2004-2005 The Parliament of the Commonwealth of Australia HOUSE OF REPRESENTATIVES Presented and read a first time Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 (Treasury) A Bill for an Act to amend the law relating to taxation, and for related purposes [Page Break] 1 Short title.......................................................................................1 2 Commencement .............................................................................1 3 Schedule(s)....................................................................................2 Schedule 1--Modifications to exemption for foreign earnings 3 Income Tax Assessment Act 1936 3 Schedule 2--Tax offset for Australian production expenditure on television series 6 Income Tax Assessment Act 1997 6 Schedule 3--Consolidation 9 Part 1--Bad debts 9 Division 1--MEC groups 9 Income Tax Assessment Act 1997 9 Division 2--Deducting debt/equity swap loss 13 Income Tax Assessment Act 1997 13 Division 3--Consequential amendments 14 Financial Corporations (Transfer of Assets and Liabilities) Act 1993 14 Income Tax Assessment Act 1936 15 Income Tax Assessment Act 1997 16 Income Tax (Transitional Provisions) Act 1997 17 Part 2--Making and revoking certain choices 18 Income Tax (Transitional Provisions) Act 1997 18 Part 3--Application 20 Schedule 4--Thin capitalisation 21 Income Tax (Transitional Provisions) Act 1997 21 Schedule 5--Forestry managed investments 23 Income Tax Assessment Act 1936 23 Schedule 6--Debt and equity interests 24 Part 1--Related party at call etc. loans 24 Income Tax Assessment Act 1997 24 i Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 July 2001 31 Income Tax Assessment Act 1936 31 Income Tax Assessment Act 1997 31 New Business Tax System (Debt and Equity) Act 2001 32 Part 3--Other technical amendments 34 Income Tax Assessment Act 1997 34 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 ii [Page Break] 2 taxation, and for related purposes 3 The Parliament of Australia enacts: 4 1 Short title 5 This Act may be cited as the Tax Laws Amendment (2005 6 Measures No. 5) Act 2005. 7 2 Commencement 8 (1) Each provision of this Act specified in column 1 of the table 9 commences, or is taken to have commenced, in accordance with 10 column 2 of the table. Any other statement in column 2 has effect 11 according to its terms. 12 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 1 [Page Break] Column 1 Column 2 Column 3 Provision(s) Commencement Date/Details 1. Sections 1 to 3 The day on which this Act receives the and anything in Royal Assent. this Act not elsewhere covered by this table 2. Schedules 1 to The day on which this Act receives the 5 Royal Assent. 3. Schedule 6, 1 July 2005. 1 July 2005 items 1 to 5 4. Schedule 6, Immediately after the commencement of the 1 July 2001 item 6 New Business Tax System (Debt and Equity) Act 2001. 5. Schedule 6, 1 July 2005. 1 July 2005 items 7 to 13 6. Schedule 6, Immediately after the commencement of the 1 July 2001 Part 2 New Business Tax System (Debt and Equity) Act 2001. 7. Schedule 6, The day on which this Act receives the Part 3 Royal Assent. 1 Note: This table relates only to the provisions of this Act as originally 2 passed by the Parliament and assented to. It will not be expanded to 3 deal with provisions inserted in this Act after assent. 4 (2) Column 3 of the table contains additional information that is not 5 part of this Act. Information in this column may be added to or 6 edited in any published version of this Act. 7 3 Schedule(s) 8 Each Act that is specified in a Schedule to this Act is amended or 9 repealed as set out in the applicable items in the Schedule 10 concerned, and any other item in a Schedule to this Act has effect 11 according to its terms. 2 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 2 Schedule 1--Modifications to exemption for 3 foreign earnings 4 5 Income Tax Assessment Act 1936 6 1 After subsection 23AG(1) 7 Insert: 8 (1A) A person is taken, for the purposes of subsection (1), to have been 9 engaged in foreign service for a continuous period of 91 days if: 10 (a) the person died at a time when he or she was engaged in 11 foreign service for a continuous period of less than 91 days; 12 and 13 (b) he or she would have otherwise continued to be engaged in 14 the foreign service; and 15 (c) his or her continuous period of engagement in the foreign 16 service would have otherwise been a period of at least 91 17 days. 18 2 After subsection 23AG(2) 19 Insert: 20 (2A) Subsection (2) does not apply in relation to foreign earnings to the 21 extent that the person derived them from foreign service in Iraq 22 after 31 December 2002 but before 1 May 2004. 23 3 Subsections 23AG(6A) to (6E) 24 Repeal the subsections, substitute: 25 (6A) 2 or more periods in which a person has been engaged in foreign 26 service are together taken to constitute a continuous period of 27 foreign service until: 28 (a) the end of the last of the 2 or more periods; or 29 (b) a time (if any), since the start of the first of the 2 or more 30 periods, when the person's total period of absence exceeds 1/6 31 of the person's total period of foreign service; 32 whichever happens sooner. 33 Example: Kate is engaged in foreign service for 20 days, is absent for 2 days and 34 is then engaged in foreign service for 10 days. These 2 periods of Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 3 [Page Break] 1 foreign service constitute a continuous period of foreign service, 2 because the total period of absence is never more than 1/10 of the total 3 period of foreign service. 4 Kate is then absent for 5 days before commencing a further period of 5 foreign service. No matter how long the further period lasts, it can 6 never constitute a continuous period of foreign service with the first 2 7 periods of foreign service, because on the fourth day of the second 8 absence the total period of absence is 1/5 of the total period of foreign 9 service. 10 (6B) In subsection (6A): 11 total period of absence, in relation to a particular time, means the 12 number of days, in the period starting at the start of the first of the 13 2 or more periods and ending at that time, for which the person was 14 not engaged in foreign service. 15 total period of foreign service, in relation to a particular time, 16 means the number of days, in the period starting at the start of the 17 first of the 2 or more periods and ending at that time, for which the 18 person was engaged in foreign service. 19 4 Subsection 23AG(6J) 20 Repeal the subsection. 21 5 Application 22 (1) The amendment made by item 1 is taken to have applied in relation to 23 deaths that occurred on or after 1 July 2004. 24 (2) The amendment made by item 2 is taken to have applied to assessments 25 for the 2002-03 year of income and each subsequent year of income. 26 (3) The amendments made by items 3 and 4 apply in relation to foreign 27 service performed on or after the day on which this Act received the 28 Royal Assent. 29 (4) If, immediately before the day on which this Act received the Royal 30 Assent (the commencement day): 31 (a) a person had an absentee credit balance within the meaning 32 of subsection 23AG(6A) of the Income Tax Assessment Act 33 1936; or 34 (b) would have had such a balance if that subsection allowed for 35 an absentee credit balance to be a part of a day; 4 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 on the commencement day the person's total period of foreign service, 2 under subsections 23AG(6A) and (6B) of that Act as amended by this 3 Act, is increased by a number of days equivalent to: 4 (c) if, immediately before the commencement day, the person 5 was engaged in foreign service--the number of days, before 6 that day, in that continuous period of foreign service; or 7 (d) if paragraph (c) does not apply--the number of days in the 8 last continuous period of foreign service in which the person 9 was engaged before that day. Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 5 [Page Break] 1 2 Schedule 2--Tax offset for Australian 3 production expenditure on television 4 series 5 6 Income Tax Assessment Act 1997 7 1 Subparagraph 376-15(1)(d)(ii) 8 Omit "; and", substitute "; or". 9 2 At the end of paragraph 376-15(1)(d) 10 Add: 11 (iii) a *television series that is not covered by 12 subparagraph (i) or (ii); and 13 3 Subparagraph 376-15(1)(e)(i) 14 Repeal the subparagraph, substitute: 15 (i) if the film is covered by subparagraph (d)(i) or (ii)--a 16 documentary; or 17 4 Subparagraph 376-15(1)(e)(v) 18 Repeal the subparagraph, substitute: 19 (v) if the film is covered by subparagraph (d)(i) or (ii)--a 20 film forming part of a drama program series that is, or is 21 intended to be, of a continuing nature; or 22 5 After paragraph 376-15(1)(e) 23 Insert: 24 (ea) if the film is a *television series that is not covered by 25 subparagraph (d)(i) or (ii): 26 (i) for a television series that is predominantly a digital 27 animation or other animation--the *making of the 28 television series (other than a pilot episode, if any, or 29 activities mentioned in paragraph 376-25(3)(a)) takes 30 place within a period of not longer than 36 months; or 31 (ii) otherwise--all principal photography for the television 32 series (other than a pilot episode, if any) takes place 33 within a period of not longer than 12 months; and 6 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 (eb) if the film is a *television series that is not covered by 2 subparagraph (d)(i) or (ii)--the amount worked out for the 3 film under subsection (3) is at least $1 million; and 4 6 At the end of section 376-15 5 Add: 6 (3) For the purposes of paragraph (1)(eb), the amount for a film is 7 worked out by using the formula: Total QAPE 8 Duration of film in hours 9 where: 10 duration of film in hours means the total length of the film, 11 measured in hours. 12 total QAPE means the total of the company's *qualifying 13 Australian production expenditure on the film (worked out using 14 Subdivision 376-C). 15 7 After section 376-15 16 Insert: 17 376-17 Television series 18 (1) A television series is a *film made up of 2 or more episodes that: 19 (a) are produced wholly or principally for exhibition to the 20 public on television under a single title; and 21 (b) contain a common theme or themes; and 22 (c) contain dramatic elements that form a narrative structure; and 23 (d) meet the requirement in subsection (2). 24 Note: A documentary can be a television series. 25 (2) The requirement is that all of the episodes must be produced 26 wholly or principally for exhibition together, for a national market 27 or national markets. 28 (3) To avoid doubt, and without limiting paragraph (1)(c), a *film 29 satisfies the requirement in that paragraph if: Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 7 [Page Break] 1 (a) the sole or dominant purpose of the film is to depict actual 2 events, people or situations; and 3 (b) the film depicts those events, people or situations in a 4 dramatic or entertaining way, with a heavy emphasis on 5 dramatic impact or entertainment value. 6 (4) A pilot episode to a television series is taken to be a part of the 7 television series. 8 8 Subsection 376-25(5) 9 Omit "section 376-35", substitute "subsection 376-35(1)". 10 9 Subsection 376-25(6) (note) 11 Omit "section 376-35", substitute "subsection 376-35(1)". 12 10 Section 376-35 13 Before "Despite", add "(1)". 14 11 At the end of section 376-35 15 Add: 16 (2) Despite sections 376-25 and 376-30, the expenditure of a company 17 is not production expenditure of the company on a *film if: 18 (a) the film is a *television series that is not covered by 19 subparagraph 376-15(1)(d)(i) or (ii); and 20 (b) the expenditure is reasonably attributable to the production of 21 a pilot episode to the television series; and 22 (c) the expenditure, apart from this subsection, would be 23 production expenditure that was not *qualifying Australian 24 production expenditure. 25 12 Subsection 995-1(1) 26 Insert: 27 television series has the meaning given by section 376-17. 28 13 Application 29 The amendments made by this Schedule apply to production 30 expenditure incurred on and after 1 July 2004. 8 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Bad debts Part 1 1 2 Schedule 3--Consolidation 3 Part 1--Bad debts 4 Division 1--MEC groups 5 Income Tax Assessment Act 1997 6 1 After Subdivision 719-H 7 Insert: 8 Subdivision 719-I--Bad debts 9 Guide to Subdivision 719-I 10 719-450 What this Subdivision is about 11 The head company of a MEC group is taken to meet the conditions 12 in section 165-123 (about maintaining the same ownership in an 13 ownership test period to be able to deduct a bad debt) if and only if 14 the top company for the group at the start of the period meets those 15 conditions for the period. 16 Table of sections 17 Maintaining the same ownership to be able to deduct bad debt 18 719-455 Special test for deducting a bad debt because a company maintains the same 19 owners 20 719-460 Assumptions about nothing happening to affect direct and indirect 21 ownership of the test company 22 719-465 Assumptions about the test company failing to meet the conditions in 23 section 165-123 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 9 [Page Break] Part 1 Bad debts 1 Maintaining the same ownership to be able to deduct bad debt 2 719-455 Special test for deducting a bad debt because a company 3 maintains the same owners 4 (1) This section has effect for the purposes of working out whether the 5 *head company of a *MEC group: 6 (a) can deduct a debt it writes off as bad; or 7 (b) could have deducted a debt as described in subsection 8 709-215(2). 9 Note: Whether the head company of the MEC group could have deducted a 10 debt as described in subsection 709-215(2) is relevant under 11 Subdivision 709-D to: 12 (a) the question whether the head company can deduct the debt it 13 writes off as bad, or the swap loss it makes in extinguishing the 14 debt as part of a debt/equity swap, after the debt was owed to an 15 entity while the entity was not a member of the MEC group; and 16 (b) the question whether an entity that was owed the debt after it was 17 owed to the head company can deduct the amount of the debt the 18 entity writes off as bad or the swap loss the entity makes in 19 extinguishing the debt as part of a debt/equity swap. 20 (2) The *head company is taken to meet the conditions in 21 section 165-123 (about the company maintaining the same owners) 22 for the *ownership test period if and only if the company (the test 23 company) that was the *top company for the *MEC group at the 24 start of the same period would have met those conditions for that 25 period on the assumptions in the following sections (if applicable): 26 (a) section 719-460 (which is about assuming that nothing 27 happened in relation to certain things that would affect 28 whether the test company would meet those conditions); 29 (b) section 719-465 (which is about assuming that the test 30 company would have failed to meet those conditions in 31 certain circumstances). 32 Note 1: Even though subsection (2) of this section raises the issue whether the 33 test company meets the conditions in section 165-123, that is 34 determined by reference to: 35 (a) the ownership test period for the head company of the MEC 36 group; and 37 (b) the debt owed to the head company. 38 Note 2: If this section is applying for the purposes of working out whether the 39 head company could have deducted a debt as described in subsection 10 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Bad debts Part 1 1 709-215(2), section 709-215 affects what is the ownership test period 2 for the purposes of section 165-123 as it applies for those purposes. 3 Head company's failure to meet conditions in section 165-123 4 (3) The *head company is taken to fail to meet a condition in 5 section 165-123 only at: 6 (a) the first time the test company would have failed to meet the 7 condition on the relevant assumptions mentioned in 8 subsection (2); or 9 (b) the *test time described in section 166-40 for the test 10 company, if: 11 (i) Division 166 is relevant to working out whether the test 12 company met the conditions in section 165-123 on the 13 relevant assumption mentioned in paragraph (2)(a); and 14 (ii) the test company is not assumed under section 719-465 15 to fail to meet the condition before the test time. 16 Note 1: If the head company is taken to fail to meet a condition in 17 section 165-123, the head company will not be able to deduct the debt 18 unless that company meets the condition in section 165-126 by 19 satisfying the same business test. That test applies to the head 20 company (and not the test company). 21 Note 2: Section 719-285 may affect whether the head company satisfies the 22 same business test if there has been a change in the identity of the 23 head company of the group during the ownership test period. 24 Same business test for head company under Division 166 25 (4) If section 166-40 directly affects whether the *head company can 26 deduct the debt, the subsection of that section that requires the 27 *same business test be applied to a particular *business operates as 28 if it required that test to be applied to the business the head 29 company carried on just before the time described in subsection (3) 30 of this section. 31 Note: Section 166-40 has an indirect effect on whether the head company 32 can deduct the debt so far as that section affects whether the test 33 company meets the conditions in section 165-123 and therefore 34 whether the head company is taken to meet those conditions. Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 11 [Page Break] Part 1 Bad debts 1 719-460 Assumptions about nothing happening to affect direct and 2 indirect ownership of the test company 3 (1) This section sets out an assumption that must be made whenever 4 there is a change in the identity of the *top company for the *MEC 5 group during the *ownership test period. 6 (2) Assume that after the change nothing happens in relation to 7 *membership interests or voting power in the following entities that 8 would affect whether the test company would meet the conditions 9 in section 165-123: 10 (a) the company that was the *top company for the *MEC group 11 before the change; 12 (b) an entity (if any) that at the time of the change was 13 interposed between: 14 (i) the company that was the top company for the MEC 15 group before the change; and 16 (ii) the company that became the top company for the MEC 17 group as part of the change. 18 719-465 Assumptions about the test company failing to meet the 19 conditions in section 165-123 20 (1) Assume that the test company fails to meet the conditions in 21 section 165-123 at the time an event described in subsection (2), 22 (3) or (4) happens after the start of the *ownership test period in 23 relation to: 24 (a) the *MEC group; or 25 (b) the *potential MEC group whose membership was the same 26 as the membership of the MEC group. 27 Note: If the test company is assumed to fail to meet the conditions in 28 section 165-123, the head company of the MEC group is taken (under 29 section 719-455) to have failed to meet those conditions. 30 (2) One event is the *potential MEC group ceasing to exist. 31 (3) Another event is something happening that meets these conditions: 32 (a) the thing happens at a time in relation to *membership 33 interests in one or more of these entities: 34 (i) a company that was just before that time a *member of 35 the *MEC group and an *eligible tier-1 company of the 36 *top company for the MEC group; 12 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Bad debts Part 1 1 (ii) an entity interposed between a company described in 2 subparagraph (i) and the company that was the top 3 company for the group just before that time; 4 (b) the thing does not cause the *potential MEC group to cease to 5 exist but does cause a change in the identity of the top 6 company for the potential MEC group. 7 (4) Another event is the *MEC group ceasing to exist because there 8 ceases to be a *provisional head company of the group. 9 Other causes of failure to meet conditions in section 165-123 10 (5) To avoid doubt, this section does not limit the circumstances in 11 which the test company would have failed to meet the conditions in 12 section 165-123. 13 Division 2--Deducting debt/equity swap loss 14 Income Tax Assessment Act 1997 15 2 At the end of subsection 709-205(1) 16 Add: 17 Note: This Subdivision affects similarly whether an entity that is or has been 18 a member of a consolidated group and extinguishes a debt as part of a 19 debt/equity swap may deduct a loss resulting from the swap. See 20 section 709-220. 21 3 At the end of Subdivision 709-D 22 Add: 23 Extension of Subdivision to debt/equity swap loss 24 709-220 Limit on deduction of swap loss 25 Object 26 (1) The object of this section is to limit the circumstances in which an 27 entity can deduct a swap loss (as defined in section 63E of the 28 Income Tax Assessment Act 1936) resulting from a debt/equity 29 swap (as defined in that section) to circumstances similar to those 30 in which this Subdivision lets an entity deduct a debt it writes off 31 as bad. Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 13 [Page Break] Part 1 Bad debts 1 Modified operation of sections 709-205, 709-210 and 709-215 2 (2) Sections 709-205, 709-210 and 709-215 (except subsection 3 709-215(2)) apply in relation to the extinction (however described) 4 of a debt as part of a debt/equity swap in the same way as they 5 apply in relation to the writing off of a debt as bad. 6 (3) Subsection 709-215(1): 7 (a) applies in relation to a swap loss from a debt/equity swap in 8 the same way as it applies in relation to a debt, or part of a 9 debt; and 10 (b) applies as if paragraph 709-215(1)(a) referred to subsection 11 63E(3) of the Income Tax Assessment Act 1936 instead of 12 sections 8-1 and 25-35. 13 (4) This section has effect despite subsection 63E(5) of the Income Tax 14 Assessment Act 1936. 15 Division 3--Consequential amendments 16 Financial Corporations (Transfer of Assets and Liabilities) 17 Act 1993 18 4 Subsection 22(2) 19 Omit "and 175-C", substitute ", 175-C, 709-D and 719-I". 20 5 Paragraph 22(3)(d) 21 Omit "Subdivision 165-C or 175-C, or both,", substitute "any one or 22 more of Subdivisions 165-C, 175-C, 709-D and 719-I". 23 6 Subsection 22(3) 24 Omit "neither Subdivision 165-C nor 175-C of that Act", substitute 25 "none of those Subdivisions". 26 7 Subsection 22(3) (at the end of the note) 27 Add: 28 Subdivision 709-D of that Act is about the conditions that must be met 29 for an entity to deduct a bad debt that has for a period been owed to a 30 member of a consolidated group and has for another period been owed 31 to an entity that was not a member of that group for the period. 14 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Bad debts Part 1 1 Subdivision 719-I of that Act is about the conditions that must be met 2 for an entity to deduct a bad debt that has for a period been owed to a 3 member of a MEC group. 4 Income Tax Assessment Act 1936 5 8 Paragraph 427(b) 6 Omit "and 175-A", substitute ", 175-A, 709-D and 719-I". 7 9 Subsection 266-35(1) in Schedule 2F (note) 8 Repeal the note, substitute: 9 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 10 also affect when a trust that used to be a member of a consolidated 11 group or MEC group may deduct a debt that used to be owed to a 12 member of the group and that the trust writes off as bad. 13 10 Subsection 266-85(3) in Schedule 2F (note) 14 Repeal the note, substitute: 15 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 16 also affect when a trust that used to be a member of a consolidated 17 group or MEC group may deduct a debt that used to be owed to a 18 member of the group and that the trust writes off as bad. 19 11 Subsection 266-120(1) in Schedule 2F (note) 20 Repeal the note, substitute: 21 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 22 also affect when a trust that used to be a member of a consolidated 23 group or MEC group may deduct a debt that used to be owed to a 24 member of the group and that the trust writes off as bad. 25 12 Subsection 266-160(2) in Schedule 2F (note) 26 Repeal the note, substitute: 27 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 28 also affect when a trust that used to be a member of a consolidated 29 group or MEC group may deduct a debt that used to be owed to a 30 member of the group and that the trust writes off as bad. 31 13 Subsection 267-25(1) in Schedule 2F (note) 32 Repeal the note, substitute: 33 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 34 also affect when a trust that used to be a member of a consolidated Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 15 [Page Break] Part 1 Bad debts 1 group or MEC group may deduct a debt that used to be owed to a 2 member of the group and that the trust writes off as bad. 3 14 Subsection 267-65(1) in Schedule 2F (note) 4 Repeal the note, substitute: 5 Note: Subdivisions 709-D and 719-I of the Income Tax Assessment Act 1997 6 also affect when a trust that used to be a member of a consolidated 7 group or MEC group may deduct a debt that used to be owed to a 8 member of the group and that the trust writes off as bad. 9 15 Paragraph 271-60(5)(a) in Schedule 2F 10 After "165-C", insert ", 709-D or 719-I". 11 Income Tax Assessment Act 1997 12 16 Section 12-5 (table item headed "bad debts") 13 Omit: debt/equity swaps ............................................................. 63E, 63F deduction of a debt that used to be owed to a member of Subdivision 709-D a consolidated group by an entity that used to be a member of the group................................................... 14 substitute: debt/equity swaps ............................................................. 63E, 63F, 709-220 deduction of a debt that used to be owed to a member of Subdivisions 709-D a consolidated group or MEC group by an entity that and 719-I used to be a member of the group ................................ 15 17 Subsection 25-35(5) (table item 6) 16 Repeal the item, substitute: 6 An entity that used to be a member of a Subdivisions 709-D consolidated group or MEC group can and 719-I deduct a bad debt that used to be owed to a member of the group only if certain conditions are met 17 18 Subsection 165-120(1) (note 3) 18 Repeal the note, substitute: 19 Note 3: Subdivisions 709-D and 719-I modify how this Subdivision operates 20 in relation to a company that used to be a member of a consolidated 21 group or MEC group and that writes off as bad a debt that used to be 22 owed to a member of the group. 16 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Bad debts Part 1 1 19 Subparagraph 709-215(2)(c)(ii) 2 Repeal the subparagraph, substitute: 3 (ii) section 63G of the Income Tax Assessment Act 1936; 4 (iii) section 267-65 in Schedule 2F to that Act. 5 Income Tax (Transitional Provisions) Act 1997 6 20 At the end of Division 719 7 Add: 8 Subdivision 719-I--Bad debts 9 Table of sections 10 719-450 Application of Subdivision 719-I of the Income Tax Assessment Act 1997 11 719-450 Application of Subdivision 719-I of the Income Tax 12 Assessment Act 1997 13 Subdivision 719-I of the Income Tax Assessment Act 1997 applies 14 on and after 1 July 2002. Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 17 [Page Break] Part 2 Making and revoking certain choices 1 2 Part 2--Making and revoking certain choices 3 Income Tax (Transitional Provisions) Act 1997 4 21 Paragraph 701-5(2)(b) 5 Omit "2004", substitute "2005". 6 22 Paragraph 701-5(4)(a) 7 Omit "2004", substitute "2005". 8 23 Paragraph 707-145(a) 9 Omit "2005", substitute "2006". 10 24 Paragraph 707-325(5)(b) 11 Omit "2004", substitute "2005". 12 25 Subsection 707-325(6) 13 Omit "2004", substitute "2005". 14 26 Subparagraph 707-327(5)(a)(ii) 15 Omit "2004", substitute "2005". 16 27 Paragraph 707-327(5)(b) 17 Omit "2004", substitute "2005". 18 28 Subparagraph 707-328A(4)(a)(ii) 19 Omit "2004", substitute "2005". 20 29 Paragraph 707-328A(4)(b) 21 Omit "2004", substitute "2005". 22 30 Paragraph 707-350(5)(b) 23 Omit "2004", substitute "2005". 24 31 Subsection 707-350(6) 25 Omit "2004", substitute "2005". 18 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Making and revoking certain choices Part 2 1 32 Section 719-310 2 Omit "2005", substitute "2006". Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 19 [Page Break] Part 3 Application 1 2 Part 3--Application 3 33 Application 4 The amendments made by this Schedule apply on and after 1 July 2002. 20 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 2 Schedule 4--Thin capitalisation 3 4 Income Tax (Transitional Provisions) Act 1997 5 1 At the end of Division 820 6 Add: 7 820-45 Transitional provision--accounting standards and 8 prudential standards 9 (1) This section applies to 3 consecutive income years of an entity 10 beginning on or after 1 January 2005. 11 (2) Subject to subsection (3), the entity may choose, for any or all of 12 those income years, to use the accounting standards in force under 13 the Corporations Act 2001 immediately before 1 January 2005 14 (rather than the current accounting standards) for the purpose of 15 calculating amounts applicable to the entity under Division 820 of 16 the Income Tax Assessment Act 1997. 17 Note 1: Making the choice for an income year does not require the entity to 18 maintain a full set of accounts based on those old accounting 19 standards. 20 Note 2: The choice is only for the purposes of calculating amounts for the 21 purposes of the thin capitalisation regime. 22 (3) If the entity makes a choice under subsection (2) for an income 23 year but an associate entity of that entity does not, the entity may, 24 in working out its associate entity excess amount so far as it relates 25 to that associate entity at a time in that year, use either the 26 accounting standards in force under the Corporations Act 2001 27 immediately before 1 January 2005 or the current accounting 28 standards. 29 (4) If an ADI makes a choice under subsection (2) for an income year, 30 the ADI must also choose to use for that year the prudential 31 standards in force under the Banking Act 1959 immediately before 32 1 January 2005 (rather than the current prudential standards) for 33 the purpose of calculating amounts applicable to the ADI under 34 Division 820 of the Income Tax Assessment Act 1997. Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 21 [Page Break] 1 Note 1: Making the choice for an income year does not require the entity to 2 maintain capital adequacy calculations based on those old prudential 3 standards. 4 Note 2: The choice is only for the purposes of calculating amounts for the 5 purposes of the thin capitalisation regime. 6 (5) For an income year for which an entity does not make a choice 7 under subsection (2), the current accounting standards will be used 8 for the purpose of calculating amounts applicable to the entity 9 under Division 820 of the Income Tax Assessment Act 1997. 10 (6) For an income year for which an ADI does not make a choice 11 under subsection (2), the current prudential standards will be used 12 for the purpose of calculating amounts applicable to the ADI under 13 Division 820 of the Income Tax Assessment Act 1997. 22 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] 1 2 Schedule 5--Forestry managed investments 3 4 Income Tax Assessment Act 1936 5 1 Paragraph 82KZMG(2)(a) 6 Omit "30 June 2006", substitute "30 June 2008". Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 23 [Page Break] Part 1 Related party at call etc. loans 1 2 Schedule 6--Debt and equity interests 3 Part 1--Related party at call etc. loans 4 Income Tax Assessment Act 1997 5 1 At the end of subsection 164-10(1) 6 Add: 7 ; or (c) a *debt interest in the company changes at a particular time 8 (the change time) to an *equity interest in the company 9 because of subsection 974-110(1) or (2); or 10 (d) the following conditions are satisfied in relation to an interest 11 in the company: 12 (i) immediately before subsection 974-75(4) ceases to have 13 effect, the interest is taken to be a debt interest in the 14 company because of that subsection; 15 (ii) the interest is an equity interest in the company at the 16 time (the change time) that is immediately after that 17 cessation; 18 (iii) subsection 974-75(6) does not apply to the interest in 19 relation to the income year that includes the change 20 time; or 21 (e) the following conditions are satisfied in relation to an interest 22 in the company: 23 (i) subsection 974-75(6) applies to the interest in relation to 24 a particular income year; 25 (ii) that subsection does not apply to the interest in relation 26 to the next income year; 27 (iii) the interest is an equity interest in the company at the 28 time (the change time) that is the start of that next 29 income year. 30 2 Subsection 164-15(2) 31 Repeal the subsection, substitute: 32 (2) If paragraph 164-10(1)(c), (d) or (e) applies in relation to a 33 particular interest in the company, there is a credit to the 24 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Related party at call etc. loans Part 1 1 *non-share capital account at the change time referred to in that 2 paragraph of an amount equal to: 3 Amount received ­ Share capital ­ Amount returned account credit 4 where: 5 amount received is the market value, when it was provided, of the 6 consideration the company received for the issue of the interest. 7 amount returned is so much of the amount received as has been 8 returned to a holder of the interest before the change time. 9 share capital account credit is the amount of any credit made to 10 the company's share capital account in respect of the issue of the 11 interest. 12 3 At the end of section 164-15 13 Add: 14 (5) To avoid doubt, if: 15 (a) it appears that a credit to the company's *non-share capital 16 account has arisen under this section because an interest in 17 the company appears to be, or have become, an *equity 18 interest at a time in a particular income year; and 19 (b) because subsection 974-75(6) or 974-110(1A) is 20 subsequently found to apply in relation to the interest and 21 that income year, the interest was not in fact, or did not in 22 fact become, an equity interest at that time; 23 the credit referred to in paragraph (a) is taken never to have arisen. 24 4 Subsection 164-20(3) 25 Repeal the subsection, substitute: 26 (3) If: 27 (a) an *equity interest in the company changes at a particular 28 time (the change time) to a *debt interest in the company 29 because of subsection 974-110(1) or (2); or 30 (b) an equity interest in the company changes to a debt interest in 31 the company, with effect from a time (the change time) that 32 is the start of a particular income year, because of subsection 33 974-110(1A); or Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 25 [Page Break] Part 1 Related party at call etc. loans 1 (c) the following conditions are satisfied in relation to an interest 2 in the company: 3 (i) subsection 974-75(6) does not apply to the interest in 4 relation to a particular income year; 5 (ii) the interest is an equity interest in the company at the 6 end of that income year; 7 (iii) subsection 974-75(6) applies to the interest from the 8 time (the change time) that is the start of the next 9 income year; 10 there is, or is taken to have been, a debit to the *non-share capital 11 account at the change time equal to: 12 Credits in relation to ­ Debits in relation to the interest the interest 13 where: 14 credits in relation to the interest is the sum of all the credits that 15 have been made to the *non-share capital account in relation to the 16 interest before the change time. 17 debits in relation to the interest is the sum of all the debits that 18 have been made to the *non-share capital account in relation to the 19 interest before the change time. 20 5 At the end of section 164-20 21 Add: 22 (4) To avoid doubt, if: 23 (a) it appears that a debit to the company's *non-share capital 24 account has arisen because an interest in the company 25 appears to be, or have become, a *debt interest at a time in a 26 particular income year; and 27 (b) because subsection 974-75(6) or 974-110(1A) is 28 subsequently found not to apply in relation to the interest and 29 that income year, the interest was not in fact, or did not in 30 fact become, a debt interest at that time; 31 the debit referred to in paragraph (a) is taken never to have arisen. 32 6 Paragraph 974-75(4)(c) 33 Repeal the paragraph, substitute: 34 (c) either: 26 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Related party at call etc. loans Part 1 1 (i) the loan is repayable on demand made by the connected 2 entity, and repayment is required immediately on the 3 making of the demand, or is required at the end of a 4 particular period after the demand is made (being a 5 period that is not longer than is reasonably necessary to 6 arrange repayment); or 7 (ii) the loan is repayable on the death of the connected 8 entity (if the connected entity is an individual); and 9 7 At the end of subsection 974-75(4) 10 Add: 11 Note: If this subsection ceases to have effect in relation to an interest that is, 12 according to the other provisions of this Division, an equity interest 13 immediately after the cessation, an adjustment to the company's 14 non-share capital account will occur at that time (see subsection 15 164-15(2)). 16 8 At the end of section 974-75 17 Add: 18 Further exception for certain related party at call loans 19 (6) In applying this Division in relation to a particular *scheme and a 20 particular income year (which may be the income year in which the 21 scheme is entered into or a later income year), the scheme is taken 22 not to give rise to an equity interest in a company, and instead to 23 give rise to a debt interest in the company, if: 24 (a) the scheme takes the form of a loan to the company that 25 satisfies paragraphs (4)(a), (b) and (c); and 26 (b) the company's annual turnover (worked out at the end of the 27 income year) is less than $20,000,000. 28 Note: If this subsection does not apply in relation to the previous income 29 year or the next income year, and the scheme gives rise to an equity 30 interest according to the other provisions of this Division, an 31 adjustment to the company's non-share capital account will occur at 32 the end of the previous income year or the start of the next income 33 year (see subsections 164-15(2) and 164-20(3)). 34 (7) For the purpose of paragraph (6)(b), the question whether a 35 company's annual turnover (worked out at the end of an income 36 year) is less than $20,000,000 is to be determined in accordance 37 with subsection 188-10(2) of the *GST Act, as if that amount of Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 27 [Page Break] Part 1 Related party at call etc. loans 1 $20,000,000 were a turnover threshold for the purposes of that 2 subsection of the GST Act. 3 9 Subsection 974-110(1) (heading) 4 Repeal the heading, substitute: 5 Change to existing scheme--general rule 6 10 After paragraph 974-110(1)(c) 7 Insert: 8 and (d) subsection (1A) does not apply to the change; 9 11 After subsection 974-110(1) 10 Insert: 11 Change to existing scheme--special rule for changing a related 12 party at call etc. loan to a private company from equity to debt 13 (1A) If: 14 (a) a *scheme takes the form of a loan that satisfies paragraphs 15 974-75(4)(a), (b) and (c); and 16 (b) the scheme gives rise to an *equity interest (disregarding the 17 effect this subsection has on the characterisation of the 18 interest because of the change referred to in paragraph (c) of 19 this subsection); and 20 (c) the scheme is subsequently changed; and 21 (d) the change occurs in the period starting immediately after the 22 end of a particular income year (the year of effect) and 23 ending at the end of the earlier of the following days: 24 (i) the due date for lodgment of the company's return of 25 income for the year of effect; 26 (ii) the date of lodgment of the company's return of income 27 for the year of effect; and 28 (e) the scheme, as it exists immediately after the change, would 29 give rise to a *debt interest in the company if the interest 30 came into existence when the change occurred; and 31 (f) the company is a *private company in relation to the year of 32 effect; and 33 (g) subsection 974-75(6) does not apply in relation to the loan 34 and the year of effect; and 28 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Related party at call etc. loans Part 1 1 (h) the company elects that this subsection is to apply to the 2 change; 3 this Division applies as if the scheme, as it exists immediately after 4 the change, had come into existence at the start of the year of 5 effect, and as if no other change of a kind referred to in 6 subsection (1) had occurred in relation to the interest in the period 7 commencing at the start of the year of effect and ending when the 8 first-mentioned change was made. 9 Note 1: This will mean that: 10 (a) the characterisation of the interest will change, with effect back 11 to the start of the year of effect; and 12 (b) that characterisation will not be affected by other changes that 13 occurred after the start of the year of effect and before the change 14 to which this subsection applies. 15 Note 2: This section can apply to an interest a number of times so that, for 16 example, an interest that is an equity interest when issued may change 17 to debt because of one subsequent change and then back to equity 18 because of a later change. 19 Note 3: An adjustment to the company's non-share capital account will be 20 taken to have occurred at the start of the year of effect (see subsection 21 164-20(3)). 22 (1B) An election for the purposes of paragraph (1A)(h): 23 (a) must be in writing; and 24 (b) can only be made in the period referred to in 25 paragraph (1A)(d); and 26 (c) cannot be revoked. 27 12 Subsection 974-110(3) 28 Omit "and (2)(c)", substitute ", (1A)(e) and (2)(c)". 29 13 Application of amendments 30 (1) The amendments made by the items in this Part, other than item 6, 31 apply to: 32 (a) schemes entered into on or after 1 July 2005; and 33 (b) schemes entered into before 1 July 2005, in so far as they 34 continue to exist on and after 1 July 2005. 35 (2) The amendment made by item 6 applies in accordance with item 118 of 36 Schedule 1 to the New Business Tax System (Debt and Equity) Act Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 29 [Page Break] Part 1 Related party at call etc. loans 1 2001, as though the amendment were one of the debt and equity test 2 amendments within the meaning of item 118 of that Schedule. 30 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Technical amendments taken to have commenced on 1 July 2001 Part 2 1 2 Part 2--Technical amendments taken to have 3 commenced on 1 July 2001 4 Income Tax Assessment Act 1936 5 14 Subsection 160AOA(2) 6 Omit "paragraphs (aaa) and (da)", substitute "paragraph (aaa)". 7 15 Subsection 160APAAAB(6) 8 Omit "paragraph (c)", substitute "paragraph (d)". 9 Income Tax Assessment Act 1997 10 16 Paragraph 104-35(5)(c) 11 After "*equity interests", insert "or non-equity shares (within the 12 meaning of the Income Tax Assessment Act 1936)". 13 17 Paragraph 104-35(5)(e) 14 After "equity interests", insert ", non-equity shares (within the meaning 15 of the Income Tax Assessment Act 1936)". 16 18 Paragraph 104-155(5)(c) 17 After "*equity interests", insert "or non-equity shares (within the 18 meaning of the Income Tax Assessment Act 1936)". 19 19 Paragraph 104-155(5)(e) 20 After "equity interests", insert ", non-equity shares (within the meaning 21 of the Income Tax Assessment Act 1936)". 22 20 Section 109-10 (table item 2, column headed "In these 23 circumstances:") 24 After "*equity interests", insert "or non-equity shares (within the 25 meaning of the Income Tax Assessment Act 1936)". 26 21 Section 109-10 (table item 2, column headed "You acquire 27 the asset at this time:") 28 After "equity interests", insert "or non-equity shares". Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 31 [Page Break] Part 2 Technical amendments taken to have commenced on 1 July 2001 1 22 At the end of section 974-75 2 Add: 3 (5) If, while subsection (4) applies to a *financing arrangement, a 4 circumstance occurs that would otherwise have attracted the 5 operation of subsection 974-110(1) or (2) in relation to the 6 arrangement: 7 (a) that subsection of section 974-110 does not apply to change 8 the result that subsection (4) of this section produces in 9 relation to the arrangement; but 10 (b) for the purpose of applying this Division in relation to the 11 arrangement after subsection (4) of this section has ceased to 12 have effect, that subsection of section 974-110 is taken to 13 have produced the result that it would have produced if 14 subsection (4) of this section had not applied to the 15 arrangement. 16 23 Subsection 974-105(1) (example) 17 Omit "section 974-20", substitute "section 974-70". 18 24 Subsections 974-110(1) and (2) (note 3) 19 Omit "164-20(4)", substitute "164-20(3)". 20 25 Application of amendments made by items 14 to 24 21 The amendments made by items 14 to 24 apply in accordance with 22 item 118 of Schedule 1 to the New Business Tax System (Debt and 23 Equity) Act 2001, as though those amendments were debt and equity 24 test amendments within the meaning of item 118 of that Schedule. 25 New Business Tax System (Debt and Equity) Act 2001 26 26 Subitem 118(2) of Schedule 1 27 Omit "any election made under". 28 27 Subitem 118(9) of Schedule 1 29 Repeal the subitem, substitute: 30 (9) If paragraph (6)(a) applies to an interest: 31 (a) paragraph 164-10(1)(b) of the Income Tax Assessment Act 32 1997 applies to the interest as if the second reference in that 32 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 [Page Break] Technical amendments taken to have commenced on 1 July 2001 Part 2 1 paragraph to "1 July 2001" were instead a reference to 2 "1 July 2004"; and 3 (b) section 164-15 of the Income Tax Assessment Act 1997 4 applies to the interest as if the following references were 5 instead references to "1 July 2004": 6 (i) the first reference in subsection 164-15(3) to "1 July 7 2001"; 8 (ii) the reference in subsection 164-15(3) to "that day"; 9 (iii) the references in paragraph 164-15(3)(b) and subsection 10 164-15(4) to "1 July 2001". Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005 33 [Page Break] Part 3 Other technical amendments 1 2 Part 3--Other technical amendments 3 Income Tax Assessment Act 1997 4 28 Paragraph 104-35(5)(c) 5 Omit "non-equity shares (within the meaning of the Income Tax 6 Assessment Act 1936)", substitute "*non-equity shares". 7 29 Paragraph 104-35(5)(e) 8 Omit "(within the meaning of the Income Tax Assessment Act 1936)". 9 30 Paragraph 104-155(5)(c) 10 Omit "non-equity shares (within the meaning of the Income Tax 11 Assessment Act 1936)", substitute "*non-equity shares". 12 31 Paragraph 104-155(5)(e) 13 Omit "(within the meaning of the Income Tax Assessment Act 1936)". 14 32 Section 109-10 (table item 2, column headed "In these 15 circumstances:") 16 Omit "non-equity shares (within the meaning of the Income Tax 17 Assessment Act 1936)", substitute "*non-equity shares". 34 Tax Laws Amendment (2005 Measures No. 5) Bill 2005 No. , 2005