Navigation: Contents
Membership of the Committee
| Core Members |
|
| Senator B Gibson (Chair) |
(Tasmania, LP) |
| Senator S Murphy (Deputy Chair) |
(Tasmania, ALP) |
| Senator G Campbell |
(New South Wales, ALP) |
| Senator G Chapman |
(South Australia, LP) |
| Senator A Murray |
(Western Australia, AD) |
| Senator J Watson |
(Tasmania, LP) |
| |
|
| Substitute Members |
|
| Senator B Greig to substitute for Senator Murray for resources issues |
| |
|
| Participating Members |
|
| Senator E Abetz |
(Tasmania, LP) |
| Senator R Boswell |
(Queensland, NPA) |
| Senator B Brown |
(Tasmania, AG) |
| Senator P Calvert |
(Tasmania, LP) |
| Senator S Conroy |
(Victoria, ALP) |
| Senator P Cook |
(Western Australia, ALP) |
| Senator H Coonan |
(New South Wales, LP) |
| Senator W Crane |
(Western Australia, LP) |
| Senator A Eggleston |
(Western Australia, LP) |
| Senator J Faulkner |
(New South Wales, ALP) |
| Senator A Ferguson |
(South Australia, LP) |
| Senator J Ferris |
(South Australia, LP) |
| Senator B Harradine |
(Tasmania, Ind) |
| Senator S Knowles |
(Western Australia, LP) |
| Senator R Lightfoot |
(Western Australia, LP) |
| Senator K Lundy |
(Australian Capital Territory, ALP) |
| Senator B Mason |
(Queensland, LP) |
| Senator J McGauran |
(Victoria, NPA) |
| Senator M Payne |
(New South Wales, LP) |
| Senator J Quirke |
(South Australia, ALP) |
| Senator A Ridgeway |
(New South Wales, AD) |
| Senator C Schacht |
(South Australia, ALP) |
| Senator N Sherry |
(Tasmania, ALP) |
| Senator T Tchen |
(Victoria, LP) |
| Senator J Tierney |
(New South Wales, LP) |
| |
|
| Secretariat |
|
Peter Hallahan, Secretary
Alistair Sands, Principal Research Officer
Angela Lancsar, Executive Assistant |
|
SG.64, Parliament House
Canberra ACT 2600 |
|
Tel: 02 6277 3540
Fax: 02 6277 5719 |
|
Report
Reference of the Bill to the Committee
1.1
The New Business Tax System (Integrity Measures)
Bill 2000 was introduced into the House of Representatives on 13 April 2000.
Following a report by the Selection of Bills Committee, the Senate referred the
Bill to this Committee on 8 June 2000 for examination and report by 20 June
2000.[1]
1.2
In particular, the Committee was asked to
consider the non-commercial loss provisions and 13 month prepayment rule
contained in the Bill.
The Committee’s Inquiry
1.3
The Committee invited a number of interested
parties to make submissions on the Bill, in addition to advertising the inquiry
on the Parliament website. The Committee received 18 submissions to the inquiry
(see Appendix 1).
1.4
The Committee held a public hearing on the Bill
in Canberra on 19 June 2000. The witnesses who appeared at the hearing are
shown in Appendix 2.
The Bill
1.5
The Bill contains two major integrity measures.
Originally recommended in the Review of Business Taxation chaired by John Ralph
AO, the Government announced on 11 November 1999 that it would adopt the
measures. The measures intend to:
- limit the extent to which taxpayers can use non-commercial losses
to reduce tax paid on their other income; and
- require that prepayments for services under tax shelter
arrangements be deducted over the period during which the services are
provided, rather than being immediately tax deductible.
Background: The Review of Business Taxation
1.6
The Review of Business Taxation (RBT) – the
so-called “Ralph Review” – explored both the impact of non-commercial losses on
the revenue and the existing rules on prepayments.
Non-commercial losses
1.7
The Review noted that significant revenue
leakage results from the losses of unprofitable activities carried out by
taxpayers, individually or in partnership. While these activities may possess
business-like characteristics, often in reality they amount to hobbies or
lifestyle choices which rarely make a profit and do not have a major commercial
purpose:
On average they make little or no contribution to the revenue
raising task but gain a significant tax advantage.[2]
1.8
Taxpayers offset the net losses flowing from these
activities against other primary income, often salary and wages.
1.9
The Review recommended a systemic solution to
this issue rather than continuing to rely on the current law and case-by-case
approach which is resource intensive to administer.
Prepayment
1.10
The Review considered that the existing law on
prepayments – which allows for an immediate deduction for advance expenditure
incurred – is inappropriate on a number of grounds: it is inconsistent with
accounting practice; it also provides inconsistent treatment between payers and
payees; and it allows the potential for immediate deductibility for expenses
relating to services over three income years. As a
consequence:
Because of its tax deferral advantages, the rule has been used
by some taxpayers as a key feature of a number of schemes and arrangements to
avoid tax.[3]
1.11
Apart from some limited exceptions, the Review
recommended that prepayments be allocated over the income years to which the
payments relate both for taxpayers incurring the expenditure and also taxpayers
receiving the payment.
Measures in the Bill
1.12
The Bill is divided into two parts relating to
non-commercial losses and prepayment deductions.
Non-commercial losses
1.13
The Bill amends the Income Tax Assessment Act
1997 (ITAA) by limiting the extent to which non-commercial losses
from an individual’s business activities can be used as tax deductions to
reduce the tax paid on other income such as wages and salary.
1.14
The amendments are intended to ensure that
individual taxpayers conducting a business activity alone or in partnership may
only claim a loss from that activity in an income year against their other
income in that year if they satisfy one of five tests. If one of the tests is
not met, the taxpayer can defer the loss to a future year. Where one of the
tests is met in a future year, deferred losses can then be offset against
assessable income in that year.
1.15
The new measures will apply for the 2000-2001
and subsequent income years. They do not affect the current treatment of losses
incurred in receipt of passive income from activities which do not constitute
the carrying on a business (eg, rent from a negatively geared investment
property, dividends from shares or interest on financial investments such as
infrastructure bonds).
1.16
Primary producers who receive less that $40,000
(excluding net capital gains) are not affected by the measure.
1.17
The five tests, one of which needs to be
satisfied to enable losses from a business activity to be deducted against
other income, are summarised in the table below.[4]
|
Test
|
Description
|
|
1
|
Assessable income test: Assessable income from a business activity is at least $20,000.
|
|
2
|
Profits test:
The business activity produces profit (for tax purposes) in at least 3 out of
the last 5 years including the current year.
|
|
3
|
Real property test: Value of real property in carrying on a business is at least
$500,000.
|
|
4
|
Other assets test: Value of other assets used in carrying on a business is at least
$100,000.
|
|
5
|
Safeguard rule: Commissioner’s
discretion: Commissioner may exercise a
discretion to allow losses where the business is affected by special
circumstances (eg, natural disasters such as flood, drought, bushfire etc) or
is in its start-up phase.
|
Prepayment
1.18
The Bill also amends ITAA 1936 to prevent
prepayments under tax shelter arrangements being immediately deductible.
According to the Explanatory Memorandum to the Bill:
The [new] rules do no affect the entitlement to the deduction
nor the amount which may be deducted, rather they alter the timing of
deductibility of prepayments made under those arrangements.[5]
[emphasis added]
1.19
Under the new rules, deductions for expenditure
will be apportioned over the period that the prepaid benefits are provided. An
“apportionment rule” will determine the amount a taxpayer may deduct for each
income year.
1.20
The following specific prepayments are excluded
from the scope of the new measure:
- interest for the acquisition of, and building, contents and rent
protection insurance in respect of, real property;
- interest for the acquisition of listed shares and widely held
units;
- interest on a loan used to acquire infrastructure borrowings
under the former tax exempt infrastructure borrowing scheme;
- prepaid ‘excluded expenditure’;
- those made under a pre-existing contractual obligation that
existed before 1pm, by legal time in the Australian Capital Territory, on 11
November 1999; or
- those made under arrangements which, prior to the announcement of
the measure, had obtained, or had applied for and later obtained, a favourable
ATO product ruling in respect of the arrangement.
Comparison of key features of new law and current law
1.21
This table compares key features of the Bill
with the existing position.
|
New Law
|
Current law
|
|
Individual taxpayers ‘carrying on a business’ activity may
only claim the excess of deductions over assessable income from the activity
against their other income if one of the 4 tests is satisfied, or the
Commissioner exercises a discretion.
|
Individual taxpayers ‘carrying on a business’ may claim the
excess of deductions over assessable income from the activity against their
other income, such as personal services income, thereby reducing their
taxable income and tax payable.
|
- All taxpayers who incur expenditure in respect to tax shelter
arrangements must claim deductions for the expenditure over the period that
the services are provided, unless the expenditure is:
- interest,
or building, contents or rent protection insurance in respect of certain
negatively geared investments in real property, listed shares or widely held
units;
- interest
in respect of infrastructure borrowings;
- made
under an irrevocable pre-existing commitment; or
- in
respect of an arrangement for which a favourable ATO product ruling had been
obtained or prior to the commencement, had been applied for and acknowledged,
and was later obtained.
- Prepayments to which the new rules do not apply will continue
to be covered by the current law.
|
- A taxpayer carrying on a business, who is not a small business
taxpayer, must spread deductions for prepayments incurred in carrying on a
business over the period the prepayment covers.
- Prepayments for things to be done within 13 months for small
business or non-business taxpayers are immediately deductible.
- All taxpayers must spread prepayments for things not to be done
within 13 months over the period the prepayment covers.
|
Issues in Evidence
1.22
The Committee was charged with examining the
non-commercial loss provisions and new prepayment rules contained in the
legislation. The evidence to the inquiry concentrated solely on the
non-commercial loss provisions; none of the evidence touched on the prepayment
rule.
1.23
Consequently, the Committee has confined its
attention to issues raised in relation to the non-commercial loss measures,
particularly their expected impact on two sectors, the arts community (eg,
artists and authors) and primary producers. These groups of witnesses noted
concerns with the legislation under two general areas:
- the nature of the tests; and
- the economic impacts, not only on their own specific sectors but
also the wider ramifications for Australia’s information economy and regional
economies.
1.24
It is important to note that a two step
assessment process applies to everyone. The first step is the existing test
determining whether the individual is carrying on a business. The second step
is the measures in the bill. The new measures do not replace the general law
tests that determine whether an individual is carrying on a business activity.[6] As Mr Butler, representing the
ATO, explained:
There are those two hurdles. The first hurdle is: are you
carrying on a business? If you are not carrying on a business then no
deductions are liable. The second hurdle is: if you are carrying on a business,
is it a non-commercial business? To escape the law as proposed under this bill
you need to satisfy one of the tests put forward or have the commissioner
exercise a discretion. It is like a two-step process.[7]
The tests - artists' and authors' concerns
1.25
Organisations representing artists and authors
claimed that some artists may have difficulty meeting any of the tests. For
instance, the Australian Society of Authors (ASA) stated:
Especially when they embark on their careers, writers will not
earn anywhere near $20,000 from their writing, they will rarely make sustained
profits and they will never be able to invest $100,000, or own property
relating to their writing valued at $500,000 or more.[8]
1.26
However, Mr Lowenstein, a partner in an
accounting firm that acts as tax advisers to about 800 artists, considered that
the measures would not affect all artists:
I would stress that the introduction of this legislation will
not affect the established artists. They are the ones who will be able to
satisfy at least one of the criteria. It will affect those artists who are
already struggling to make ends meet and who can least afford to forgo the tax
deductions on the losses from their art related activities.[9]
1.27
These organisations also contended that the
measures in general and the tests in particular reverse a 1998 agreement
between arts groups and the Australian Taxation Office (ATO) on the defining
characteristics of a genuine artistic business as opposed to arts hobbyists.
These groups claimed that the definitions agreed to by the ATO accepted that
relying on dollar-based criteria was inappropriate for the arts sector.
1.28
Mr Butler indicated that the earlier
collaborative work done by the ATO and arts groups on the defining
characteristics of a genuine arts business would still apply for first step of
the process relating to whether an activity was a business.[10]
1.29
Arts bodies proposed an amendment to the
legislation that would allow arts and cultural producers whose non-art income
is less than $40,000 to offset their business losses against that income
without having to meet the other tests. According to Ms Browne of the Arts Law
Centre of Australia:
We want, like primary producers, an exemption and parity with
the exemption given to primary producers.[11]
The tests - primary producers' concerns
1.30
Witnesses representing primary producers also
suggested changes to the tests. The National Farmers’ Federation (NFF)
recommended that the Commissioner’s discretion be broadened better to reflect
the conditions that affect start-up businesses. The NFF also recommended that
the profits test be amended from requiring an activity to make a profit three
years out of five to two years out of five.[12]
In evidence, officials noted that requiring a profit in two from five years
might be relatively easy to satisfy, to the extent that the timing of expenses
is flexible and open to manipulation.[13]
1.31
The ATO indicated to the Committee that a public
ruling on the start-up phase of business is currently being prepared and,
following the Committee’s hearing, would be expedited. The ruling would
complement the legislation and assist in clarifying for taxpayers the ATO’s
view on how the Commissioner’s discretion will be able to be exercised in the
start-up phase and when taxpayers are faced with special circumstances such as
natural disaster.[14]
1.32
The Committee is concerned that generally, the
rulings system significantly lags behind the date of effect of legislation.
There may be a need to develop a mechanism to provide more certainty to primary
producers in the start-up phase of enterprises. The Committee draws this matter
to the Government's attention for further consideration.
Impact of the measures
1.33
Witnesses representing both the arts and primary
production sectors predicted that the measures could put significant numbers of
genuine producers in both sectors out of work.[15]
Officials from the Treasury and the ATO indicated to the Committee that the
total number of taxpayers expected to be affected by the non-commercial losses
provisions is almost 177,000. In relation to the arts community, the ATO stated
that of the 25,000 taxpayers who identify themselves as artists in their tax
returns, 8,792 may be affected by the legislation. The ATO noted that its data
on artists is not entirely reliable as it depends upon taxpayer
self-identification as to their profession. The ATO stated that a larger number
of people who consider themselves as artists could also be affected by the
legislation but these people have not declared themselves as artists for tax
purposes.[16]
1.34
Witnesses representing the arts community and
primary producers also argued that the repercussions of the measures might not
be isolated to their own sectors but may have a ripple effect on other areas of
the economy. If the writing industry were to suffer as a consequence of the
legislation, the ASA claimed that this could erode Australia’s information
economy and result in Australia becoming a “cultural importer”.[17] Mr Peter Andren, MP, expressed
concern that no official assessment appears to have been done on the wider
impact of the legislation on regional economies.[18]
1.35
Mr Andren also raised the possibility of potential
for adverse environmental impacts. He suggested that land-holders may reduce
their expenditure on land care and other environmental management work if they
are unable to offset those costs for tax purposes against their off-farm
income.[19]
1.36
The NFF supported Mr Andren’s recommendation
that a deduction should be allowed for land care and environmental expenses:
We certainly agree with that. We think that that is a extremely
important part of the role of the government in helping farmers to assist the
environment and we thinki that that would be obviously a measure that would be
of great assistance. It is not talking about a large amount of dollars at the
end of the day anyhow, but it is still encouraging people to do the right
thing.[20]
1.37
The impact of the measures on welfare
expenditure was another area raised in evidence. The Arts Law Centre of
Australia suggested that the measures may cause some artists to switch to full
time work at the expense of their art work or access welfare to concentrate on
their arts activity full time.[21]
The NFF noted:
Denying genuine small-scale farmers the ability to claim their
losses may lead to loss of jobs in rural communities and new applicants for
family welfare payments, putting a further burden on welfare.[22]
Recommendation
1.38
The Committee recommends that the Senate pass
the Bills.
Senator the Hon Brian Gibson
Chairman
Labor Senators’ Minority Report
Labor Senators reserve their
position on this legislation.
Senator Shayne Murphy Senator
George Campbell
Deputy Chairman
Australian Democrats’ Minority Report
The Bill
The New Business Tax System (integrity
Measures) Bill, 2000, seeks to introduce two major integrity measures as
recommended by Mr John Ralph, AO, Chair of the Review of Business Taxation in
1999
The Committee was charged with examining these
integrity measures, namely the non-commercial loss provisions and the new
prepayment rules proposed in the Bill.
The evidence to the inquiry at the public hearings conducted
by the Committee on 19 June, 2000 focussed on the non-commercial loss
provisions of the Bill and the likely impacts their implementation will have on
the arts sector and primary producers.
Issues in Evidence
The Australian Democrats are primarily concerned about the
likely economic impacts of the non-commercial loss provisions on the arts
sector, and more generally the Australian economy.
The Australian Democrats consider the concerns of the
organisations representing artists and authors who gave evidence at the public
hearing to be very valid.
The bulk of artists are unlikely to sustain a living from
their art work for at least five to ten years; perhaps not at all. Yet they
make a significant contribution to our national well-being that cannot be
calculated in dollar terms.
These struggling artists may still, for taxation purposes,
consider themselves a business, yet never find themselves in position where
they can satisfy one of the ‘tests’ outlined in the non-commercial loss
measures, or come under the discretion test of the Tax Commissioner.
The Australian Democrats consider that the likely number of
artists to be affected by this Bill far exceeds the ATO’s conservative estimate
of 8,792, which is based solely on those who identify as artists in their tax
returns. This figure is unlikely to reflect the numbers of emerging artists
whose primary income is in non-art related work – precisely the people who will
be affected by the implementation of this Bill.
The Australia Council estimated in 1999 that there are
perhaps some 40,000 professional artists in Australia.[23]
The National Association of the Visual Arts (NAVA) estimated
the overall number of artists in Australia to be about 80,000.[24]
It is NAVA’s view that the economic fortunes of artists will fluctuate
throughout their professional careers, and it is likely that a majority of
artists will at one time or another, be affected by the provisions of this
Bill.
The Australian Democrats share the concerns expressed by the
Arts Law Centre that this Bill would present almost insurmountable obstacles to
the establishment of many artistic careers. The cost of these obstacles should
not only be measured in dollar terms, such as increased pressures on social
welfare payments. The cost must also be calculated in cultural and artistic
terms.
Australian Democrat Conclusions
The Australian Democrats support the principle of limiting
the extent to which taxpayers can use non-commercial losses to reduce the tax
paid on their other income. That said, such an integrity measure needs to be
exercised with care to ensure that individuals carrying on genuine businesses
but supplementing their income from other sources are not affected adversely.
The Democrats are concerned that, in its current form, the
legislation will have negative repercussions on genuine arts and cultural
producers who find it necessary to support themselves and their artistic
endeavours with non-art income.
It is already recognised in the legislation
that protection should be granted to some genuine primary producers who find it
necessary to support themselves with off-farm income. Primary producers who
earn off-farm income of less than $40,000 will not be affected by the new
measures. In the Bill’s Second Reading Speech, the Treasurer’s explanation for
this exemption noted that:
This assists those small primary producers who find it necessary
to support themselves through moderate amounts of off-farm income (particularly
during periods of hardship), while genuinely, at the same time, seeking to
pursue their farm activities.
Many genuine professional artists face similar
circumstances. Lengthy production times and fluctuating income mean that many
artists, both emerging and established, must supplement their art income with
other sources of earning. Periods of hardship are as much a reality for artists
as they are for small scale primary producers. However, as it stands, the
legislation only recognises this point in relation to primary producers and not
for professional artists.
This shortcoming in the legislation should be,
in the Democrats view, remedied by extending the exemption for primary
producers to professional artists as well. The Democrats recommended amendment
to the Bill is attached.
In addition to the equity reasons for
exempting professional artists who come under the $40,000 threshold, it should
be noted that the risk to the revenue of extending the exemption can be
considered reasonably low.
As noted in the Majority Report, the ATO and
arts groups have collaborated on establishing a set of characteristics for
defining genuine artistic businesses. In evidence, the ATO indicated that this
collaborative work had been successful helping both the ATO and professional
artists to sort out genuine arts businesses from arts hobbyists that were not
eligible for business deductions. As First Assistant Commissioner Butler
stated:
I would say that the result of the work that we did with various
representatives of the arts community, and looking at the sorts of things
happening in tax returns, there was quite a positive impact as far as people
who should not have been claiming their own business stopped claiming they were
in business.[25]
Despite the dispute about actual figures, this
evidence suggests that existing measures have already curbed arts hobbyists
from claiming business loss deductions. Consequently, the risk to revenue (in
real terms) in providing an exemption for professional artists who earn under
$40,000 from non-art income is not likely to be high regardless of what figure
of professional artists such a calculation is based on.
Recommendations
The Australian Democrats support the recommendation of the
arts organisations that the Bill be amended so that professional artists whose
non-arts related income is less than $40,000 can offset their arts-based
business losses against that income without having to meet the other tests.
The Australian Democrats therefore recommend that the
exemption currently proposed for primary producers be extended to include
professional practising artists.
Amendments are attached.
Senator Aden Ridgeway
1998-1999-2000
The Parliament of the
Commonwealth of Australia
THE SENATE
New Business Tax System (Integrity Measures) Bill 2000
(Amendments
to be moved by Senator Ridgeway for the Australian Democrats in committee of
the whole)
(1) Schedule 1, item 3, page 5
(line 35) to page 6 (line 4), omit subsection (4), substitute:
Exceptions
(4) The rule in subsection (2) does not apply
to a * business activity for an income year if:
(a) the activity is:
(i) a * primary production
business; or
(ii) a * professional arts
practice; and
(b) your assessable income for that year
(except any * net capital gain) from other sources that are not primary
production businesses or professional arts practices, as the case may be, is
less than the * non-commercial business activity exception threshold.
[section 35-10—deferral of deductions from
non-commercial business activities]
(2) Schedule 1, item 3, page 6
(after line 4), after section 35-10, insert:
35-11 Meaning of non-commercial business activity exception threshold
(1) The non-commercial business activity
exception threshold for the 2000-01 income year is $40,000.
(2) The * non-commercial business activity
exception threshold is indexed annually.
Note: Subdivision 960-M shows you how to index
amounts.
(3) The Commissioner must publish before the
beginning of each * financial year the * non-commercial business activity
exception threshold for that year.
[section 35-11—exception threshold]
(3) Schedule 1, page 11 (after
line 3), after item 3, insert:
3A Section 960-265 (before table item 1)
Insert:
|
1A
|
Non-commercial business activities
|
Division 35
|
3B Section 995-1
Insert:
non-commercial business activity exception threshold
has the meaning given by section 35-11.
3C Section 995-1
Insert:
professional arts practice: you carry on a
professional arts practice if you are a *professional arts practitioner.
3D Section 995-1
Insert:
professional arts practitioner: you are a
professional arts practitioner if you carry on a business (either alone or in
partnership) as:
(a) the author of a literary, dramatic,
musical or artistic work; or
Note: The expression “author” is a technical term
from copyright law. In general, the “author” of a musical work is its composer
and the “author” of an artistic work is the artist, sculptor or photographer
who created it.
(b) a * performing artist; or
(c) a * production associate.
[section 995-1—dictionary]
Senator Andrew
Murray
Australian Democrats
Appendices:
Appendix 1: List of Submissions
- Arts Law Council of
Australia
- Graham, Mr A, NSW
- Hook, Lindsay and
Carolyn, NSW
- ACT Legislative
Assembly
- National
Association for the Visual Arts (NAVA)
- McGregor, Mr
Robert, NSW
- Nightingale, Errol and
Marie, NSW
- Moore, Ms
Catherine, NSW
- National Farmers’ Federation, ACT
- Australian Society
of Authors
- Mr Peter Andren MP,
Member for Calare, NSW
- Mr
the Hon Larry Anthony MP, Federal Member for Richmond,
Minister for
Community Services, NSW
- Australian Council
for the Arts
- Stark, Mr Peter, NSW
- Gorman House Arts
Centre
- ArtsVoice ACT Inc.
- Evans, Steven and
Irene, NSW
- Thompson, Mr Stuart,
NSW
- Australian Forest
Growers
- Clydsdale,
Bruce and Ann, NSW
Appendix 2: List of Witnesses Appearing Before the Committee
Monday, 19 June 2000
Committee Room 1S3, Parliament House, Canberra
Mr Peter Andren MP
Australian Society of
Authors
Jose
Borghino, Executive Director
ArtsLaw
Centre of Australia
Delia
Browne, Executive Director
Tom
Lowenstein, Partner Lowenstein Sharp Accountants
Judy
Sullivan, Legal Adviser
National
Association for the Visual Arts
Tamara
Winikoff, Executive Director
National
Farmers Federation
Ian Dongess,
President
Su
McCluskey, Director of Taxation
Australian
Taxation Office
David Butler,
First Assistant Commissioner
Michael
Smith, Assistant Commissioner
David Hinds,
Executive Officer
Department
of Treasury
Paul
McCullough, General Manager, Business Income Division
John
Anderson, Manager
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