the injected capital gain) it
would not have made if the net capital loss from an earlier year had not been
available to be applied in working out the company’s net capital gain for the
income year (or for some other income year)[63] or
- a
person has obtained or will obtain a tax benefit in connection with a scheme
and the scheme would not have been entered into or carried out if the net
capital loss from an earlier year had not been available to be applied in
working out the company’s net capital gain for the income year (or for some
other income year).[64]
Use of
company’s bad debts to avoid income tax
Subdivision 175-C of the ITAA 1997 contains two
integrity rules that prevent income injection schemes by allowing the
Commissioner of Taxation to disallow a deduction for a bad debt:
- if
the company would not have had some or all (the injected amount) of its
assessable income or capital gains for the income year if:
-
the
debt had not been incurred and
-
the
debt (or the relevant part of the debt) had not been written off (or able to be
written off) as bad[65] or
- a
person has obtained or will obtain a tax benefit in connection with a scheme
and the scheme would not have been entered into or carried out if the debt had
not been incurred and the debt (or the relevant part of the debt) had not been
written off (or able to be written off) as bad.[66]
Proposed
integrity measures
As the similar business test is designed to allow entities
to enter into new kinds of business and transactions without losing access to
tax losses, it does not contain the two negative limbs used in the same
business test. However, to prevent contrived arrangements aimed at ensuring
access to previous years’ tax losses, the Bill contains an integrity measure
modelled on existing subsection 165-210(3) of the ITAA 1997.
Proposed subsection 165-211(3) of the ITAA 1997 (in relation to companies) and proposed subsection 269‑105(4) of Schedule 2F of the ITAA 1936 (in relation to listed widely held
trusts) provide that an entity does not meet the similar business test where
before the test time (the time of the change of ownership or control) it:
- started
to carry on a new business or entered into new transactions and
- did
so for the purpose, or for purposes including the purpose, of being taken to
have carried on throughout the business continuity test period a business that
is similar to the business it carried on immediately before the test time.
In other words, the similar business test is not satisfied
where contrived arrangements (such as making changes to a business prior to and
in contemplation of a change in ownership or control) are entered into in
order to satisfy the similar business test for the purpose of being able to
access the entity’s previous years’ tax losses.
The current integrity measures (discussed above) contained
in Division 175 of the ITAA 1997 do not apply where the same business
test is satisfied (because the operation of the two negative limbs of the same
business test target the relevant integrity concerns). This means that
amendments are necessary to ensure that Division 175 does not apply where the
new business continuity test is satisfied because the relevant company
satisfies the same business test in proposed section 165-211 of the ITAA
1997 (which as noted above, includes the integrity measure aimed at
preventing contrived arrangements aimed at ensuring access to previous years’
tax losses).
Items 9 to 11 of Schedule 1 of the Bill
ensure that Division 175 will continue to apply where the company satisfies the
business continuity test because of the application of the similar business
test, thereby ensuring that the omission of the negative limbs from the similar
business test does not create tax avoidance or income injection opportunities
that would minimise a company’s tax liability.[67]
As noted above, similar amendments in relation to listed
widely held trusts are not necessary as the existing applicable integrity rules
in Division 270 of the ITAA 1936 will continue to apply and prevent tax
avoidance schemes that seek to use a listed widely held trust’s tax losses or
deductions, despite the introduction of the similar business test.
Retrospective
commencement
The amendments in Schedule 1 of the Bill apply in relation
to income years starting on or after 1 July 2015.[68] This means that, generally speaking, the similar business test applies for
income years beginning on or after 1 July 2015 in relation to:
- tax
losses incurred by entities for income years (loss years) beginning on or after
1 July 2015—the entity may choose to apply the same business test or the
similar business test[69]
- debts
incurred in income years beginning on or after 1 July 2015 that the entity
writes off as bad[70]
- a
company’s taxable income and tax loss in an income year beginning on or after 1
July 2015[71]
- a
listed widely held trust’s net income for an income year beginning on or after
1 July 2015[72]
- a
company’s net capital gain or loss, in an income year beginning on or after 1
July 2015[73] and
- a
debt, incurred by a listed widely held trust in an income year starting on or
after 1 July 2015, in relation to which a debt/equity swap occurs.[74]
Key issues
and provisions: depreciation of intangible assets
As noted in the background above (under the heading ‘Depreciation of intangible assets’), in some circumstances deductions are
available for the decline of the value of depreciating assets (including
certain intangible assets) to the extent that the asset is used for a taxable
purpose.
Current law
Currently the tax law recognises a number of different
types of intellectual property and other intangible assets as depreciating
assets and provides special rules for their effective life.[75]
As noted in the Explanatory Memorandum, the law currently
mandates the effective life to be used for certain intangible depreciating
assets in calculating their decline in value (the ‘statutory effective life’,
set out above in Table 1: current statutory effective life of depreciating
intangible assets). The Government argues that the standardised deduction
allowed for depreciation of such assets ‘may not necessarily reflect the period
of time that the assets provide economic benefits to the taxpayer’.[76]
Factors to
be considered when self-assessing the effective life of a depreciating asset
Currently section 40-105 of the ITAA 1997 provides
that when a taxpayer elects to self-assess the effective life of a depreciating
asset, they must work out the effective life in accordance with that section,
which includes taking into account:
- how
they expect to use the asset (whilst assuming that the asset will be maintained
in reasonably good order and condition)
- the
estimated period of time that the asset can be used by any entity to derive
income at its start time (for a taxable purpose, for producing exempt income or
non-assessable non-exempt income, or for the purpose of conducting research and
development activities)
- the
likelihood of the asset becoming obsolete and
- the
estimated time when the asset will be sold for ‘no more than scrap value’ or
abandoned.
As a result, usually a depreciating asset will start to
decline in value from its ‘start time’ (generally when the taxpayer first uses
the asset or has it installed and ready for use) until the end of its effective
life.
Associate
and same user rules
Currently section 40-95 of the ITAA 1997 contains the
associate and same user rules. In short, these are rules for calculating the
effective life of a depreciating asset where:
- it
was acquired from an associate (for example, a related company) or
- where
the holder of the asset changes but the asset continues to be used by the same
former user (or an associate of the former user).
In simple terms, where a depreciating asset is acquired
from an associate, the new holder is required to use the effective life
determined by the former holder. This means the new holder of the asset does
not have the choice to self-assess the effective life of the asset—they must
use an effective life equal to the effective life of the former holder that is
yet to elapse at the time the new holder starts to hold the depreciating asset.[77]
Recalculating
the effective life of a depreciating asset
Currently section 40-110 of the ITAA 1997 contains
rules for recalculating the effective life of a depreciating asset. In effect,
it allows taxpayers to recalculate the effective life of a depreciating asset from
a later income year if the effective life being used is no longer accurate
because of changed circumstances relating to the nature of the use of the asset.
Some examples include:
- the
use of the asset turns out to be more or less rigorous than expected
- there
is a downturn in demand for the goods or services the asset is used to produce
that result in the asset being scrapped
- legislation
prevents the asset’s continued use or
- changes
in technology make the asset redundant.[78]
A taxpayer must recalculate the effective life of a
depreciating asset where the cost of the asset increases by 10 per cent or
more in a later income year (including if the asset was acquired from an
associate and the cost increases by 10 per cent or more in a later income
year).[79]
Importantly, currently subsection 40-110(5) of the ITAA
1997 provides that the recalculation provisions do not apply to intangible
deprecating assets listed in the table in subsection 40-95(7) (which are
subject to the statutory effective life).
Summary of
proposed changes
The amendments will allow taxpayers to choose to
self-assess the effective life of intangible depreciating assets that they start
to hold on or after 1 July 2016 listed in the table in subsection 40-95(7) of
the ITAA 1997, rather than using the specified statutory effective life.
Eligible
intangible assets
Taxpayers will be able to self-assess the effective life
of the following intangible depreciating assets currently included in the table
to subsection 40-95(7) of the ITAA 1997:
- a
standard, innovation or petty patent
- a
registered design
- a
copyright (except in film) or a licence relating to a copyright (except in a
film)
- a
licence (except one relating to a copyright or in-house software)
- in-house
software
- a
spectrum or datacasting transmitter licence and
- a
telecommunications site access right.[80]
Self-assessment
of the effective life of intangible depreciating assets by taxpayers
Proposed subsection 40-95(7) and paragraph
40-105(4)(a) of the ITAA 1997 (at items 8 and 10 of Schedule
2 to the Bill) have the effect of allowing tax payers to self-assess the
effective life of any intangible depreciating assets that the taxpayer starts
to hold on or after 1 July 2016, or to use the specified statutory effective
life in the table to subsection 40-95(7) of the ITAA 1997. Intangible
depreciating assets held by the taxpayer before 1 July 2016 will still be
subject to the specified statutory effective life.
The effective life is then used in calculating the decline
in value of the intangible depreciating asset under section 40-105 of the ITAA
1997 (discussed above).
Restrictions
on timing of self-assessment
Proposed subsection 40-95(7A) of the ITAA 1997 (at item 9 of Schedule 2 to the Bill) provides that where a taxpayer
chooses to self-assess the effective life of an intangible depreciating asset,
the choice must be made for the income year in which the asset’s ‘start time’ occurs
(generally when the taxpayer first uses the asset or has it installed and ready
for use).
The choice must be made by the day the taxpayer lodges
their income tax return for the income year, unless a later time is allowed by
the Commissioner of Taxation.[81]
Application
of associate and same user rules
Proposed subsection 40-95(7B) of the ITAA 1997 (at item 9 of Schedule 2 to the Bill) provides that the existing
associate and same user rules (discussed above) will apply to the intangible
depreciating assets listed in the table in subsection 40-95(7). This means that
the new holder of an intangible depreciating asset acquired from an associate,
or that continues to be used by the former user will not have the choice to
self-assess the effective life of the asset or use the statutory effective life
in the table in subsection 40-95(7) of the ITAA 1997.
However, subsection 40-95(6) as amended by item 6 and proposed subsection 40-95(6A), at item 7, provide that where the
holder of the asset changes but the asset continues to be used by the same
former user (or an associate of the former user) and:
- the
new holder does not know and cannot readily find out which effective life the
former holder was using or
- the
former holder did not use an effective life, then
the new holder of the intangible depreciating asset must use
the statutory effective life in the table in subsection 40-95(7) of the ITAA
1997.
Application
of recalculation rules
Proposed subsection 40-110(5), at item 13,
repeals and replaces current subsection 40-110(5) of the ITAA 1997 (which
provides that the recalculation provisions do not apply to intangible
deprecating assets listed in the table in subsection 40-95(7)). As a result of
the amendment, the effective life of an intangible depreciating asset can be
recalculated by the taxpayer where there are changes, in a later income year,
to the circumstances relating to the use of an intangible depreciating asset
that the taxpayer started to hold on or after 1 July 2016 provided those
changes make the previously calculated effective life inaccurate.
The effect of paragraph 40-110(2)(a)(iii) as amended by
item 11, proposed paragraph 40‑110(2)(a)(iv) at item 12 and subsection 40-110(5) is that a taxpayer must recalculate the
effective life of an intangible depreciating asset where it increases by at
least 10 per cent in a later income year or where the taxpayer starts to hold
an intangible depreciating asset and:
- the
taxpayer is using an effective life because of the associate or same user rule
in subsections 40-95(4) or (5) and
- the
intangible depreciating asset’s cost increases after the taxpayer starts to
hold it in that income year by at least 10 per cent.
Any such recalculations must be done under section 40-105 of
the ITAA 1997, using self-assessment.[82]
Retrospective
commencement
The amendments in Schedule 2 of the Bill apply in relation
to intangible depreciating assets that a taxpayer started to hold on or after 1
July 2016.
Concluding comments
As tax losses can be used to reduce assessable income,
they can reduce the amount of tax an entity pays in a particular income year in
which it made a taxable profit. As such one effect of the proposed amendments
would be to reduce the taxable income of entities; at least in the years
immediately after they commence entering into new (but similar) kinds of
business and transactions.
However, whilst increasing access to previous years’ tax
losses may result in short-term reductions in revenue collected from entities
expanding into new (but similar) kinds of business, the reforms may also
incentivise entities with tax losses to innovate and expand their business and
ultimately (in the long-term) become profitable. This would in turn increase
tax revenues.
In relation to allowing taxpayers to self-assess the
effective life of intangible depreciating assets that they start to hold on or
after 1 July 2016, whilst this may allow entities to increase the tax
deductions flowing from the depreciation of certain intangible assets in a way
that is most beneficial to the entity (and therefore reduce tax revenue), it
may also encourage innovation, increasing further investment in research and
development and therefore the generation of further income-producing intangible
depreciating assets (such as patents), resulting in increased profitability and
tax revenue.
However, some concerns have been expressed regarding
whether certain intangible assets (such as telecommunications site accesses
rights, datacasting transmitter licences and spectrum licences) could actually
be viewed as being sufficiently connected to innovation in the same way as
other types of intangible assets such as patents.[83]
Further, concerns have been expressed that allowing companies
to choose their own depreciation schedules for intangible assets may heighten
the tax avoidance risk associated with intangible assets, or at least further
incentivise the use of tax-minimisation driven related-party transactions
involving intangible assets.[84]
Members, Senators and Parliamentary staff can obtain
further information from the Parliamentary Library on (02) 6277 2500.
[1]. Explanatory
Memorandum, Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill
2017, p. 3.
[2]. Income Tax
Assessment Act 1997 (ITAA 1997), section 36-10.
[3]. Ibid.,
section 165-5.
[4]. Ibid.,
subsection 165-210(4).
[5]. CCH
Australia, Australian
master tax guide, Wolters Kluwer, Sydney, 2017, p. 1075, para. [¶17-005].
[6]. ITAA
1997, op. cit., subsections 40-30(2), 40-95(7) and 995-1(1).
[7]. Department
of Industry, Innovation and Science (DIIS), National
innovation and science agenda: welcome to the ideas boom, DIIS, Canberra,
December 2015, p. 4.
[8]. Ibid.,
p. 7.
[9]. The
Treasury, ‘National
innovation and science agenda: intangible asset depreciation’, Treasury
website, 1 April 2016.
[10]. The
Treasury, ‘National
Innovation and Science Agenda: intangible asset depreciation: submissions’,
Treasury website, 2016; PricewaterhouseCoopers (PwC), Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 22 April 2016; Telstra, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 21 April 2016; The Franksons Group, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 21 April 2016; and The Tax
Institute, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 20 April 2016.
[11]. K
Mansell, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 1 April 2016.
[12]. The
Treasury, ‘National
Innovation and Science Agenda: increasing access to company losses’,
Treasury website, 6 April 2016.
[13]. The
Treasury, ‘NISA:
increasing access to company losses: submissions’, Treasury website, 6
April 2016 (see, for example, The Tax Institute, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: increasing access to company losses, 21 April 2016, p.
1).
[14]. Senate
Standing Committee for the Scrutiny of Bills, Scrutiny
digest, 5, 2017, The Senate, 10 May 2017, p. 58.
[15]. Senate
Selection of Bills Committee, Report,
5, 2017, The Senate, 11 May 2017, p. 3.
[16]. A
Leigh (Shadow Assistant Treasurer), ‘Second
reading speech: Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill
2017’, House of Representatives, Debates, 21 June 2017, p. 7294.
[17]. Ibid.,
pp. 7294–7295.
[18]. A
Leigh (Shadow Assistant Treasurer and Minister for Competition), Malcolm
Turnbull's idea of helping startups: give tax breaks to world's biggest firms,
media release, 10 December 2015.
[19]. Deloitte, Tax
insights: creating Australia’s future innovation landscape?, Deloitte
Australia, Melbourne, 9 December 2015, p. 4.
[20]. The
Treasury, ‘NISA:
increasing access to company losses: submissions’, Treasury website, 6
April 2016.
[21]. J
Wong, ‘New
similar business test for losses’, KPMG website, 12 April 2017. See also:
KPMG, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: increasing access to company losses, 22 April 2016, pp. 1–2.).
[22]. Explanatory
Memorandum, op. cit., p. 3.
[23]. Ibid.,
p. 4.
[24]. The
Statement of Compatibility with Human Rights can be found at pages 25 and 34 of
the Explanatory
Memorandum to the Bill.
[25]. Parliamentary Joint Committee on Human Rights, Scrutiny report, 4, 2017,
The Senate, Canberra, 9 May 2017, p. 74.
[26]. ITAA
1997, section 36-10.
[27]. Income Tax Assessment
Act 1936 (ITAA 1936), section 272-115 of Schedule 2F. Currently,
there are various restrictions on a listed widely held trust accessing tax
losses and claiming debt deductions contained in subdivision 266-D of Schedule
2F to the ITAA
1936. See, for example, ITAA 1936, Schedule 2F, section 266-110.
[28]. Explanatory
Memorandum, pp. 5–6.
[29]. In
relation to listed widely held trusts: ITAA 1936, Schedule 2F,
subsection 269-100(1); in relation to companies see: ITAA 1997, subsection 165-210(1).
[30]. In
relation to listed widely held trusts: ITAA 1936, Schedule 2F, paragraph
269-100(3)(a); in relation to companies see: ITAA 1997, para. 165‑210(2)(a).
[31]. In
relation to listed widely held trusts: ITAA 1936, Schedule 2F, paragraph
269-100(3)(b); in relation to companies see: ITAA 1997, para. 165‑210(2)(b).
[32]. Explanatory
Memorandum, p. 6.
[33]. In
relation to companies see: subsection 165-210(3) of the ITAA 1997. In
relation to listed widely held trusts see: ITAA 1936, Schedule 2F,
subsection 269-100(4).
[34]. In
relation to companies see: subsection 165-210(4) of the ITAA 1997. In
relation to listed widely held trusts see: ITAA 1936, Schedule 2F,
subsection 269-100(5).
[35]. In
relation to companies see: see sections 165-12 and 165-13 of the ITAA 1997.
In relation to listed widely held trusts see: ITAA 1936, subdivision
266-D of Schedule 2F.
[36]. See:
subdivision 165-CA of the ITAA 1997.
[37]. See:
subdivision 165-CC of the ITAA 1997.
[38]. In
relation to companies see: Subdivision 165-C of the ITAA 1997. In
relation to listed widely held trusts see: ITAA 1936, Subdivision 266-D
in Schedule 2F.
[39]. In
relation to companies see: see Subdivisions 165-B and 165-CB of the ITAA
1997. In relation to listed widely held trusts see: ITAA 1936, Division
268 of Schedule 2F.
[40]. See:
subdivision 707-A of the ITAA 1997.
[41]. Explanatory
Memorandum, op. cit., p. 9.
[42]. The
‘business continuity test period’ used in the Bill is equivalent to the ‘same
business test period’ in the current law: Explanatory Memorandum,
op. cit., p. 19.
[43]. Proposed
subsection 165-211(1) of the ITAA 1997 (in relation to companies) (item
8 of Schedule 1 to the Bill); proposed subsection 269‑105(1) of Schedule 2F to the ITAA 1936 (in relation to listed widely held
trusts)(item 21 of Schedule 1 to the Bill).
[44]. Explanatory Memorandum,
op. cit., p. 8.
[45]. Ibid.,
p. 10.
[46]. Ibid.,
p. 11.
[47]. Proposed
paragraph 165-211(2)(a) of the ITAA 1997; proposed paragraph
269-105(3)(a) of Schedule 2F to the ITAA 1936.
[48]. Explanatory
Memorandum, op. cit., p. 11.
[49]. Ibid.,
p. 11.
[50]. Proposed
paragraph 165-211(2)(b) of the ITAA 1997; proposed paragraph
269-105(3)(b) of Schedule 2F to the ITAA 1936.
[51]. Explanatory
Memorandum, op. cit., p. 12.
[52]. Proposed
paragraph 165-211(2)(c) of the ITAA 1997; proposed paragraph
269-105(3)(c) in Schedule 2F to the ITAA 1936.
[53]. Explanatory
Memorandum, op. cit., p. 12.
[54]. Ibid.
[55]. Ibid.
[56]. Ibid.
[57]. Proposed
paragraph 165-211(2)(d) of the ITAA 1997; proposed paragraph
269-105(3)(d) in Schedule 2F to the ITAA 1936.
[58]. Explanatory
Memorandum, op. cit., p. 13.
[59]. ITAA
1997, subsection 165-210(2).
[60]. Explanatory
Memorandum, op. cit., p. 13.
[61]. ITAA
1997, section 175-10.
[62]. Ibid.,
section 175-15.
[63]. Ibid.,
subsection 175-45(1).
[64]. Ibid.,
section 175-50.
[65]. Ibid.,
section 175-85.
[66]. Ibid.,
section 175-90.
[67]. Explanatory
Memorandum, op. cit., p. 20.
[68]. Schedule
1, items 13 and 22.
[69]. Proposed
paragraph 165-211(1)(a) of the ITAA 1997 (in relation to companies); proposed paragraph 269-105(1)(a) of Schedule 2F to the ITAA 1936 (in relation to listed widely held trusts).
[70]. Proposed
paragraph 165-211(1)(d) of the ITAA 1997 (in relation to companies); proposed paragraph 269-105(1)(c) of Schedule 2F to the ITAA 1936 (in relation to listed widely held trusts).
[71]. Proposed
paragraph 165-211(1)(b) of the ITAA 1997.
[72]. Proposed
paragraph 269-105(1)(b) of Schedule 2F to the ITAA 1936.
[73]. Proposed
paragraph 165-211(1)(c) of the ITAA 1997.
[74]. Proposed
paragraph 269-105(1)(d) of Schedule 2F to the ITAA 1936.
[75]. ITAA
1997, subsections 40-30(2), 40-95(7), 995-1(1).
[76]. Explanatory
Memorandum, op. cit., p. 27.
[77]. See
in particular subsections 40-95(4) and (5) of the ITAA 1997.
[78]. ITAA
1997, example to subsection 40-110(1).
[79]. Ibid.,
subsections 40-110(2) and (3).
[80]. ITAA
1997, subsection 40-95(7).
[81]. ITAA
1997, section 40-130.
[82]. Explanatory
Memorandum, op. cit., pp. 30, 32.
[83]. K
Mansell, Submission to the Treasury, Consultation into the National Innovation and Science
Agenda: intangible asset depreciation, 1 April 2016.
[84]. Leigh, Malcolm
Turnbull's idea of helping startups: give tax breaks to world's biggest firms,
op. cit.
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