TAX LAWS AMENDMENT (2006 MEASURES NO. 1) BILL 2006

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 1

2004-2005-2006

The Parliament of the

Commonwealth of Australia

HOUSE OF REPRESENTATIVES

Presented and read a first time

Tax Laws Amendment (2006 Measures

No. 1) Bill 2006

No. , 2006

(Treasury)

A Bill for an Act to amend the law relating to

taxation, and for related purposes

2 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Contents

1 Short

title ...........................................................................................3

2 Commencement.................................................................................3

3 Schedule(s) ........................................................................................3

Schedule 1--Foreign source income exemptions for temporary

residents

Part 1--Main amendments

Income Tax Assessment Act 1997

Part 2--Other amendments

Fringe Benefits Tax Assessment Act 1986

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Schedule 2--Business related costs

Part 1--Capital allowances amendments

Income Tax Assessment Act 1997

Part 2--CGT amendments

Income Tax Assessment Act 1997

Income Tax (Transitional Provisions) Act 1997

Part 3--Application

Schedule 3--Promotion and implementation of schemes

Part 1--Main amendments

Taxation Administration Act 1953

Part 2--Consequential amendments

Income Tax Assessment Act 1997

Taxation Administration Act 1953

Part 3--Application

Schedule 4--Vouchers

A New Tax System (Goods and Services Tax) Act 1999

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 3

A Bill for an Act to amend the law relating to

taxation, and for related purposes

The Parliament of Australia enacts:

1 Short title

This Act may be cited as the Tax Laws Amendment (2006

Measures No. 1) Act 2006.

2 Commencement

This Act commences on the day on which it receives the Royal

Assent.

3 Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or

repealed as set out in the applicable items in the Schedule

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 5

Schedule 1--Foreign source income

exemptions for temporary residents

Part 1--Main amendments

Income Tax Assessment Act 1997

1 At the end of Division 768

Add:

Subdivision 768-R--Temporary residents

Guide to Subdivision 768-R

768-900 What this Subdivision is about

This Subdivision modifies the general tax rules for people in

Australia who are temporary residents, whether Australian

residents or foreign residents.

Generally foreign income derived by temporary residents is

non-assessable non-exempt income and capital gains and losses

they make are also disregarded for CGT purposes. There are some

exceptions for employment-related income and capital gains on

shares and rights acquired under employee share schemes.

Temporary residents are also partly relieved of record-keeping

obligations in relation to the controlled foreign company and

foreign investment fund rules.

Interest paid by temporary residents is not subject to withholding

tax and may be non-assessable non-exempt income for a foreign

resident.

Table of sections

Operative provisions

768-905 Objects

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

6 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

768-910 Income derived by temporary resident

768-915 Certain capital gains and capital losses of temporary resident to be

disregarded

768-920 Capital gains and losses on employee shares and rights where taxation of

discount not deferred

768-925 Notional gain or loss

768-930 Adjustment to notional gain or loss

768-935 Adjustment for share or right acquired under employee share scheme

768-940 Adjustment for derived share

768-945 Amending assessment to take account of effect on capital gain or loss of

recalculating discount

768-950 Individual becoming an Australian resident

768-955 Temporary resident who ceases to be temporary resident but remains an

Australian resident

768-960 Temporary resident not attributable taxpayer for purposes of controlled

foreign companies rules

768-965 Exemption of temporary resident from taxation in respect of foreign

investment fund income

768-970 Modification of rules for accruals system of taxation of certain non-resident

trust estates

768-975 Calculation of beneficiary's share of net income of non-resident trust estate

768-980 Interest paid by temporary resident

Operative provisions

768-905 Objects

The objects of this Subdivision are to:

(a)

provide

temporary residents with tax relief on most foreign

source income and capital gains; and

(b) relieve the burdens associated with complying with certain

record-keeping obligations and interest withholding tax

obligations.

768-910 Income derived by temporary resident

(1) The following are

non-assessable non-exempt income:

(a)

the

ordinary income you

derive directly or indirectly from a

source other than an

Australian source if you are a

temporary resident when you derive it;

(b)

your

statutory income (other than a

net capital gain) from a

source other than an Australian source if you are a temporary

resident when you derive it.

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 7

This subsection has effect subject to subsections (3) and (5).

Note:

A capital gain or loss you make may be disregarded under

section 768-915.

(2) For the purposes of paragraph (1)(b):

(a) if you have statutory income because a particular

circumstance occurs, you derive the statutory income at the

time when the circumstance occurs; and

(b) if you have statutory income because a number of

circumstances occur, you derive the statutory income at the

time when the last of those circumstances occurs.

Exception to subsection (1)

(3) However, the following are not

non-assessable non-exempt

income under subsection (1):

(a)

the

ordinary income you

derive directly or indirectly from a

source other than an

Australian source to the extent that it is

remuneration, for employment undertaken, or services

provided, while you are a

temporary resident;

(b)

your

statutory income (other than a

net capital gain) from a

source other than an Australian source to the extent that it

relates to employment undertaken, or services provided,

while you are a temporary resident;

Division 86;

(d) an amount that, but for subsection (1), would be included in

your assessable income under Division 13A of Part III of the

Income Tax Assessment Act 1936.

Note:

This subsection only makes an amount not non-assessable non-exempt

income under subsection (1). It does not prevent that amount from

being non-assessable non-exempt income under some other provision

of this Act or the Income Tax Assessment Act 1936.

Section 26AAC employee share schemes

(4) This subsection applies if:

(a) an amount would otherwise be included in your assessable

income under section 26AAC of the Income Tax Assessment

Act 1936 (about shares and rights acquired by employees);

and

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

8 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(b) the applicable time mentioned in subsection 26AAC(15) of

that Act for the relevant

share occurs while you are a

temporary resident.

(5) If subsection (4) applies, the amount is

non-assessable

non-exempt income to the extent to which you acquired the

relevant

share under a scheme for the acquisition of shares by

employees in respect of, or for or in relation (directly or indirectly)

to:

(a) any employment you undertook outside Australia; or

(b) any services you provided outside Australia;

prior to becoming a

temporary resident.

(6) Subsection (5) does not limit paragraph (1)(b).

768-915 Certain capital gains and capital losses of temporary

resident to be disregarded

capital gain or

capital loss you make from a

CGT event is

disregarded if:

(a) you are a

temporary resident when, or immediately before,

the CGT event happens; and

(b) you would not make a capital gain or loss from the CGT

event if you were a foreign resident when, or immediately

before, the CGT event happens.

Note:

Division 136 deals with capital gains and capital losses by foreign

residents.

768-920 Capital gains and losses on employee shares and rights

where taxation of discount not deferred

When this section applies

(1) This section applies to a

share or right if:

(a)

you

acquire the share or right under an

employee share

scheme; and

(b) you engage in employment, or render services, that affect the

holding or acquisition of the shares or rights while you are a

temporary resident; and

necessary connection

with Australia; and

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 9

(d)

either:

(i) the share or right is not a

qualifying share or

qualifying right; or

(ii) the share or right is a qualifying share or qualifying

right and you have made an election under section 139E

of the Income Tax Assessment Act 1936 covering the

share or right; and

(e)

CGT event happens in relation to the share or right; and

(f) if the CGT event is CGT event I1--you are not a temporary

resident immediately before the event happens; and

(g) you would make a

capital gain or

capital loss from the CGT

event, and the capital gain or capital loss would not be

disregarded, if you were an Australian resident (but not a

temporary resident) when the CGT event happens; and

(h) this section has not previously applied to you in relation to a

CGT event in relation to the share or right.

Note:

Paragraph (a)--section 139DQ of the Income Tax Assessment Act

1936 applies for the purposes of this Subdivision to treat a matching

share or right issued as part of a 100% takeover or restructure as a

continuation of the share or right it matches.

(2) This section also applies to a

share (the derived share) if:

(a)

you

acquire a right (the original right) under an

employee

share scheme; and

(b) you engage in employment, or render services, that affect the

holding or acquisition of the original right, or the derived

share, while you are a

temporary resident; and

and

(d) the derived share does not have the

necessary connection

with Australia; and

(e)

either:

(i) the original right is not a

qualifying right; or

(ii) the original right is a qualifying right and you have

made an election under section 139E of the Income Tax

Assessment Act 1936 covering the original right; and

(f)

CGT event happens in relation to the derived share; and

(g) if the CGT event is CGT event I1--you are not a temporary

resident immediately before the event happens; and

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

10 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(h) you would make a

capital gain or

capital loss from the CGT

event, and the capital gain or capital loss would not be

disregarded, if you were an Australian resident (but not a

temporary resident) when the CGT event happens; and

(i) this section has not previously applied to you in relation to

the original right or the derived share.

Note:

Paragraph (a)--section 139DQ of the Income Tax Assessment Act

1936 applies for the purposes of this Subdivision to treat a matching

share or right issued as part of a 100% takeover or restructure as a

continuation of the share or right it matches.

(3) To avoid doubt, paragraph (1)(e) or (2)(f) applies:

(a) even if you are not a

temporary resident when the

CGT

event happens; and

(b) whether you are an Australian resident or a foreign resident

when the CGT event happens.

Capital gain or loss

(4) If you are a

temporary resident or a foreign resident when the

CGT event happens, you make a

capital gain or

capital loss from

the CGT event.

Note:

If you are an Australian resident (but not a temporary resident) when

the CGT event occurs, neither Division 136 nor section 768-915

prevents you having a capital gain or capital loss.

(5) Subsection (4) has effect despite Division 136 and section 768-915.

Amount of capital gain or capital loss for temporary residents and

foreign residents

(6) If you are a

temporary resident or a foreign resident when the

CGT event happens, the amount of the

capital gain or

capital

loss is the amount of your adjusted notional gain or loss worked

out under subsection (9).

Amount of capital gain or capital loss for Australian residents

(7) If you are an Australian resident (but not a

temporary resident)

when the

CGT event happens, the amount of the

capital gain or

capital loss is the sum of:

(a) the amount that would be the amount of your capital gain or

capital loss if this section did not apply to you; and

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 11

(b) the amount of your adjusted notional gain or loss worked out

under subsection (9).

Example: George, a New Zealander, is granted shares (with a total market value

at the time of $100,000) under an employee share scheme on

20 January 2006. He comes to Australia as a temporary resident on

1 January 2007 and completes the rest of the employment to which the

shares relate in Australia. George elects to have the discount assessed

in that income year. He then ceases to be a temporary resident but

remains an Australian resident on 8 May 2008. At that time the shares

have a market value of $80,000. George disposes of the shares on

30 June 2009 for $115, 000. George's capital gain for the purpose of

paragraph (a) would be $35,000. Assume that the amount of the loss

that accrued up to 8 May 2008 that is to be counted for the purpose of

paragraph (b) is $9,000. For the year ending 30 June 2009, George

would, as a result of subsection (7), make a capital gain of $26,000

(being $35,000 less $9,000).

(8) If subsection (7) applies to the

CGT event, subsections 136-40(3)

and 768-955(3) do not apply for the purposes of applying

Division 115 in relation to the CGT event.

Adjusted notional gain or loss

(9) To work out your adjusted notional gain or loss:

(a) work out your notional gain or loss using section 768-925;

and

(b) adjust your notional gain or loss using sections 768-930,

768-935 and 768-940.

768-925 Notional gain or loss

(1) Your notional gain or loss is the

capital gain or

capital loss you

would have had in relation to the

CGT event if, for the whole of

the period set by subsections (2) and (3), you:

(a) had been an Australian resident; and

(b) had not been a

temporary resident.

(2) The period starts:

(a) in the case of section 768-920 applying to the

share or right

in relation to which the

CGT event happens because of

subsection 768-920(1):

(i) if the share or right was acquired from an

employee

share trust--when you first acquired a beneficial

interest in the share or right; or

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

12 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(ii) if subparagraph (i) does not apply--when you

acquired

that share or right; and

(b) in the case of section 768-920 applying to the

share in

relation to which the

CGT event happens because of

subsection 768-920(2):

(i) if the share was acquired from an

employee share

trust--when you first acquired a beneficial interest in

the original right; or

(ii) if subparagraph (i) does not apply--when you

acquired

the original right.

(3) The period ends when the

CGT event happens.

(4) If you are an Australian resident (but not a

temporary resident)

when the

CGT event happens, your notional gain or loss is

reduced by the amount of the

capital gain or

capital loss that you

would have made in relation to the

CGT event if section 768-920

did not apply to you.

768-930 Adjustment to notional gain or loss

(1) If section 768-920 applies to the

share or right in relation to which

the

CGT event happens because of subsection 768-920(1), adjust

your notional gain or loss by:

(a) firstly, applying the factor worked out under subsection

768-935(1), (2) or (3) to the amount of your notional gain or

loss; and

(b) secondly, applying the factor worked out under subsection

768-935(4) to the amount worked out under paragraph (a).

(2) If section 768-920 applies to the

share in relation to which the

CGT event happens because of subsection 768-920(2), adjust your

notional gain or loss by:

(a) firstly, applying the factor worked out under subsection

768-940(1), (2) or (3) to the amount of your notional gain or

loss; and

(b) secondly, applying the factor worked out under subsection

768-940(4) to the amount worked out under paragraph (a).

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 13

768-935 Adjustment for share or right acquired under employee

share scheme

(1)

If:

(a)

the

CGT event happens on or after the

cessation time for

the share or right; and

(b) when, or immediately before, the CGT event happens you are

either:

(i) a foreign resident; or

(ii) an Australian resident who is a temporary resident;

the factor to be applied for the purposes of paragraph

768-930(1)(a) is:

Days before cessation time

Days before CGT event

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you

acquired the

share or right

or, if you acquired the share or right from an

employee share

trust, on the day on which you first acquired a beneficial

interest in the share or right; and

(b) ends on the

cessation time for the share or right.

days before CGT event is the number of days in the period that:

(a) starts on the day on which you

acquired the

share or right

or, if you acquired the share or right from an

employee share

trust, on the day on which you first acquired a beneficial

interest in the share or right; and

(b) ends on the day on which the

CGT event happens.

(2)

If:

(a)

the

CGT event happens on or after the

cessation time for

the share or right; and

(b) when, or immediately before, the CGT event happens you are

an Australian resident (but not a

temporary resident);

the factor to be applied for the purposes of paragraph

768-930(1)(a) is:

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

14 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Days before cessation time

Days before ceasing to be a temporary resident

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you

acquired the

share or right

or, if you acquired the share or right from an

employee share

trust, on the day on which you first acquired a beneficial

interest in the share or right; and

(b) ends on the

cessation time for the share or right.

days before ceasing to be a temporary resident is the number of

days in the period that:

(a) starts on the day on which you

acquired the

share or right

or, if you acquired the share or right from an

employee share

trust, on the day on which you first acquired a beneficial

interest in the share or right; and

(b) ends on the day on which you cease to be a

temporary

resident.

(3) The factor to be applied for the purposes of paragraph

768-930(1)(a) is 1 if:

(a) the CGT event happens before the

cessation time for the

share or right; or

(b) you became an Australian resident who was not a

temporary

resident before the cessation time for the share or right.

(4) The factor to be applied for the purposes of paragraph

768-930(1)(b) is:

Assessable part of discount

Discount

where:

assessable part of discount is the amount of the discount that:

(a) was included in your assessable income under Division 13A

of Part III of the Income Tax Assessment Act 1936 in relation

to the

share or right; or

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 15

(b) would have been included in your assessable income under

that Division in relation to the share or right if subsection

139BA(2) of that Act were disregarded.

discount is the amount of the discount.

768-940 Adjustment for derived share

(1)

If:

(a)

the

CGT event happens on or after the

cessation time for

the original right; and

(b) when, or immediately before, the CGT event happens you are

either:

(i) a foreign resident; or

(ii) an Australian resident who is a

temporary resident;

the factor to be applied for the purposes of paragraph

768-930(2)(a) is:

Days before cessation time

Days before CGT event

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you

acquired the original right or,

if you acquired the

share from an

employee share trust, on

the day on which you first acquired a beneficial interest in

the original right; and

(b) ends on the

cessation time for the original right.

days before CGT event is the number of days in the period that:

(a) starts on the day on which you

acquired the original right or,

if you acquired the

share from an

employee share trust, on

the day on which you first acquired a beneficial interest in

the original right; and

(b) ends on the day on which the

CGT event happens.

(2)

If:

(a)

the

CGT event happens on or after the

cessation time for

the original right; and

(b) when, or immediately before, the CGT event happens you are

an Australian resident (but not a

temporary resident);

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

16 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

the factor to be applied for the purposes of paragraph

768-930(2)(a) is:

Days before cessation time

Days before ceasing to be a temporary resident

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you

acquired the original right or,

if you acquired the

share from an

employee share trust, on

the day on which you first acquired a beneficial interest in

the original right; and

(b) ends on the

cessation time for the original right.

days before ceasing to be a temporary resident is the number of

days in the period that:

(a) starts on the day on which you

acquired the original right or,

if you acquired the

share from an

employee share trust, on

the day on which you first acquired a beneficial interest in

the original right; and

(b) ends on the day on which you cease to be a

temporary

resident.

(3) The factor to be applied for the purposes of paragraph

768-930(2)(a) is 1 if:

(a)

the

CGT event happens before the

cessation time for the

original right; or

(b) you became an Australian resident who was not a

temporary

resident before the cessation time for the original right.

(4) The factor to be applied for the purposes of paragraph

768-930(2)(b) is:

Assessable part of discount

Discount

where:

assessable part of discount is the amount of the discount that:

(a) was included in your assessable income under Division 13A

of Part III of the Income Tax Assessment Act 1936 in relation

to the original right; or

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 17

(b) would have been included in your assessable income under

that Division in relation to the original right if subsection

139BA(2) of that Act were disregarded.

discount is the amount of the discount.

768-945 Amending assessment to take account of effect on capital

gain or loss of recalculating discount

(1) This section applies if:

(a) an amount is included in your assessable income, or you have

a net capital loss, for a particular income year; and

(b) that amount is reduced, or increased, because of a change in

the extent (if any) to which any of the following provisions

of the Income Tax Assessment Act 1936 apply in relation to

the amount during a subsequent income year:

(i)

section

23AF;

(ii)

section

23AG;

(iii)

subsection

139B(1A).

(2)

paragraph

(1)(b):

(a) the reference to an amount being reduced includes a

reference to the amount being reduced to a nil amount; and

(b) the reference to an amount being increased includes a

reference to the amount being increased from a nil amount.

(3) Section 170 of the Income Tax Assessment Act 1936 does not

prevent the amendment of an assessment to take account of the

effect that the reduction or increase has on the determination of the

amount of a

capital gain or

capital loss under subsection

768-920(6) or (7).

(4) If section 768-920 applies to the

share or right in relation to which

the

CGT event occurs because of subsection 768-920(1), the

amendment must be made before the end of the period of 4 years

starting immediately after the income year during which the period

of employment or service relating to the

acquisition of the share or

right ends.

(5) If section 768-920 applies to the

share or right in relation to which

the

CGT event occurs because of subsection 768-920(2), the

amendment must be made before the end of the period of 4 years

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

18 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

starting immediately after the income year during which the period

of employment or service relating to the

acquisition of the original

right ends.

768-950 Individual becoming an Australian resident

Section 136-40 does not apply to your becoming an Australian

resident if you are a

temporary resident immediately after you

become an Australian resident.

768-955 Temporary resident who ceases to be temporary resident

but remains an Australian resident

(1) If you are a

temporary resident and you then cease to be a

temporary resident (but remain, at that time, an Australian

resident), there are rules relevant to each

CGT asset that:

(a) you owned just before you ceased to be a temporary resident;

and

(b) does not have the

necessary connection with Australia; and

(c)

you

acquired on or after 20 September 1985.

(2) The first element of the

cost base and

reduced cost base of the

asset (at the time you cease to be a

temporary resident) is its

market value at that time. This subsection has effect despite

Subdivision 130-D.

(3) Also, Parts 3-1 and 3-3 apply to the asset as if you had

acquired it

at the time you ceased to be a

temporary resident.

(4) This section does not apply to a

share or right if:

(a) it is a

qualifying share or a

qualifying right; and

(b) you have not made an election under section 139E of the

Income Tax Assessment Act 1936 covering the share or right;

and

(c)

the

cessation time for the share or right has not occurred.

768-960 Temporary resident not attributable taxpayer for purposes

of controlled foreign companies rules

For the purposes of Part X of the Income Tax Assessment Act 1936

(which deals with the attribution of income in respect of controlled

foreign companies), you are taken not to be an

attributable

Foreign source income exemptions for temporary residents Schedule 1

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 19

taxpayer in relation to a

CFC or

CFT at any time you are a

temporary resident.

768-965 Exemption of temporary resident from taxation in respect

of foreign investment fund income

If you are a

temporary resident at the end of an income year,

section 529 and Division 22 of Part XI of the Income Tax

Assessment Act 1936 do not apply to you in relation to a

FIF or

FLP in respect of the notional accounting period of the FIF or FLP

that ends in that income year.

768-970 Modification of rules for accruals system of taxation of

certain non-resident trust estates

At any time when you are a

temporary resident, you are taken not

to be a resident for the purposes of section 102AAZD of the

Income Tax Assessment Act 1936.

768-975 Calculation of beneficiary's share of net income of

non-resident trust estate

At any time when you are a

temporary resident, you are taken not

to be a resident for the purposes of subsection 96C(6) of the

Income Tax Assessment Act 1936.

768-980 Interest paid by temporary resident

Interest that is paid by a

temporary resident:

(a) is an amount to which section 128B (liability to withholding

tax) of the Income Tax Assessment Act 1936 does not apply;

and

(b)

non-assessable non-exempt income if the interest is:

(i)

derived by a foreign resident; and

(ii) is not derived from carrying on

business in Australia at

or through a

permanent establishment in Australia.

2 Subsection 995-1(1)

Insert:

temporary resident: you are a temporary resident if:

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

20 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(a) you hold a temporary visa granted under the Migration Act

1958; and

(b) you are not an Australian resident within the meaning of the

Social Security Act 1991; and

(c)

your

spouse is not an Australian resident within the meaning

of the Social Security Act 1991.

However, you are not a temporary resident if you have been an

Australian resident (within the meaning of this Act), and any of

paragraphs (a), (b) and (c) are not satisfied, at any time after the

commencement of this definition.

Note:

The tests in paragraphs (b) and (c) are applied to ensure that holders of

temporary visas who nonetheless have a significant connection with

Australia are not treated as temporary residents for the purposes of

this Act.

Foreign source income exemptions for temporary residents Schedule 1

Other amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 21

Part 2--Other amendments

Fringe Benefits Tax Assessment Act 1986

3 Subsection 136(1) (sub-subparagraph (j)(ii)(B) of the

definition of fringe benefit)

Omit "an exempt visitor to Australia for the purposes of section 517 of

that Act in relation to the year of income in which", substitute "a

temporary resident (within the meaning of the Income Tax Assessment

Act 1997) when".

Income Tax Assessment Act 1936

4 At the end of subsection 96C(6)

Add:

Note:

A temporary resident is taken not to be a resident for the purposes of

this subsection: see section 768-975 of the Income Tax Assessment Act

1997.

5 At the end of subsection 128B(2)

Add:

Note:

An amount of interest paid to a person by a temporary resident is an

amount to which this section does not apply: see section 768-980 of

the Income Tax Assessment Act 1997.

6 At the end of subsection 128B(2A)

Add:

Note:

An amount of interest paid to a person by a temporary resident is an

amount to which this section does not apply: see section 768-980 of

the Income Tax Assessment Act 1997.

7 At the end of section 128D

Add:

Note:

An amount of interest paid to a person by a temporary resident is

non-assessable non-exempt income: see section 768-980 of the

Income Tax Assessment Act 1997.

8 Subsection 139DQ(1)

Schedule 1 Foreign source income exemptions for temporary residents

Part 2 Other amendments

22 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

After "this Division", insert "and Subdivision 768-R of the Income Tax

Assessment Act 1997".

9 Subsection 139DQ(2)

After "this Division", insert "and Subdivision 768-R of the Income Tax

Assessment Act 1997".

10 Subsection 139DQ(3)

After "this Division", insert "and Subdivision 768-R of the Income Tax

Assessment Act 1997".

11 Paragraphs 139GB(3)(a) and (b)

Repeal the paragraphs, substitute:

(a) is a temporary resident within the meaning of the Income Tax

Assessment Act 1997; or

(b) is not a resident; or

12 Paragraph 274(1)(aa)

Omit "an exempt visitor to Australia for the purposes of section 517 in

relation to", substitute "a temporary resident within the meaning of the

Income Tax Assessment Act 1997 at the end of".

13 At the end of section 361

Add:

(3) Subsections (1) and (2) have effect subject to section 768-960 of

the Income Tax Assessment Act 1997.

14 Subsection 469(5)

Repeal the subsection, substitute:

(5) The operative provision does not apply, or its application is

affected, in certain circumstances which are set out in:

(a) Divisions 2 to 15 of this Part; and

(b) section 768-965 of the Income Tax Assessment Act 1997.

15 Division 10 of Part XI

Repeal the Division.

Foreign source income exemptions for temporary residents Schedule 1

Other amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 23

Income Tax Assessment Act 1997

16 Section 11-55 (table item headed "foreign aspects of

income taxation")

Before:

withholding tax, dividend royalty or interest subject to............. 128D

insert:

income derived by temporary residents...................................... 768-910

interest paid by temporary residents........................................... 768-980

17 Section 11-55 (after table item headed "tax loss transfers")

Insert:

temporary residents

see foreign aspects of income taxation

18 Subsection 104-160(6) (note 1)

Omit "section 104-165", substitute "section 104-166".

19 Subsection 104-160(6) (after note 1)

Insert:

Note 1A: An individual may disregard the gain or loss if he or she was a

temporary resident immediately before he or she stopped being an

Australian resident: see section 768-915.

20 Subsection 104-165(1)

Repeal the subsection.

Note:

The heading to section 104-165 is replaced by the heading "Exception for

individuals".

21 After section104-165

Insert:

104-166 Subsection 104-165(1) still applies if you continue to be a

short term Australian resident

Subsection 104-165(1) continues to apply, despite its repeal by

item 20 of Schedule 1 to the Tax Laws Amendment (2006

Measures No. 1) Act 2006, to an individual:

Schedule 1 Foreign source income exemptions for temporary residents

Part 2 Other amendments

24 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(a) who is in Australia on the day on which that item receives the

Royal Assent; and

(b) who remains an Australian resident from that day until the

time subsection 104-165(1) is applied in respect of him or

her.

22 Section 109-55 (table item 15)

After "become an Australian resident", insert "(but not a temporary

resident)".

23 Section 109-55 (after table item 15)

Insert:

15A

You are a temporary resident,

you then cease to be a

temporary resident (but

remain, at that time, an

Australian resident) and you

owned a CGT asset that you

acquired on or after

20 September 1985 and that

did not have the necessary

connection with Australia

when you cease to be

a temporary resident

section 768-955

24 Section 112-87 (table item 1)

After "becomes an Australian resident", insert "(but not a temporary

resident)".

25 Section 112-87 (after table item 1)

Insert:

A temporary resident ceases

to be a temporary resident

(but remains, at that time, an

Australian resident)

First element of cost

base and reduced cost

base

768-955

26 After paragraph 130-80(4)(a)

Insert:

(aa) you are not a

temporary resident immediately after you

become an Australian resident; and

27 Subsection 130-80(4) (note)

Foreign source income exemptions for temporary residents Schedule 1

Other amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 25

Omit "Note", substitute "Note 1".

28 Subsection 130-80(4) (note)

Omit "Section 136-40 deals", substitute "Sections 136-40 and 768-955

deal".

29 At the end of subsection 130-80(4)

Add:

Note 2:

Paragraph (aa)--see also section 768-920.

30 After paragraph 130-83(4)(a)

Insert:

(aa) you are not a

temporary resident immediately after you

become an Australian resident; and

31 Subsection 130-83(4) (note)

Omit "Note", substitute "Note 1".

32 Subsection 130-83(4) (note)

Omit "Section 136-40 deals", substitute "Sections 136-40 and 768-955

deal".

33 After paragraph 130-85(4)(a)

Insert:

(aa) you are not a

temporary resident immediately after you

become an Australian resident; and

34 Subsection 130-85(4) (note)

Omit "Note", substitute "Note 1".

35 Subsection 130-85(4) (note)

Omit "Section 136-40 deals", substitute "Sections 136-40 and 768-955

deal".

36 At the end of subsection 130-85(4)

Add:

Note 2:

Paragraph (aa)--see also section 768-920.

37 At the end of subsection 136-40(1)

Schedule 1 Foreign source income exemptions for temporary residents

Part 2 Other amendments

26 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Add:

Note:

This section has effect subject to section 768-950 (individuals who

become Australian residents and are temporary residents immediately

after they become Australian residents).

38 Subsection 995-1(1)

Insert:

FLP has the same meaning as in Part XI of the Income Tax

Assessment Act 1936.

39 Subsection 995-1(1) (definition of notional accounting

period)

Omit "section 486", substitute "section 470".

40 Application

(1)

Sections 768-910, 768-945, 768-960, 768-965, 768-970 and 768-975 of

the Income Tax Assessment Act 1997 apply for an income year that

begins on or after the start-up day.

(2)

Sections 768-915, 768-920, 768-925, 768-930, 768-935 and 768-940 of

the Income Tax Assessment Act 1997 and items 20 and 21 of this

Schedule apply if the relevant CGT event happens on or after the

start-up day.

(3)

For the purposes of sections 768-920, 768-925, 768-930, 768-935,

768-940 and 768-945 of the Income Tax Assessment Act 1997, items 8,

9 and 10 of this Schedule apply if:

(a) the relevant CGT event happens on or after the start-up day;

and

(b) the relevant matching shares or rights were acquired on or

after 1 July 2004.

(4)

Section 768-950 of the Income Tax Assessment Act 1997 and items 26,

30 and 33 of this Schedule apply to an individual becoming an

Australian resident on or after the start-up day.

(5)

Section 768-955 of the Income Tax Assessment Act 1997 applies to an

individual ceasing to be a temporary resident (but remaining an

Australian resident) on or after the start-up day.

Foreign source income exemptions for temporary residents Schedule 1

Other amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 27

(6)

For the purposes of section 768-955 of the Income Tax Assessment Act

1997, items 8, 9 and 10 of this Schedule apply if:

(a) the individual ceases to be a temporary resident (but remains

an Australian resident) on or after the start-up day; and

(b) the relevant CGT asset is a matching share or right that was

acquired on or after 1 July 2004.

(7)

Section 768-980 of the Income Tax Assessment Act 1997 applies to a

payment of interest made on or after the day on which this Act receives

the Royal Assent.

(8)

The amendments made by items 13, 14 and 15 of this Schedule apply

for an income year that begins on or after the start-up day.

(9)

In this item:

start-up day means the 1 July next following the day on which this Act

receives the Royal Assent.

Schedule 2 Business related costs

Part 1 Capital allowances amendments

28 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Schedule 2--Business related costs

Part 1--Capital allowances amendments

Income Tax Assessment Act 1997

1 Subsection 12-5(2) (before table item headed "leases")

Insert:

lease, authority, licence, permit or quota

expenditure to terminate...................................................... 25-110

2 At the end of Division 25

Add:

25-110 Capital expenditure to terminate lease etc.

(1) You can deduct an amount for capital expenditure you incur to

terminate a lease or licence (including an authority, permit or

quota) that results in the termination of the lease or licence if the

expenditure is incurred:

(a) in the course of

carrying on a

business; or

(b) in connection with ceasing to carry on a business.

(2) The amount you can deduct is 20% of the expenditure:

(a) for the income year in which the lease or licence is

terminated; and

(b) for each of the next 4 income years.

Exceptions

(3) You cannot deduct any amount for expenditure you incur to

terminate a lease that, in accordance with

accounting standards, or

statements of accounting concepts made by the Australian

Accounting Standards Board, is classified as a finance lease.

(4) If you incurred the expenditure under an

arrangement and:

(a) there is at least one other party to the arrangement with

whom you did not deal at

arm's length; and

Business related costs Schedule 2

Capital allowances amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 29

(b) apart from this subsection, the amount of the expenditure

would be more than the

market value of what it was for

(assuming the termination did not occur and was never

proposed to occur);

the amount of expenditure you take into account is that market

value.

(5) You cannot deduct any amount for expenditure you incur to

terminate a lease or licence if:

(a) after the termination, you or an

associate of yours enters into

another lease or licence with the same party or an associate of

that party; and

(b) the other lease or licence is of the same kind as the original

one.

(6) You cannot deduct any amount for expenditure you incur to

terminate a lease or licence to the extent that the expenditure is for

the granting or receipt of another lease or licence in relation to the

asset that was the subject of the original lease or licence.

3 Section 35-5

Repeal the section, substitute:

35-5 Object

(1) The object of this Division is to improve the integrity of the

taxation system by:

(a) preventing losses from non-commercial activities that are

carried on as

businesses by individuals (alone or in

partnership) being offset against other assessable income;

and

(b) preventing pre-business capital expenditure and

post-business capital expenditure by individuals (alone or in

partnership) in relation to non-commercial activities being

deductible under section 40-880 (business related costs);

unless certain exceptions apply.

(2) This Division is not intended to apply to activities that do not

constitute

carrying on a

business (for example, the receipt of

income from passive investments).

4 Subsection 35-10(2) (heading)

Schedule 2 Business related costs

Part 1 Capital allowances amendments

30 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Repeal the heading, substitute:

Rules

5 After subsection 35-10(2)

Insert:

(2A) You cannot deduct an amount under section 40-880 (business

related costs) for expenditure in relation to a

business activity you

used to

carry on if you are an individual, either alone or in

partnership (whether or not some other entity is a member of the

partnership) unless:

(a) one of the tests set out in section 35-30 (assessable income

test), 35-35 (profits test), 35-40 (real property test) or 35-45

(other assets test) was satisfied for the business activity; or

(b) the Commissioner has exercised the discretion set out in

section 35-55 for the business activity; or

for the income year in which the business activity ceased to be

carried on or an earlier income year.

(2B) If you are an individual, either alone or in partnership (whether or

not some other entity is a member of the partnership), you cannot

deduct an amount under section 40-880 (business related costs) for

expenditure in relation to a

business activity:

(a)

you

propose

carry on; or

(b) another entity proposes to carry on if the other entity is not an

individual, either alone or in partnership;

for an income year before the one in which the business activity

starts to be carried on.

(2C) This section applies to an amount that you could have deducted,

apart from paragraph (2B)(a), as if it were an amount attributable

to the

business activity that you can deduct from assessable

income from the activity for the income year in which the business

activity starts to be

carried on.

(2D) You can deduct expenditure covered by paragraph (2B)(b) for the

income year in which the

business activity starts to be

carried on.

6 Subsection 35-10(4)

Business related costs Schedule 2

Capital allowances amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 31

After "subsection (2)", insert ", (2A) or (2B)".

7 Subsection 35-15(1)

Omit "section 35-10", substitute "subsection 35-10(2)".

8 Subsection 35-20(1)

Omit "section 35-10", substitute "subsection 35-10(2) or (2A)".

9 Section 35-30

Omit "rule in section 35-10 does not apply", substitute "rules in

section 35-10 do not apply".

10 Subsection 35-35(1)

Omit "rule in section 35-10 does not apply", substitute "rules in

section 35-10 do not apply".

11 Subsection 35-35(1)

Omit "subsection 35-10(2)", substitute "subsections 35-10(2) and

(2C)".

12 Subsection 35-35(2)

Omit "rule in section 35-10 does not apply", substitute "rules in

section 35-10 do not apply".

13 Subsection 35-35(2)

Omit "subsection 35-10(2)", substitute "subsections 35-10(2) and

(2C)".

14 Subsection 35-40(1)

Omit "rule in section 35-10 does not apply", substitute "rules in

section 35-10 do not apply".

15 Subsection 35-45(1)

Omit "rule in section 35-10 does not apply", substitute "rules in

section 35-10 do not apply".

16 Subsection 35-55(1)

Omit "section 35-10", substitute "subsection 35-10(2)".

Schedule 2 Business related costs

Part 1 Capital allowances amendments

32 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

17 Subparagraph 35-55(1)(b)(ii)

Omit "subsection 35-10(2)", substitute "subsections 35-10(2) and

(2C)".

18 At the end of section 35-55 (after the note)

Add:

(2) The Commissioner may decide that the rule in subsection

35-10(2B) does not apply to a

business activity for an income year

if the Commissioner is satisfied that it would be unreasonable to

apply that rule because special circumstances of the kind referred

to in paragraph (1)(a) of this section prevented the activity from

starting.

Note:

This subsection is intended to provide for a case where a business

activity would have begun to be carried on and satisfied one of the

tests if it were not for the special circumstances.

19 Section 40-10 (table item 2.3)

After "5 years", insert "where the amounts are not otherwise taken into

account and are not denied a deduction".

20 At the end of section 40-180

Add:

(3) The first element of

cost includes an amount you paid or are taken

to have paid in relation to starting to

hold the

depreciating asset if

that amount is directly connected with holding the asset.

(4) The first element of

cost of a

depreciating asset does not include

an amount that forms part of the second element of cost of another

depreciating asset.

21 Paragraph 40-185(1)(b)

Omit "for holding the asset or receiving the benefit", substitute "in

relation to holding the asset or receiving the benefit".

22 Subsection 40-185(1) (example)

Omit "Example", substitute "Example 1".

23 Subsection 40-185(1) (after example 1)

Insert:

Business related costs Schedule 2

Capital allowances amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 33

Example 2: Laura travels overseas to purchase a purpose-built vehicle for use in

her trade. The purchase of the vehicle is the sole reason for the trip.

Laura incurs expenses for airfares and accommodation. These

expenses are included in the cost of the vehicle because they are "in

relation to starting to hold" the vehicle.

24 Subsection 40-190(2)

Repeal the subsection (not including the example or the note),

substitute:

(2) The second element is:

(a) the amount you are taken to have paid under section 40-185

for each economic benefit that has contributed to bringing the

asset to its present condition and location from time to time

since you started to

hold the asset; and

(b) expenditure you incur that is reasonably attributable to a

balancing adjustment event occurring for the asset.

25 Subsection 40-190(2) (example)

Omit "Example", substitute "Example 1".

26 Subsection 40-190(2) (before the note)

Insert:

Example 2: Leonie needed to replace one of her old depreciating assets that was

fixed to her land with a new, more efficient one. Leonie paid a

contractor a fee to demolish and remove the old asset. This resulted in

a balancing adjustment event occurring for the old asset, and the fee

forms part of the second element of the cost of the old asset that was

demolished.

27 Before subsection 40-190(3)

Insert:

(2A) Paragraph (2)(b) does not apply to a

balancing adjustment event

referred to in item 6 or 11 of the table in subsection 40-300(2).

28 Section 40-315

Repeal the section.

29 Section 40-825

After "5 years", insert "if the amounts are not otherwise taken into

account and are not denied a deduction".

Schedule 2 Business related costs

Part 1 Capital allowances amendments

34 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

30 Section 40-880

Repeal the section, substitute:

40-880 Business related costs

Object

(1) The object of this section is to make certain

business capital

expenditure deductible over 5 years if:

(a) the expenditure is not otherwise taken into account; and

(b) a deduction is not denied by some other provision; and

carried on for a

taxable purpose.

Deduction

(2) You can deduct, in equal proportions over a period of 5 income

years starting in the year in which you incur it, capital expenditure

you incur:

(a) in relation to your

business; or

(b) in relation to a business that used to be

carried on; or

(d) to liquidate or deregister a company of which you were a

member, to wind up a partnership of which you were a

partner or to wind up a trust of which you were a beneficiary,

that carried on a business.

Limitations and exceptions

(3) You can only deduct the expenditure, for a

business that you

carry on, used to carry on or propose to carry on, to the extent that

the business is carried on, was carried on or is proposed to be

carried on for a

taxable purpose.

(4) You can only deduct the expenditure, for a

business that another

entity used to

carry on or proposes to carry on, to the extent that:

(a) the business was carried on or is proposed to be carried on

for a

taxable purpose; and

(b) the expenditure is in connection with:

(i) your deriving assessable income from the business; and

Business related costs Schedule 2

Capital allowances amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 35

(ii) the business that was carried on or is proposed to be

carried on.

(5) You cannot deduct anything under this section for an amount of

expenditure you incur to the extent that:

(a) it forms part of the

cost of a

depreciating asset that you

hold, used to hold or will hold; or

(b) you can deduct an amount for it under a provision of this Act

other than this section; or

(d) it is in relation to a lease or other legal or equitable right; or

(e) it would, apart from this section, be taken into account in

working out:

(i) a profit that is included in your assessable income (for

example, under section 6-5 or 15-15); or

(ii) a loss that you can deduct (for example, under

section 8-1 or 25-40); or

(f) it could, apart from this section, be taken into account in

working out the amount of a

capital gain or

capital loss

from a

CGT event; or

(g) a provision of this Act other than this section would

expressly make the expenditure non-deductible if it were not

of a capital nature; or

(h) a provision of this Act other than this section expressly

prevents the expenditure being taken into account as

described in paragraphs (a) to (f) for a reason other than the

expenditure being of a capital nature; or

(i) it is expenditure of a private or domestic nature; or

(j) it is incurred in relation to gaining or producing

exempt

income or

non-assessable non-exempt income.

(6) The exceptions in paragraphs (5)(d) and (f) do not apply to

expenditure you incur to preserve (but not enhance) the value of

goodwill if the expenditure you incur is in relation to a legal or

equitable right and the value to you of the right is solely

attributable to the effect that the right has on goodwill.

(7) You cannot deduct an amount under paragraph (2)(c) in relation to

business proposed to be

carried on unless, having regard to any

relevant circumstances, it is reasonable to conclude that the

business is proposed to be carried on within a reasonable time.

Schedule 2 Business related costs

Part 1 Capital allowances amendments

36 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(8) You cannot deduct anything under this section for an amount of

expenditure that, because of a market value substitution rule, was

excluded from the

cost of a

depreciating asset or the

cost base or

reduced cost base of a

CGT asset.

Note:

Some examples of market value substitution rules are subsection

40-180(2) (table item 8), subsection 40-190(3) (table item 1) and

sections 40-765 and 112-20.

(9) You cannot deduct anything under this section for an amount of

expenditure you incur:

(a) by way of returning an amount you have received (except to

the extent that the amount was included in your assessable

income or taken into account in working out an amount so

included); or

(b) to the extent that, for another entity, the amount is a

return

on or of:

(i)

equity interest; or

(ii)

debt interest that is an obligation of yours.

Business related costs Schedule 2

CGT amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 37

Part 2--CGT amendments

Income Tax Assessment Act 1997

31 Section 108-17

Omit "non-capital costs of ownership", substitute "costs of ownership".

32 Section 108-30

Omit "non-capital costs of ownership", substitute "costs of ownership".

33 Subsection 110-25(1)

Omit ", subject to subsections (7), (8) and (9)".

34 Subsection 110-25(3)

Repeal the subsection (not including the note), substitute:

(3) The second element is the

incidental costs you incurred. These

costs can include giving property: see section 103-5.

35 Subsection 110-25(4)

Omit "non-capital costs of ownership of", substitute "costs of owning".

36 Subsection 110-25(5)

Repeal the subsection (including the note), substitute:

(5) The fourth element is capital expenditure you incurred:

(a) the purpose or the expected effect of which is to increase or

preserve the asset's value; or

(b) that relates to installing or moving the asset.

The expenditure can include giving property: see section 103-5.

Note:

There are 3 situations involving leases in which this element is

modified: see section 112-80.

(5A) Subsection (5) does not apply to capital expenditure incurred in

relation to goodwill.

37 Subsections 110-25(7), (8), (9), (10) and (11)

Repeal the subsections.

Schedule 2 Business related costs

Part 2 CGT amendments

38 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

38 Subsection 110-25(12) (note 1)

Omit "subsection (5) of this section or".

39 Subsection 110-35(1)

Repeal the subsection, substitute:

(1) There are a number of incidental costs you may have incurred.

Except for the ninth, they are costs you may have incurred:

(a)

acquire a

CGT asset; or

(b) that relate to a

CGT event.

40 Paragraphs 110-35(5)(a) and (b)

After "advertising", insert "or marketing".

41 At the end of section 110-35

Add:

(7)

The

sixth is search fees relating to a

CGT asset.

(8)

The

seventh is the cost of a conveyancing kit (or a similar cost).

(9)

The

eighth is borrowing expenses (such as loan application fees

and mortgage discharge fees).

(10)

The

ninth is expenditure that:

(a) is incurred by the

head company of a

consolidated group to

an entity that is not a

member of the group; and

(b) reasonably relates to a

CGT asset

held by the head

company; and

of the group.

Example: Land is transferred by one company to another company. The

companies are members of a consolidated group. Stamp duty is

payable as a result of the transaction.

The transaction has no taxation consequences because of its

intra-group nature.

The stamp duty is included in the cost base and reduced cost base of

the land.

Note:

Intra-group assets are not held by the head company because of the

operation of subsection 701-1(1) (the single entity rule). An example

of an intra-group asset is a debt owed by a member of the consolidated

group to another member of the group.

Business related costs Schedule 2

CGT amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 39

42 After section 110-35

Insert:

110-36 Indexation

(1)

The

cost base of a

CGT asset

acquired at or before 11.45 am (by

legal time in the Australian Capital Territory) on 21 September

1999 also includes indexation of the elements of the cost base

(except the third element) if the requirements of Division 114 are

met.

(2) However, for the purposes of working out the

capital gain of an

entity mentioned in an item of the table from a

CGT event

happening after 11.45 am (by legal time in the Australian Capital

Territory) on 21 September 1999, the cost base includes indexation

only if the entity mentioned in the item chooses that the cost base

includes indexation.

Choice of indexation

Item

For the purposes of working out

the capital gain of this entity:

The cost base includes indexation

only if this entity chooses so:

An individual

The individual

complying superannuation entity

The trustee of the complying

superannuation entity

A trust

The trustee of the trust

A listed investment company

The company

Note 1:

Section 103-25 specifies when you must make the choice and provides

that the way you prepare your income tax return is evidence of your

choice.

Note 2:

For each CGT asset whose cost base you need to work out, you may

either choose to index the expenditure included in the asset's cost base

or not make that choice. If you do not choose to index the expenditure,

your net capital gain includes only part of your capital gain on the

CGT asset as worked out on the basis of the cost base not including

indexation and reduced by your capital losses.

(3) Also, for the purpose of working out the

capital gain of a

life

insurance company from a

CGT event happening after 30 June

2000 in respect of a

CGT asset that is a

virtual PST asset, the cost

base includes indexation only if the life insurance company

chooses that the cost base includes indexation.

Schedule 2 Business related costs

Part 2 CGT amendments

40 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Note:

Section 110-25 of the Income Tax (Transitional Provisions) Act 1997

provides that, in working out the capital gain from a CGT event after

11.45 am on 21 September 1999 and before 1 July 2000 in respect of

an asset of a life insurance company or registered organisation, the

cost base includes indexation only if the company or organisation

chooses it.

43 Section 110-38

Before "Expenditure", insert "(1)".

44 At the end of section 110-38

Add:

(2)

Expenditure

does

not form part of any element of the cost base to

the extent that it is a

bribe to a foreign public official or a

bribe to

a public official.

(3)

Expenditure

does

not form part of any element of the cost base to

the extent that it is in respect of providing

entertainment.

(4)

Expenditure

does

not form part of any element of the cost base to

the extent that section 26-5 prevents it being deducted (even if

some other provision also prevents it being deducted).

Note:

Section 26-5 denies deductions for penalties.

45 After subsection 110-55(9A)

Insert:

(9B)

Expenditure

does

not form part of the reduced cost base to the

extent that it is a

bribe to a foreign public official or a

bribe to a

public official.

(9C)

Expenditure

does

not form part of the reduced cost base to the

extent that it is in respect of providing

entertainment.

(9D)

Expenditure

does

not form part of the reduced cost base to the

extent that section 26-5 prevents it being deducted (even if some

other provision also prevents it being deducted).

Note:

Section 26-5 denies deductions for penalties.

46 Section 114-1 (note 3)

Omit "non-capital costs of ownership", substitute "costs of ownership".

Business related costs Schedule 2

CGT amendments Part 2

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 41

47 Subsections 114-5(2) and (3)

Omit "for the purposes of section 110-25".

48 Subsection 960-275(4)

Omit "non-capital costs of ownership", substitute "costs of ownership".

49 Subsection 995-1(1) (definition of incidental costs)

Repeal the definition, substitute:

incidental costs has the meaning given by section 110-35.

Income Tax (Transitional Provisions) Act 1997

50 Section 114-5

Omit "section 110-25 of".

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 43

Schedule 3--Promotion and implementation

of schemes

Part 1--Main amendments

Taxation Administration Act 1953

1 After Division 288 in Schedule 1

Insert:

Division 290--Promotion and implementation of schemes

Table of Subdivisions

290-A Objects of this Division

290-B Civil

penalties

290-C Injunctions

290-D Voluntary

undertakings

Subdivision 290-A--Objects of this Division

Table of sections

290-5

Objects of this Division

290-5 Objects of this Division

The objects of this Division are:

(a) to deter the promotion of tax avoidance

schemes and tax

evasion schemes; and

(b) to deter the implementation of schemes that have been

promoted on the basis of conformity with a

product ruling in

a way that is materially different from that described in the

product ruling.

Schedule 3 Promotion and implementation of schemes

Part 1 Main amendments

44 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Subdivision 290-B--Civil penalties

Table of sections

290-50 Civil

penalties

290-55 Exceptions

290-60 Meaning

promoter

290-65 Meaning

tax exploitation scheme

290-50 Civil penalties

Promoter of tax exploitation scheme

(1) An entity must not engage in conduct that results in that or another

entity being a

promoter of a

tax exploitation scheme.

Implementing scheme otherwise than in accordance with ruling

(2) An entity must not engage in conduct that results in a

scheme that

has been promoted on the basis of conformity with a

product

ruling being implemented in a way that is materially different from

that described in the product ruling.

Note:

A scheme will not have been implemented in a way that is materially

different from that described in a product ruling if the tax outcome for

participants in the scheme is the same as that described in the ruling.

Civil penalty

(3) If the Federal Court of Australia is satisfied, on application by the

Commissioner, that an entity has contravened subsection (1) or (2),

the Court may order the entity to pay a civil penalty to the

Commonwealth.

Amount of penalty

(4) The maximum amount of the penalty is the greater of:

(a) 5,000 penalty units (for an individual) or 25,000 penalty units

(for a body corporate); and

(b) twice the consideration received or receivable (directly or

indirectly) by the entity and

associates of the entity in

respect of the

scheme.

Note:

See section 4AA of the Crimes Act 1914 for the current value of a

penalty unit.

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 45

Principles relating to penalties

(5) In deciding what penalty is appropriate for a contravention of

subsection (1) or (2) by an entity, the Federal Court of Australia

may have regard to all matters it considers relevant, including:

(a) the amount of the consideration received or receivable

(directly or indirectly) by the entity and

associates of the

entity in respect of the

scheme; and

(b) the deterrent effect that any penalty may have; and

participants; and

(d) the nature and extent of the contravention; and

(e) the circumstances in which the contravention took place,

including the deliberateness of the entity's conduct and

whether there was an honest and reasonable mistake of law;

and

(f) the period over which the conduct extended; and

(g) whether the entity took any steps to avoid the contravention;

and

(h) whether the entity has previously been found by the Court to

have engaged in the same or similar conduct; and

(i) the degree of the entity's cooperation with the

Commissioner.

Recovery of penalty

(6) The penalty is a civil debt payable to the Commonwealth, and the

Commissioner may, on behalf of the Commonwealth, enforce an

order for an entity to pay the penalty as if it were an order made in

civil proceedings against the entity to recover a debt due by the

entity. The debt arising from the order is taken to be a judgment

debt.

290-55 Exceptions

Reasonable mistake or reasonable precautions

(1) The Federal Court of Australia must not order the entity to pay a

civil penalty if the entity satisfies the Court:

(a) that the conduct in respect of which the proceedings were

instituted was due to a reasonable mistake of fact; or

Schedule 3 Promotion and implementation of schemes

Part 1 Main amendments

46 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

(b)

that:

(i) the conduct in respect of which the proceedings were

instituted was due to the act or default of another entity,

to an accident or to some other cause beyond the

entity's control; and

(ii) the entity took reasonable precautions and exercised due

diligence to avoid the conduct.

(2) The other entity referred to in paragraph (1)(b) does not include

someone who was an employee or agent of the entity when the

alleged conduct occurred.

Reliance on advice from the Commissioner

(3) The Commissioner must not make an application under

section 290-50 for conduct referred to in subsection 290-50(1) in

relation to an entity's involvement in a

scheme if:

(a) the scheme is based on treating a

taxation law as applying in

a particular way; and

(b) that way agrees with:

(i) advice given to the entity or the entity's agent by or on

behalf of the Commissioner; or

(ii) a statement in a publication approved in writing by the

Commissioner.

Time limitation

(4) The Commissioner must not make an application under

section 290-50 in relation to an entity's involvement in a

tax

exploitation scheme more than 4 years after the entity last engaged

in conduct that resulted in the entity or another entity being a

promoter of the tax exploitation scheme.

(5) The Commissioner must not make an application under

section 290-50 in relation to an entity's involvement in a

scheme

that has been promoted on the basis of conformity with a

product

ruling more than 4 years after the entity last engaged in conduct in

relation to implementation of the scheme.

(6) However, the limitation in subsection (4) or (5) does not apply to a

scheme involving tax evasion.

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 47

Exception where entity does not know result of conduct

(7) The Federal Court of Australia must not order an entity to pay a

civil penalty in relation to the entity's engaging in conduct:

(a) that results in another entity being a

promoter of a

tax

exploitation scheme; or

(b) that results in a

scheme that has been promoted on the basis

of conformity with a

product ruling being implemented in a

way that is materially different from that described in the

product ruling;

if the entity satisfies the Court that the entity did not know, and

could not reasonably be expected to have known, that the entity's

conduct would produce that result.

Employees

(8) The Commissioner must not make an application under

section 290-50 in relation to an individual's involvement in a

scheme as an employee if the Federal Court of Australia has

ordered the individual's employer to pay a civil penalty under this

Division in relation to the same scheme.

290-60 Meaning of promoter

(1) An entity is a promoter of a

tax exploitation scheme if:

(a) the entity markets the scheme or otherwise encourages the

growth of the scheme or interest in it; and

(b) the entity or an

associate of the entity receives (directly or

indirectly) consideration in respect of that marketing or

encouragement; and

conclude that the entity has had a substantial role in respect

of that marketing or encouragement.

(2) However, an entity is not a promoter of a

tax exploitation scheme

merely because the entity provides advice about the

scheme.

(3) An employee is not to be taken to have had a substantial role in

respect of that marketing or encouragement merely because the

employee distributes information or material prepared by another

entity.

Schedule 3 Promotion and implementation of schemes

Part 1 Main amendments

48 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

290-65 Meaning of tax exploitation scheme

(1)

scheme is a tax exploitation scheme if, at the time of the

conduct mentioned in subsection 290-50(1):

(a) one of these conditions is satisfied:

(i) if the scheme has been implemented--it is reasonable to

conclude that an entity that (alone or with others)

entered into or carried out the scheme did so with the

sole or dominant purpose of that entity or another entity

getting a

scheme benefit from the scheme;

(ii) if the scheme has not been implemented--it is

reasonable to conclude that, if an entity (alone or with

others) had entered into or carried out the scheme, it

would have done so with the sole or dominant purpose

of that entity or another entity getting a scheme benefit

from the scheme; and

(b) one of these conditions is satisfied:

(i) if the scheme has been implemented--it is not

reasonably arguable that the scheme benefit is available

at law;

(ii) if the scheme has not been implemented--it is not

reasonably arguable that the scheme benefit would be

available at law if the scheme were implemented.

Note:

The condition in paragraph (b) would not be satisfied if the

implementation of the scheme for all participants were in accordance

with binding advice given by or on behalf of the Commissioner of

Taxation (for example, if that implementation were in accordance with

a public ruling under this Act, or all participants had private rulings

under this Act and that implementation were in accordance with those

rulings).

(2) In deciding whether it is

reasonably arguable that a

scheme

benefit would be available at law, take into account any thing that

the Commissioner can do under a

taxation law.

Example: The Commissioner may cancel a tax benefit obtained by a taxpayer in

connection with a scheme under section 177F of the Income Tax

Assessment Act 1936.

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 49

Subdivision 290-C--Injunctions

Table of sections

290-120 Conduct to which this Subdivision applies

290-125 Injunctions

290-130 Interim

injunctions

290-135 Delay in making ruling

290-140 Discharge etc. of injunctions

290-145 Certain limits on granting injunctions not to apply

290-150 Other powers of the Federal Court unaffected

290-120 Conduct to which this Subdivision applies

This Subdivision applies to conduct of the kind referred to in

subsection 290-50(1) or (2).

290-125 Injunctions

If an entity has engaged, is engaging or is proposing to engage in

conduct to which this Subdivision applies or would apply, the

Federal Court of Australia may, on the application of the

Commissioner, grant an injunction:

(a) restraining the entity from engaging in the conduct; and

(b) if, in the Court's opinion, it is desirable to do so--requiring

the entity to do something.

290-130 Interim injunctions

The Federal Court of Australia may, before considering an

application for an injunction under section 290-125, grant an

interim injunction restraining an entity from engaging in conduct to

which this Subdivision applies.

290-135 Delay in making ruling

If:

(a) an entity applied in writing to the Commissioner for a

product ruling in relation to a

scheme; and

(b) the Commissioner has neither made the ruling nor told the

entity in writing that the Commissioner has declined to make

the ruling;

Schedule 3 Promotion and implementation of schemes

Part 1 Main amendments

50 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

the Commissioner must not make an application under

section 290-125 in relation to conduct or proposed conduct by an

entity in relation to the scheme until the Commissioner makes the

ruling or tells the entity in writing that the Commissioner has

declined to make the ruling.

290-140 Discharge etc. of injunctions

The Federal Court of Australia may discharge or vary an injunction

granted under this Subdivision.

290-145 Certain limits on granting injunctions not to apply

Restraining injunctions

(1) The power of the Federal Court of Australia under this Subdivision

to grant an injunction restraining an entity from engaging in

conduct of a particular kind may be exercised:

(a) if the Court is satisfied that the entity has engaged in conduct

of that kind--whether or not it appears to the Court that the

entity intends to engage again, or to continue to engage, in

conduct of that kind; or

(b) if it appears to the Court that, if an injunction is not granted,

it is likely that the entity will engage in conduct of that

kind--whether or not the entity has previously engaged in

conduct of that kind and whether or not there is an imminent

danger of substantial damage to anyone if the entity engages

in conduct of that kind.

Performance injunctions

(2) The power of the Federal Court of Australia under this Subdivision

to grant an injunction requiring an entity to do something may be

exercised:

(a) if the Court is satisfied that the entity has refused or failed to

do that thing--whether or not it appears to the Court that the

entity intends to refuse or fail again, or to continue to refuse

or fail, to do that thing; or

(b) if it appears to the Court that, if an injunction is not granted,

it is likely that the entity will refuse or fail to do that thing--

whether or not the entity has previously refused or failed to

do that act or thing and whether or not there is an imminent

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 51

danger of substantial damage to anyone if the entity refuses

or fails to do that act or thing.

290-150 Other powers of the Federal Court unaffected

The powers conferred on the Federal Court of Australia under this

Subdivision are in addition to, and not instead of, any other powers

of the Court, however conferred.

Subdivision 290-D--Voluntary undertakings

Table of sections

290-200 Voluntary

undertakings

290-200 Voluntary undertakings

(1) The Commissioner may accept a written undertaking given by an

entity for the purposes of this section in connection with furthering

the objects of this Division.

(2) The entity may withdraw or vary the undertaking at any time, but

only with the consent of the Commissioner.

(3) If the Commissioner considers that the entity that gave the

undertaking has breached any of its terms, the Commissioner may

apply to the Federal Court of Australia for an order under

subsection (4).

(4) If the Court is satisfied that the entity has breached a term of the

undertaking, the Court may make one or both of the following

orders:

(a) an order directing the entity to comply with that term of the

undertaking;

(b) any other order that the Court considers appropriate.

2 At the end of Division 298 in Schedule 1

Add:

Schedule 3 Promotion and implementation of schemes

Part 1 Main amendments

52 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Subdivision 298-B--Civil penalties

Table of sections

298-80

Application of Subdivision

298-85

Civil evidence and procedure rules for civil penalty orders

298-90

Civil proceedings after criminal proceedings

298-95 Criminal

proceedings

during civil proceedings

298-100 Criminal proceedings after civil proceedings

298-105 Evidence given in proceedings for penalty not admissible in criminal

proceedings

298-110 Civil double jeopardy

298-80 Application of Subdivision

This Subdivision applies for the purposes of the provisions (the

civil penalty provisions) set out in this table.

Application of Subdivision

Item Provision

Brief

description

Division 290

Civil penalties for the promotion and implementation of

schemes

298-85 Civil evidence and procedure rules for civil penalty orders

The Federal Court of Australia must apply the rules of evidence

and procedure for civil matters when hearing proceedings for a

civil penalty order under the civil penalty provisions.

298-90 Civil proceedings after criminal proceedings

The Court must not make a civil penalty order under the civil

penalty provisions against an entity if the entity has been convicted

of an offence constituted by conduct that is substantially the same

as the conduct in relation to which the civil penalty order would be

made.

298-95 Criminal proceedings during civil proceedings

(1) Proceedings for a civil penalty order under the civil penalty

provisions against an entity are stayed if:

Promotion and implementation of schemes Schedule 3

Main amendments Part 1

Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006 53

(a) criminal proceedings are started or have already been started

against the entity for an offence; and

(b) the offence is constituted by conduct that is substantially the

same as the conduct in relation to which the civil penalty

order would be made.

(2) The proceedings for the order may be resumed if the entity is not

convicted of the offence. Otherwise, the proceedings for the order

are dismissed.

298-100 Criminal proceedings after civil proceedings

Criminal proceedings may be started against an entity for conduct

that is substantially the same as conduct in relation to which a civil

penalty order under the civil penalty provisions could be made

regardless of whether a civil penalty order has been made against

the entity.

298-105 Evidence given in proceedings for penalty not admissible in

criminal proceedings

Evidence of information given or evidence of production of

documents by an entity is not admissible in criminal proceedings

against the entity if:

(a) the entity previously gave the evidence or produced the

documents in proceedings for a civil penalty order under the

civil penalty provisions against the entity (whether or not the

order was made); and

(b) the conduct alleged to constitute the offence is substantially

the same as the conduct in relation to which the civil penalty

order was sought.

However, this does not apply to a criminal proceeding in respect of

the falsity of the evidence given by the entity in the proceedings for

the civil penalty order.

298-110 Civil double jeopardy

If an entity is ordered to pay a civil penalty under the civil penalty

provisions in respect of particular conduct, the entity is not liable to

a civil penalty under some other provision of a

Commonwealth

law in respect of that conduct.

Schedule 3 Promotion and implementation of schemes

Part 2 Consequential amendments

54 Tax Laws Amendment (2006 Measures No. 1) Bill 2006 No. , 2006

Part 2--Consequential amendments

Income Tax Assessment Act 1997

3 Subsection 995-1(1)

Insert:

product ruling means a public ruling under the Taxation

Administration Act 1953 that states that it is a product ruling.

4 Subsection 995-1(1)

Insert:

promoter has the meaning given by section 290-60 in Schedule 1

to the Taxation Administration Act 1953.

5 Subsection 995-1(1)

Insert:

tax exploitation scheme has the meaning given by section 290-65

in Schedule 1 to the Taxation Administration Act 1953.

Taxation Administration Act 1953

6 Subsection 16-35(1) in Schedule 1 (note 2)

After "administrative", insert "and civil".

7 Subsection 16-43(2) in Schedule 1 (note)

After "administrative", insert "and civil".

8 Subsection 16-140(3) in Schedule 1 (note 2)

After "administrative", insert "and civil".

9 Section 255-1 in Schedule 1

Before "A tax-related liability", insert "(1)".

10 At the end of section 255-1 in Schedule 1

Add:

Commonwealth of Australia Bills

TAX LAWS AMENDMENT (2006 MEASURES NO. 1) BILL 2006