TAXATION LAWS AMENDMENT BILL (NO. 3) 1996

1996

The Parliament of the
Commonwealth of Australia

HOUSE OF REPRESENTATIVES

(As read a third time)

Taxation Laws Amendment Bill (No. 3) 1996

No. , 1996

A Bill for an Act to amend the law relating to taxation

Division 1—Amendments to reduce the rate of deduction from 150% to 125% 6tla30h3.html

Division 2—Amendments relating to deductions for expenditure incurred by partnerships 6tla30h3.html

Division 3—Amendments to limit the period for amending assessments to give effect to provisions relating to deductions for expenditure on research and development activities 6tla30h3.html

Division 4—Amendments relating to deductions for interest payments 6tla30h3.html

Division 8—Amendments to clarify the meaning of research and development activities 6tla30h3.html

Part 2—Amendment of the Industry Research and Development Act 1986 6tla30h3.html

This Bill originated in the House of Representatives; and, having this day passed, is now ready for presentation to the Senate for its concurrence.

1 Short title

2 Commencement

(1) Subject to this section, this Act commences on the day on which it receives the Royal Assent.

(2) Item 11 of Schedule 1 is taken to have commenced immediately after item 10 of that Schedule.

(4) Items 60 and 61 of Schedule 4 are taken to have commenced at 5.00 pm, by legal time in the Australian Capital Territory, on 23 July 1996.

3 Schedule(s)

Subject to section 2, each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

Schedule 1—Amendment of the Income Tax Assessment Act 1936: various measures

160AAAA Tax rebate for low income aged persons

(1) A taxpayer who is an individual (other than in the capacity as trustee) is entitled to a rebate of tax in the taxpayer’s assessment in respect of income of a year of income of an amount (if any), ascertained in accordance with the regulations, if the taxpayer satisfies the conditions in subsections (2) and (3).

(2) The first condition is that, on at least one day during the year of income, the taxpayer:

(a) has reached pension age, within the meaning of the Social Security Act 1991; and

(b) has 10 years qualifying Australian residence or has a qualifying residence exemption for an age pension, within the meaning of the Social Security Act 1991; and

(a) has a taxable income for the year of income less than an amount ascertained in accordance with the regulations; and

(b) is not entitled to a rebate of tax for the year of income under section 160AAA.

(4) For the purposes of paragraph (3)(a), if the taxpayer is the spouse of another person, the taxable income of the taxpayer is taken to be half of the sum of:

(b) any share of the net income of a trust estate to which the spouse is presently entitled and that is assessed under section 98; and

(c) the actual taxable income of the spouse (reduced by any amount included in the spouse’s assessable income under section 100).

(5) Regulations made for the purposes of this section may be expressed to apply in relation to a year of income any part of which occurred before the notification of the regulations.

160AAAB Tax rebate for low income aged persons—trustees assessed under section 98

(1) A taxpayer who is a trustee who is liable to be assessed under section 98 in respect of a beneficiary’s share of the net income of the trust estate is entitled to a rebate of tax in the trustee’s assessment in respect of income of a year of income of an amount (if any), ascertained in accordance with the regulations, if the conditions in subsections (2) and (3) are satisfied.

(2) The first condition is that, on at least one day during the year of income, the beneficiary:

(a) has reached pension age, within the meaning of the Social Security Act 1991; and

(b) has 10 years qualifying Australian residence or has a qualifying residence exemption for an age pension, within the meaning of the Social Security Act 1991; and

(a) has a taxable income for the year of income less than an amount ascertained in accordance with the regulations; and

(b) is not entitled to a rebate of tax for the year of income under section 160AAA.

(4) For the purposes of paragraph (3)(a), if the beneficiary is not the spouse of another person, the taxable income of the beneficiary is taken to be the beneficiary’s share of the net income of the trust estate.

(5) For the purposes of paragraph (3)(a), if the beneficiary is the spouse of another person, the taxable income of the beneficiary is taken to be half of the sum of:

(b) any share of the net income of a trust estate to which the spouse is presently entitled and that is assessed under section 98; and

(c) the actual taxable income of the spouse (reduced by any amount included in the spouse’s assessable income under section 100).

(6) Regulations made for the purposes of this section may be expressed to apply in relation to a year of income any part of which occurred before the notification of the regulations.

(1) The amendments of the Income Tax Assessment Act 1936 made by items 1 and 2 of this Schedule apply to assessments for the 1996-97 year of income and for all later years of income.

(2) The amendments of the Income Tax Assessment Act 1936 made by items 3 and 4 of this Schedule apply in respect of the 1996-97 year of income and for all later years of income.

6 Subsection 27A(1) (paragraph (a) of the definition of qualifying annuity)

7 Subsection 27A(1) (subparagraph (b)(i) of the definition of qualifying annuity)

8 Subsection 27A(1) (at the end of paragraph (c) of the definition of qualifying annuity)

The amendments made by this Part apply to annuities commuted, or that terminate, on or after 15 June 1996.

(1) The amendment made by item 10 applies to assessments in respect of income of the 1996-97 year of income.

(2) The amendment made by item 11 applies to assessments in respect of income of the 1997-98 year of income and for all later years of income.

After “assignment”(first occurring), insert “under a contract entered into on or before 31 December 1996,”.

Division 11B—Equity investments in small-medium enterprises

128TG Summary of this Division

(2) If, in connection with a money-lending business, a taxpayer is issued shares in a small-medium enterprise, any profit or loss the taxpayer makes when it disposes of certain shares that would be dealt with under section 25 or 51 is, to the extent that it relates to the period after the issue, instead dealt with under Part IIIA (Capital gains and capital losses).

(3) For this to apply, the taxpayer must, after the issue, hold shares representing at least 10% of the paid up capital of the small-medium enterprise.

128TH When Division applies

(b) afterwards, in the course of carrying on a business of lending money, or otherwise in connection with such a business, the taxpayer disposes of ordinary shares, or an interest in ordinary shares, in the SME that were issued to the taxpayer (whether before, at the time of, or after acquiring the threshold interest); and

(i) any profit on the disposal would be included in the taxpayer’s assessable income of a year of income under section 25; and

(ii) any loss on the disposal would be allowable as a deduction from the taxpayer’s assessable income of a year of income under section 51.

128TI Consequences of Division applying

(a) no profit on the disposal is included in the taxpayer’s assessable income of any year of income under section 25; and

(b) no loss on the disposal is allowable as a deduction from the taxpayer’s assessable income of any year of income under section 51; and

(i) to have disposed of the shares, at the time of acquiring the threshold interest in the SME, for a consideration equal to their market value at the time; and

(ii) to have re-acquired the shares immediately afterwards (for the purposes of this section, as if they had been issued to the taxpayer) for an amount equal to that consideration; and

(d) any profit or loss on the disposal that is taken to have happened by subparagraph (c)(i) is included in the taxpayer’s assessable income under section 25, or is an allowable deduction under section 51, in the year of income in which the shares are actually (disregarding that subparagraph) disposed of, and not in any other year of income.

Note: As a result of this section, the tax consequences of the actual disposal will be dealt with under section 25 or 51 in respect of any period of holding before the acquisition of the threshold interest and under Part IIIA in respect of any period after the acquisition of that interest.

128TJ Acquiring a threshold interest in an SME

(a) in the course of carrying on a business of lending money, or otherwise in connection with such a business, ordinary shares in a company are issued to the taxpayer; and

(c) immediately after the shares, and any other ordinary shares forming part of the same issue, are issued to the taxpayer and any other persons, the percentage of the total paid-up capital of the company (assuming all amounts payable for the issue had been paid) represented by ordinary shares issued to the taxpayer (whether before or as part of the threshold share issue) is at least 10%; and

(d) no previous issue of shares to the taxpayer had resulted in the taxpayer acquiring a threshold interest in the SME.

128TK SME or small-medium enterprise

(1) An SME or small-medium enterprise is a company the total value of whose assets, as determined under this section, is no more than $50 million.

(2) The total value of the company’s assets is the total value of its assets (both current and non-current) as shown in the last audited accounts prepared in relation to the company for the purposes of Division 4 of Part 3.6 of the Corporations Law of a State or internal Territory before the investment is made.

(a) no such audited accounts have been prepared within the 12 months ending when the shares are issued; or

(b) the last such audited accounts prepared relate to a period that ended more than 18 months before the shares are issued;

(c) before the shares are issued, the taxpayer gets an audited statement (see subsection (4)) showing the total value of the company’s assets as at a time no more than 12 months before the shares are issued; and

(4) In subsection (3), an audited statement is a statement audited by a person or firm:

(a) who is appointed as the company’s auditor in accordance with the Corporations Law of a State or internal Territory; or

The amendment made by this Part applies where the taxpayer acquired the threshold interest in the SME on or after 1 July 1996.

For the purposes of Division 11B of the Income Tax Assessment Act 1936 as amended by this Part, any shares held by the taxpayer on or after 1 July 1996 that were issued to the taxpayer before 1 July 1996 are taken to be held instead by a person other than the taxpayer.

(a) is distributed among its shareholders as rebates or bonuses based on business done by shareholders with the company; or

(1) Subject to subitems (2) and (3), the amendments of the Income Tax Assessment Act 1936 made by item 17 of this Schedule apply in relation to loans entered into after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996.

(2) The amendments of the Income Tax Assessment Act 1936 made by item 17 of this Schedule do not apply in relation to a loan to a co-operative company if:

(b) the loan was entered into for the sole purpose of acquiring a specified asset; and

(i) the directors of the company had given approval to a business plan that anticipated the acquisition of the asset and that approval is recorded in the company’s minutes; or

(d) if subparagraph (c)(ii) does not apply—on or before 31 December 1996, the company entered into a contract to acquire the asset; and

(i) plant or articles (for the purposes of section 54 of the Income Tax Assessment Act 1936); or

is not an eligible motor vehicle within the meaning of section 55 of that Act; and

(f) the asset is first installed ready for use by the company on or before 30 June 1998; and

(g) the company was, or will be, entitled to a deduction, under paragraph 120(1)(c), in the company’s assessment for a year of income, in relation to another loan, where that other loan was in existence at any time in the period starting on 20 August 1993 and ending at 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996.

(3) The amendments of the Income Tax Assessment Act 1936 made by item 17 of this Schedule do not apply in relation to a loan to a co-operative company if:

(a) the loan was entered into after 7.30 pm, by legal time in the Australian Capital Territory, on 20 August 1996; and

(b) at or before that time, the parties to the loan entered into an agreement (whether or not binding and whether or not for a specified amount) for the provision of finance; and

(d) at or before 7.30 pm, by legal time in the Australian Capital Territory on 20 August 1996, the company entered into a contract to acquire the asset.

However, if the acquisition of the asset ceases, at any time, to be the sole purpose of the loan, the amendments apply in relation to the loan after that time.

(4) For the purposes of subitems (1), (2) and (3), a company is taken to have entered into a loan after a particular time if:

(5) For the purposes of this item, the terms of a loan are taken to provide that the amount of the loan is equal to the sum of:

(a) any amounts borrowed, and not repaid, before the time set out in subitem (4); and

(b) any amount that has not been borrowed at that time but that the company is, at that time, under a contractual obligation to borrow.

Schedule 2—Amendment of the Income Tax Assessment Act 1936: tax exempt entities that become taxable

Schedule 2D—Tax exempt entities that become taxable

Division 57—Tax exempt entities that become taxable

Guide to Division 57

57-1 What this Division is about

This Division is about the income tax treatment of a taxpayer whose income ceases to be wholly exempt. Broadly, income, outgoings, gains and losses are attributed to the periods before and after the loss of full exemption.

Subdivision 57-A—Key concepts

57-5 Entities to which this Division applies

(a) at a particular time, all of the income of a taxpayer is wholly exempt from income tax; and

(b) immediately after that time, the taxpayer’s income becomes to any extent assessable income;

(d) the time when the taxpayer’s income becomes to that extent assessable is the transition time; and

(e) the year of income in which the transition time occurs is the transition year for the taxpayer.

Subdivision 57-B—Predecessors of the transition taxpayer

57-10 Activities of transition taxpayer’s predecessor attributed to transition taxpayer

(a) at the transition time, the transition taxpayer performs particular functions or carries on particular activities; and

(b) during any period before the transition taxpayer first began to perform the functions or carry on the activities, an exempt government entity performed those same functions or carried on those same activities; and

(c) at the end of the period, responsibility for performing the functions or carrying on the activities was transferred, either directly or through one or more other exempt government entities, to the transition taxpayer;

this Division applies as if, during that period, anything done by or to the exempt government entity in performing those functions or carrying on those activities had instead been done by or to the transition taxpayer.

Note: As a result of this provision, the transition taxpayer may for example be able to deduct after the transition time, under Division 10 of Part III as modified by Subdivision 57-J, a portion of allowable capital expenditure incurred before the transition time by an exempt government entity whose functions were transferred to the transition taxpayer.

(b) an STB, within the meaning of Division 1AB of Part III, that is exempt from tax under that Division.

Subdivision 57-C—Time when income derived

57-15 Time when income derived

(1) To the extent that income derived by the transition taxpayer before the transition time is in respect of:

at or after the transition time, the income is treated for the purposes of this Act as having been derived at the time the services were rendered, the goods were provided or the thing was done, as the case requires.

(2) To the extent that income derived by the transition taxpayer at or after the transition time is in respect of:

before the transition time, the income is treated for the purposes of this Act as having been derived before that time.

Subdivision 57-D—Time when losses and outgoings incurred

57-20 Time when losses and outgoings incurred

(1) To the extent that a loss or outgoing (within the meaning of section 51) incurred by the transition taxpayer before the transition time is in respect of:

at or after the transition time, the loss or outgoing is treated for the purposes of this Act as having been incurred at the time the services were rendered, the goods were provided or the thing was done, as the case requires.

(2) To the extent that a loss or outgoing (within the meaning of section 51) incurred by the transition taxpayer at or after the transition time is in respect of:

before the transition time, the loss or outgoing is treated for the purposes of this Act as having been incurred before that time.

Subdivision 57-E—Assets and liabilities

57-25 Deemed disposal and re-acquisition of assets

(1) This section applies to the disposal of an asset by the transition taxpayer after the transition time, where the transition taxpayer owned the asset at all times from the transition time until the disposal.

(a) for the purposes of this Act (other than Part IIIA and the excluded provisions mentioned in subsection (4)) whether an amount is included in, or allowable as a deduction from, the assessable income of the transition taxpayer in respect of the disposal; or

(i) whether a capital gain accrues to the transition taxpayer in respect of the disposal; or

(ii) whether the transition taxpayer incurs a capital loss in respect of the disposal;

(d) to have purchased each of its assets again at the transition time for consideration equal to the asset’s adjusted market value at the transition time.

(3) An asset’s adjusted market value at the transition time is the asset’s market value at that time:

(a) reduced by any amount of income received or receivable by the transition taxpayer in respect of the asset at or after the transition time that:

(ii) because all of the income of the transition taxpayer was wholly exempt from income tax before the transition time;

(b) increased by any amount of income received or receivable by the transition taxpayer in respect of the asset before the transition time that:

(ii) because the transition taxpayer’s income ceased to be exempt from income tax at the transition time;

(a) acquired an asset (whether before the transition time or otherwise) before the commencement of a provision listed in subsection (6); and

(b) after acquiring the asset, owned the asset at all times before the transition time;

the deemed acquisition of the asset under subsection (2) does not affect the operation of the listed provision.

(7) To avoid doubt, an effect of subsection (2) is that the sum of all allowable deductions (if any) in respect of the writing off as bad of the whole or part of a debt to which that subsection applies will not exceed the market value of the debt at the transition time.

(8) To avoid doubt, an asset may be disposed of for the purposes of this section whether or not the disposal involves alienating the asset.

57-30 Deemed cessation and re-assumption of liabilities

(1) Subject to subsection (3), for the purposes of determining a deduction allowable to, or an amount included in the assessable income of, the transition taxpayer after the transition time in respect of the satisfaction of a liability owed by the transition taxpayer immediately before the transition time, the transition taxpayer is taken:

(a) to have ceased immediately before the transition time to have any liabilities; and

(b) to have assumed each of its liabilities again at the transition time in return for consideration equal to the adjusted market value (see subsection (2)) at that time of the right or other asset, corresponding to the liability, that was held by the person to whom the liability was owed.

(2) The adjusted market value of the corresponding right or other asset is the market value of that right or asset at the transition time:

(a) reduced by any amount paid or that becomes payable by the transition taxpayer in respect of the liability at or after the transition time, where:

(ii) because all of the transition taxpayer’s income was wholly exempt from income tax before the transition time;

(b) increased by any amount paid or that became payable by the transition taxpayer in respect of the liability before the transition time, where:

(ii) because the transition taxpayer’s income ceased to be exempt from income tax at the transition time;

(3) Division 3B of Part III only applies to a liability of the transition taxpayer at the transition time if the liability first came into existence after the day on which that Division commenced.

57-35 Interpretation

(a) any legal or equitable estate or interest (whether present or future, vested or contingent, tangible or intangible, in real or personal property) of any kind; and

(c) any right, interest or claim of any kind including rights, interests or claims in or in relation to property (whether arising under an instrument or otherwise, and whether liquidated or unliquidated, certain or contingent, accrued or accruing); and

liability includes a duty or obligation of any kind (whether arising under an instrument or otherwise, and whether actual, contingent or prospective).

Subdivision 57-F—Superannuation deductions

57-40 Contributions under defined benefit superannuation schemes

(1) This section applies to a deduction allowable apart from this Subdivision to the transition taxpayer under section 82AAC for a contribution made to a fund in relation to a person if:

(a) the person was an employee of the transition taxpayer at any time before or after the transition time; and

(b) the contribution was made under a defined benefit scheme (within the meaning of section 6A of the Superannuation Guarantee (Administration) Act 1992).

Deduction allowable only if sum of all deductions exceeds defined benefit threshold amount

(2) The deduction is not allowable for a year of income if the sum of all deductions of the transition taxpayer to which this section applies for the year of income is less than or equal to the defined benefit threshold amount (see subsection (4)) for the year of income.

(3) If the sum is greater than that amount, so much of the deduction as is worked out using the following formula is not allowable:

(a) if the year of income is the transition year—the unfunded liability amount (see subsection (5)); or

(b) in any other case—that amount as reduced by the total amount of deductions to which this section applies, that, because of subsection (2) or (3), have not (disregarding section 57-55) been allowable to the transition taxpayer for all previous years of income.

(5) The unfunded liability amount is the value, worked out as at the transition time in accordance with actuarial principles, of the liabilities of the transition taxpayer to provide superannuation benefits for, or for dependants of, employees of the transition taxpayer, where the liabilities:

57-45 Deduction for surplus to meet defined benefit scheme liabilities

(a) at the transition time, the transition taxpayer has an amount that, according to the transition taxpayer’s accounts, is available solely to meet liabilities of a kind mentioned in the definition of unfunded liability amount in subsection 57-40(5); and

the excess is an allowable deduction of the transition taxpayer for the transition year.

57-50 Contributions generally

(1) This section applies to a deduction allowable apart from this Subdivision to the transition taxpayer under section 82AAC for a contribution made to a fund in relation to a person if the person was an employee of the transition taxpayer at any time before or after the transition time.

Deduction allowable only if sum of all deductions exceeds general superannuation threshold amount

(2) The deduction is not allowable for a year of income if the sum of all deductions of the transition taxpayer to which this section applies for the year of income is less than or equal to the general superannuation threshold amount (see subsection (4)) for the year of income.

(3) If the sum is greater than the general superannuation threshold amount, so much of the deduction as is worked out using the following formula is not allowable:

(a) if the year of income is the transition year—the undischarged superannuation liability amount (see subsection (5)); or

(b) in any other case—the amount applicable under paragraph (a), reduced by the total amount of deductions to which this section applies that, because of subsection (2) or (3), have not (disregarding section 57-55) been allowable to the transition taxpayer for all previous years of income.

(5) This is how to work out the transition taxpayer’s undischarged superannuation liability amount:

Step 1. For each person who was an employee of the transition taxpayer at any time before the transition time, take the sum of:

(a) if the whole or any part of the person’s period of employment with the transition taxpayer took place before the beginning of the superannuation guarantee period (see subsection (6)) and there were one or more required award etc. contribution amounts (see subsection (7)) in respect of any of that whole or part—that amount or those amounts; and

(b) if, for the whole or any part or parts of the superannuation guarantee period, there were one or more required award etc. contribution amounts that were greater than the required superannuation guarantee contribution amount or amounts (see subsection (8))—that greater amount or those greater amounts; and

(c) if, for the whole or any part or parts of the superannuation guarantee period, either there was no required award etc. contribution amount or there was such an amount but it was not greater than the required superannuation guarantee contribution amount—the required superannuation guarantee contribution amount for the whole or the part of the period, or the sum of the required superannuation guarantee contribution amounts for the parts of the period, as the case may be.

Step 2. Reduce the sum from Step 1 by the sum of amounts that the transition taxpayer actually contributed:

(a) in payment of required award etc. contribution amounts or required superannuation guarantee contribution amounts for the employee that are included in the sum in Step 1; or

(b) voluntarily to a superannuation fund for the purpose of providing superannuation benefits for the employee, or dependants of the employee;

in respect of any period of employment of the employee with the transition taxpayer before the start of the transition year.

Step 3. If the result after applying Step 2 for a particular employee is less than nil, it is nil instead.

Step 4. Add up the results for all of the employees. This final sum is the transition taxpayer’s undischarged superannuation liability amount.

(6) The superannuation guarantee period is the period beginning at the start of the earliest contribution period (within the meaning of the Superannuation Guarantee (Administration) Act 1992) and ending at the transition time.

(7) A required award etc. contribution amount is an amount required to be contributed to a superannuation fund by an employer for the benefit of an employee:

(8) A required superannuation guarantee contribution amount is an amount that an employer would need to contribute in respect of a contribution period (within the meaning of the Superannuation Guarantee (Administration) Act 1992) so as not to have a superannuation guarantee shortfall under that Act in respect of that period.

57-55 Deductions reduced under both sections 57-40 and 57-50

If the amount of a deduction otherwise allowable to the transition taxpayer in respect of a contribution to a fund is required to be reduced under both sections 57-40 and 57-50:

(a) if the reduction is of a different amount—the amount is reduced only under that section that requires the greater reduction; or

(b) if the reduction is of the same amount—the amount is reduced only under section 57-40.

Subdivision 57-G—Denial of certain deductions

57-60 Effect of pre-transition time accrued leave entitlements

(1) This section applies to a deduction otherwise allowable to the transition taxpayer for a year of income under subsection 51(1) in respect of long service leave payments or annual leave payments to a person who was an employee of the transition taxpayer at any time before or after the transition time.

Deduction allowable only if sum of all deductions exceeds leave threshold amount

(2) The deduction is not allowable if the sum of all deductions of the transition taxpayer to which this section applies for the year of income is less than or equal to the leave threshold amount (see subsection (4)) for the year of income.

(3) If the sum is greater than the leave threshold amount, so much of the deduction as is worked out using the following formula is not allowable:

(a) if the year of income is the transition year—the (pre-transition time service) leave amount (see subsection (5)) of the transition taxpayer; or

(b) in any other case—that amount as reduced by the total amount of deductions to which this section applies that, because of subsection (2) or (3), have not been allowable to the transition taxpayer for all previous years of income.

(5) The (pre-transition time service) leave amount of the transition taxpayer is the sum of the following amounts:

(a) the amount that would be payable by the transition taxpayer in respect of annual leave and long service leave if, at the transition time, all employees of the transition taxpayer began to take all leave of that kind that they were eligible to take; and

(b) if the transition taxpayer elects, in accordance with subsection (6), that this paragraph applies—the amount that, according to actuarial principles, would need to be set aside at the transition time to meet all obligations of the transition taxpayer that might reasonably be expected to arise after that time to make annual leave payments and long service leave payments (other than in respect of leave taken into account under paragraph (a)) for periods of service of employees occurring before the transition time; and

(c) if paragraph (b) does not apply—the present value, at the transition time, of all annual leave payments and long service leave payments (other than in respect of leave taken into account under paragraph (a)) that the transition taxpayer would become liable to make after that time in respect of periods of service of employees occurring before that time if all such leave became eligible to be taken.

(a) the day by which the transition taxpayer’s return of income for the transition year is due to be lodged; or

57-65 Treatment of bad debts

(1) This section applies to a deduction otherwise allowable to the transition taxpayer for a year of income under this Act for the writing off as bad of the whole or part of a debt owing to the transition taxpayer.

Deduction allowable only if sum of all deductions exceeds doubtful debt provision limit

(2) The deduction is not allowable if the sum of all deductions of the transition taxpayer to which this section applies for the year of income is less than or equal to the doubtful debt provision limit (see subsection (4)) for the year of income.

(3) If the sum is greater than that limit, so much of the deduction as is worked out using the following formula is not allowable:

(a) if the year of income is the transition year—the pre-transition doubtful debt limit (see subsection (5)); or

(b) in any other case—that limit as reduced by the total amount of deductions to which this section applies that, because of subsection (2) or (3), have not been allowable to the transition taxpayer for all previous years of income.

(5) The pre-transition doubtful debt limit is the total of the amounts that, under generally accepted accounting principles, would be the appropriate doubtful debt provisions in relation to all debts owed to the transition taxpayer as at the transition time.

(i) the amount (if any) that, under generally accepted accounting principles, would be the appropriate doubtful debt provision in relation to the debt as at the transition time; and

the pre-transition doubtful debt limit is reduced by the amount of the excess.

57-70 Treatment of eligible termination payments

(1) This section applies to a deduction otherwise allowable to the transition taxpayer for a year of income under subsection 51(1) or subsection 78(11) for an eligible termination payment for a person who was an employee of the transition taxpayer at any time before the transition time (regardless of whether the person was an employee at or after the transition time).

(2) So much (if any) of the deduction as relates to a period of service of the employee before the transition time is not allowable.

(3) This section does not apply to an approved early retirement scheme payment or a bona fide redundancy payment.

(4) Expressions in this section that are also in subsection 27A(1) have the same meanings as in that subsection.

Subdivision 57-H—Domestic losses

57-75 Domestic losses

(a) only exempt income derived at or after the transition time is taken into account as exempt income of the transition taxpayer; and

(b) allowable deductions are only taken into account as non-loss deductions of the transition taxpayer to the extent that they are in respect of:

Subdivision 57-I—Depreciation deductions

57-80 Depreciation

(1) This section applies in determining a deduction allowable to the transition taxpayer in respect of any period (the depreciation period) after the transition time for depreciation under Subdivision A of Division 3 of Part III in respect of a unit of property, if the property was owned by the transition taxpayer at the transition time.

(2) Assume that, at all times before the transition time, when the unit of property was owned by:

the transition taxpayer’s income had not been exempt from income tax and no provision of this Act had denied a deduction for depreciation in respect of the unit.

(3) The transition taxpayer is taken to have used the same method of depreciation in relation to the unit of property in each year before the transition year as it uses for:

(b) if the transition taxpayer does not claim depreciation for the transition year—the first year after the transition year in which the transition taxpayer claims depreciation.

(4) If, assuming that the income of the transition taxpayer had never been wholly exempt from income tax, the transition taxpayer could have made an election under subsection 54A(1) at a particular time before the transition time, the transition taxpayer is taken to have made the election at that time.

(5) If, assuming that the income of the transition taxpayer had never been wholly exempt from income tax, the transition taxpayer could have made or could make an election under subsection 59(2A) in relation to the disposal, loss or destruction of a unit of property taking place before the transition time, the transition taxpayer is taken not to have made and not to be able to make that election.

method of depreciation means the way of working out the depreciation allowable under this Act in respect of a unit of property set out in paragraph 56(1)(a) or (b).

Subdivision 57-J—Capital allowances and certain other deductions

57-85 What are the modified deduction rules?

For the purposes of this Subdivision, each of the following provisions and groups of provisions is a modified deduction rule:

Modified deduction rules
Item	Description	Provision
1	Borrowing expenses	Section 67
2	Electricity connections	Section 70A
3	Environmental impact studies	Subdivision C of Division 3 of Part III
4	Environment protection	Subdivision CA of Division 3 of Part III
5	Films, Australian	Division 10BA of Part III
6	Grapevines	Section 75AA
7	Industrial property	Division 10B of Part III
8	Land degradation	Section 75D
9	Gifts	Section 78
10	Mining and quarrying	Division 10 of Part III
11	Mining transport and quarrying transport	Division 10AAA of Part III
12	Petroleum mining	Division 10AA of Part III
13	Mining etc. site rehabilitation	Division 10AB of Part III
14	Research and development (“R&D”)	Section 73B
15	Scientific research	Section 73A
16	Telephone lines	Section 70
17	Timber mill buildings	Subdivision B of Division 10A of Part III
18	Timber operations: access roads	Subdivision A of Division 10A of Part III
19	Water conservation	Section 75B

57-90 Post-transition deductions—assume that the transition taxpayer had never been exempt

In working out the transition taxpayer’s allowable deductions under a modified deduction rule for the transition year or a later year of income, assume that the modified deduction rule had applied at all times before the transition time as if the transition taxpayer’s income had never been exempt from income tax.

57-95 Amount of deduction not allowable for transition year

(1) If, apart from this section, an amount would be an allowable deduction under a modified deduction rule for the transition year in respect of expenditure incurred before the transition time (whether or not during the transition year), only so much of the amount as is worked out using the following formula is so allowable:

where:

post-expenditure part means:

(a) if the expenditure was incurred before the transition year—the number of days in the transition year; or

(b) otherwise—the number of days in the period from the beginning of the day on which the expenditure is incurred until the end of the transition year.

(2) This section does not apply to an amount to which paragraph 57-110(1)(b) (which deals with balancing adjustments) applies.

57-100 No elections etc. before transition time

In working out the transition taxpayer’s allowable deductions under a modified deduction rule:

(a) assume that the transition taxpayer did not, at any time, make any election or declaration, or give any notice, under the rule in relation to a year of income before the transition year; and

(b) any election or declaration (other than one under subsection 124ZADA(1)) the transition taxpayer makes, or any notice the transition taxpayer gives, under the rule in relation to the transition year has no effect in so far as it relates to expenditure incurred before the transition time.

57-105 Special rules for mining and quarrying

Exploration and prospecting—assume no expenditure

(1) In working out the transition taxpayer’s allowable deductions under Division 10 or 10AA of Part III, assume that the transition taxpayer incurred no expenditure on exploration and prospecting before the transition time.

Assume that no excess deductions available

(2) In working out the transition taxpayer’s allowable deductions under Division 10 or 10AA of Part III, assume that, for each year of income before the transition year, the transition taxpayer’s assessable income would have exceeded the total of the transition taxpayer’s deductions for the year.

Note: This means that the transition taxpayer can have no excess deductions remaining from years of income before the transition year.

Subdivision 57-K—Balancing adjustments

57-110 Apportionment of balancing adjustments

(1) If, apart from this subsection, a balancing adjustment provision (see subsection (2)) would:

(a) require an amount to be included in the transition taxpayer’s assessable income for the transition year or a later year of income in respect of particular expenditure; or

(b) allow an amount as a deduction from the transition taxpayer’s assessable income for the transition year or a later year of income in respect of particular expenditure;

then only so much of the amount as is worked out using the following formula is so included or allowable:

where:

actual deductions is the sum of all deductions actually allowed or allowable to the transition taxpayer for the expenditure under the deduction rule to which the balancing adjustment provision relates (see subsection (3)).

notional deductions is the sum of all deductions for the expenditure that would have been allowable to the transition taxpayer under the deduction rule to which the balancing adjustment provision relates, if the transition taxpayer had never been wholly exempt from income tax.

(2) For the purposes of subsection (1), the following are the balancing adjustment provisions:

Balancing adjustment provisions
Item	Description	Provision
1	Capital works: buildings, structural improvements, environment protection earthworks and extensions, alterations or improvements	Sections 124ZE and 124ZK
2	Depreciation	Section 59
3	Grapevines	Subsection 75AA(6)
4	Industrial property	Sections 124N and 124P
5	Mining and quarrying	Section 122K
6	Mining transport and quarrying transport	Section 123C
7	Petroleum mining	Section 124AM
8	Research and development (“R&D”)	Subsections 73B(23), (24), (25), (26) and (27)
9	Scientific research	Subsection 73A(4)
10	Timber mill buildings	Section 124JB
11	Timber operations: access roads	Section 124G

(3) For the purposes of subsection (1), the following are the deduction rules in relation to the respective balancing adjustment provisions:

(a) if the balancing adjustment provision is section 59—Subdivision A of Division 3;

(b) if the balancing adjustment provision is section 124ZE—Division 10C;

(d) in any other case—the modified deduction rule (see section 57-85) that the balancing adjustment provision is part of.

Subdivision 57-L—Trading stock

57-115 Modification of trading stock provisions

(1) For the purposes of applying Subdivision B of Division 2 of Part III in relation to the transition year, the only trading stock of the transition taxpayer that is to be taken into account under section 28 as being on hand at the beginning of the transition year is such trading stock as was on hand at the transition time.

(2) For the purpose of working out the value at which the trading stock is to be taken into account, the year of income preceding the transition year is taken to have ended immediately before the transition time.

Note: The value of trading stock on hand at the beginning of the transition year will, under section 29, be the same as at the end of the preceding year of income.

(3) If:

(a) the basis of valuation of the trading stock at the end of the transition year is cost price; and

(b) the basis of valuation at the beginning of the transition year is different;

then, for the purposes of the valuation at the end of the transition year, the cost price of the trading stock is taken to be equal to the value at which it was taken into account at the beginning of the transition year.

2 Application

The amendments made by this Schedule apply where the transition time is after 2 July 1995.

Schedule 3—Amendment of the Development Allowance Authority Act 1992

1 Subsection 93D(1) (paragraph (e) of the definition of Crown lease)

Omit “(within the meaning of section 160K of that Act)”.

2 Subsection 93D(1)

Insert:

non-exempt resident company means an incorporated body (not in the capacity of trustee), where:

(a) the body is a resident; and

(b) the body’s income is not exempt from income tax under the Tax Act because of a relevant exempting provision.

3 Subsection 93D(1)

Insert:

non-exempt resident corporate limited partnership, in relation to a year of income, means a corporate limited partnership (not in the capacity of trustee) in relation to the year of income, where:

(a) the partnership is a resident; and

(b) the partnership’s income is not exempt from income tax under the Tax Act because of a relevant exempting provision.

4 Subsection 93D(1)

Insert:

relevant exempting provision has the same meaning as in section 160K of the Tax Act.

5 Subsection 93D(1)

Insert:

resident has the same meaning as in the Tax Act.

6 After subsection 93I(4)

Insert:

(4A) In the case of:

(a) an indirect infrastructure borrowing; or

(b) a refinancing infrastructure borrowing that relates to an indirect infrastructure borrowing;

the borrower must be:

(d) a non-exempt resident corporate limited partnership in relation to the year of income in which the borrowing takes place.

(4B) If the borrower is an incorporated company (not in the capacity of trustee) and the borrowing is:

(a) an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; or

(b) a refinancing infrastructure borrowing that relates to an indirect infrastructure borrowing covered by paragraph (a);

the borrower must, at the time of the borrowing, intend to be a non-exempt resident company throughout the applicable borrower requirement period. For this purpose, the applicable borrower requirement period is the borrower requirement period in relation to the direct infrastructure borrowing.

(4C) If the borrower is a corporate limited partnership (not in the capacity of trustee) in relation to the year of income in which the borrowing takes place and the borrowing is:

(a) an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; or

(b) a refinancing infrastructure borrowing that relates to an indirect infrastructure borrowing covered by paragraph (a);

the borrower must, at the time of the borrowing, intend to be a non-exempt resident corporate limited partnership in relation to each year of income in which any part of the applicable borrower requirement period occurs. For this purpose, the applicable borrower requirement period is the borrower requirement period in relation to the direct infrastructure borrowing.

7 After section 93ZA

Insert:

93ZAA Cancellation of certificate that applies to an indirect infrastructure borrowing etc.—holder ceases to be a resident

(1) If:

(a) a certificate held by an incorporated company (not in the capacity of trustee) applies to:

(i) an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; or

(ii) a refinancing infrastructure borrowing that relates to an indirect infrastructure borrowing covered by subparagraph (i); and

(b) at the time when the company became the holder of the certificate, the holder was a non-exempt resident company; and

(c) the holder has ceased to be a non-exempt resident company before the end of the applicable borrower requirement period;

the DAA is taken to have cancelled the certificate with effect from the time of the cessation. For this purpose, the applicable borrower requirement period is the borrower requirement period in relation to the direct infrastructure borrowing.

(2) If:

(a) a certificate held by a partnership (not in the capacity of trustee) applies to:

(i) an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; or

(ii) a refinancing infrastructure borrowing that relates to an indirect infrastructure borrowing covered by subparagraph (i); and

(b) the holder was a non-exempt resident corporate limited partnership in relation to the year of income in which the partnership became the holder of the certificate; and

(c) the holder has ceased to be a non-exempt resident corporate limited partnership in relation to a year of income in which any part of the applicable borrower requirement period occurs;

(3) If a certificate is cancelled under subsection (1) or (2), the cessation is taken to be the ground relied on by the DAA for cancelling the certificate.

93ZAB Cancellation of certificate that applies to an indirect infrastructure borrowing—transfer of rights etc.

(1) If:

(a) a certificate applies to an indirect infrastructure borrowing; and

(b) the holder transfers to another person (the transferee) any or all of the holder’s rights, interests and obligations in relation to the lending of the borrowed money as mentioned in subparagraph 93G(b)(i); and

(i) in a case where all of the holder’s rights, interests and obligations are transferred—the holder has neither repaid the whole of the borrowing nor passed the certificate transfer test set out in subsection (3); or

(ii) in a case where some, but not all, of the holder’s rights, interests and obligations are transferred—the holder has not repaid the whole of the borrowing;

the DAA is taken to have cancelled the certificate with effect from the time of the transfer.

(2) If the certificate is cancelled under subsection (1), the transfer is taken to be the ground relied on by the DAA for cancelling the certificate.

(3) For the purposes of this section, the holder passes the certificate transfer test at a particular time if, before that time:

(a) an application has been made under section 93U to transfer the certificate to the transferee; and

(b) either:

(i) the DAA has transferred the certificate to the transferee under this Division; or

(ii) the DAA was required to transfer the certificate to the transferee under this Division.

93ZAC Cancellation of certificate that applies to an indirect infrastructure borrowing—total repayment of related direct infrastructure borrowing

(1) If:

(a) a certificate applies to an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; and

(b) the whole of the direct infrastructure borrowing is repaid; and

(i) in a case where the repayment is made using a refinancing infrastructure borrowing—the holder has neither repaid the whole of the indirect infrastructure borrowing nor passed the certificate transfer test set out in subsection (3); or

(ii) in any other case—the holder has not repaid the whole of the indirect infrastructure borrowing;

the DAA is taken to have cancelled the certificate with effect from the time of the repayment of the direct infrastructure borrowing.

(2) If the certificate is cancelled under subsection (1), the repayment of the direct infrastructure borrowing is taken to be the ground relied on by the DAA for cancelling the certificate.

(3) For the purposes of this section, the holder passes the certificate transfer test at a particular time if, before that time:

(a) an application has been made under section 93U to transfer the certificate to the borrower in relation to the refinancing infrastructure borrowing (the transferee); and

(b) either:

(i) the DAA has transferred the certificate to the transferee under this Division; or

(ii) the DAA was required to transfer the certificate to the transferee under this Division.

93ZAD Cancellation of certificate that applies to an indirect infrastructure borrowing—partial repayment of related direct infrastructure borrowing

(1) If:

(a) a certificate applies to an indirect infrastructure borrowing that relates to a direct infrastructure borrowing; and

(b) a percentage (being a percentage less than 100%) of the direct infrastructure borrowing is repaid; and

the DAA is taken to have cancelled the certificate with effect from the time of the repayment of that percentage of the direct infrastructure borrowing.

(2) If the certificate is cancelled under subsection (1), the repayment of that percentage of the direct infrastructure borrowing is taken to be the ground relied on by the DAA for cancelling the certificate.

8 Subsection 93ZB(3)

Omit “must also cancel”, substitute “is taken to have also cancelled”.

9 At the end of subsection 93ZB(3)

Add:

The grounds relied on by the DAA for cancelling the certificate that applies to the refinancing infrastructure borrowing are taken to be the same as the grounds relied on by the DAA for cancelling the certificate that applies to the indirect infrastructure borrowing.

10 Application of amendments

(1) Subsections 93I(4A), (4B) and (4C) and section 93ZAA of the Development Allowance Authority Act 1992 as amended by this Schedule apply to an indirect infrastructure borrowing or a refinancing infrastructure borrowing, where a certificate in respect of the borrowing was issued on or after 30 October 1995.

(2) Sections 93ZAB, 93ZAC and 93ZAD of the Development Allowance Authority Act 1992 as amended by this Schedule apply to an indirect infrastructure borrowing, where a certificate in respect of the borrowing was issued on or after 30 October 1995.

Schedule 4—Research and development activities

Part 1—Amendment of the Income Tax Assessment Act 1936

Division 1—Amendments to reduce the rate of deduction from 150% to 125%

1 Subsection 73B(1) (paragraph (ba) of the definition of aggregate research and development amount)

Omit “two-thirds”, substitute “four-fifths”.

2 Subsection 73B(4E)