TAX LAWS AMENDMENT (2006 MEASURES NO. 3) BILL 2006 Explanatory Memorandum
TAX LAWS AMENDMENT (2006 MEASURES NO. 3) BILL 2006
2004-2005-2006
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
TAX LAWS AMENDMENT (2006 MEASURES No. 3) BILL 2006
NEW BUSINESS TAX SYSTEM (UNTAINTING TAX) BILL 2006
REVISED EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello MP)
This memorandum takes account of amendments made by the House of
Representatives to the Bills as introduced
Table of contents
Glossary ....................................................................................... 1
General outline and financial impact ....................................................... 3
Chapter 1 Extension of the beneficiary tax offset to
Cyclone Larry and Cyclone Monica income
support payments ........................................................ 13
Chapter 2 Cyclones Larry and Monica: Assistance for
affected businesses ..................................................... 17
Chapter 3 Extension of the beneficiary tax offset to
interim income support payments ................................ 19
Chapter 4 Simplified imputation system (share capital
tainting rules) ............................................................... 23
Chapter 5 Government grants ...................................................... 47
Chapter 6 Medicare levy surcharge lump sum payment
in arrears offset............................................................ 53
Chapter 7 Reporting of employer superannuation
contributions by superannuation providers .................. 63
Chapter 8 Exclusion for fringe benefits to address
personal security concern............................................ 67
Chapter 9 Pre-1 July 1988 funding credits ................................... 75
Chapter 10 Allow certain funds to obtain an Australian
Business Number ........................................................ 81
Chapter 11 New deductible gift recipient categories ...................... 85
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Chapter 12 GST treatment of gift-deductible entities.................... 103
Chapter 13 Technical clarification of time for certain
amended assessments.............................................. 111
Chapter 14 Increase in wine equalisation tax producer rebate..... 113
Chapter 15 GST treatment of residential premises ...................... 115
Index ................................................................................... 123
2
Glossary
The following abbreviations and acronyms are used throughout this
revised explanatory memorandum.
Abbreviation Definition
ABN Australian Business Number
ABN Act A New Tax System (Australian Business
Number) Act 1999
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
DGR deductible gift recipient
FBT fringe benefits tax
FBTAA 1986 Fringe Benefits Tax Assessment Act 1986
funding credits Pre-1 July 1988 funding credits
GST goods and services tax
GST Act A New Tax System (Goods and Services Tax)
Act 1999
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
MEC group multiple entry consolidated group
RSA retirement savings accounts
TAA 1953 Taxation Administration Act 1953
the Marana decision Marana Holdings Pty Ltd v Commissioner
of Taxation [2004] FCAFC 307
(see paragraph 15.1)
WET wine equalisation tax
1
General outline and financial impact
Extension of the beneficiary tax offset to Cyclone Larry and
Cyclone Monica income support payments
Schedule 1 to this Bill amends the Income Tax Assessment Act 1936 and
the Income Tax Assessment Act 1997 to extend eligibility for the
beneficiary tax offset to farmers and small business owners in receipt of
Cyclone Larry and Cyclone Monica income support payments.
Date of effect: The beneficiary tax offset applies to Cyclone Larry and
Cyclone Monica income support payments for the 2005-06, 2006-07 and
2007-08 years of income.
Proposal announced: The amendments that relate to extending the
beneficiary tax offset to Cyclone Larry and Cyclone Monica income
support payments have not previously been announced.
Cyclone Larry income support payments were announced by the Prime
Minister on 22 March 2006 and Cyclone Monica income support
payments were announced by the Prime Minister on 26 May 2006.
Financial impact: This measure has an estimated impact on revenue of
nil in 2006-07 and a cost of $0.5 million in 2007-08.
Compliance cost impact: Negligible.
Cyclones Larry and Monica: Assistance for affected
businesses
Schedule 2 to this Bill provides tax-free status for certain Australian
Government payments to businesses adversely affected by Cyclone Larry,
and by flooding due to the combined impacts of Cyclones Larry and
Monica.
Date of effect: This measure will apply to all relevant payments made in
2005-06 and 2006-07 income years.
Proposal announced: This measure was announced by the
Prime Minister in his press releases of 22 and 26 March 2006, and 26 May
2006.
3
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09 2009-10
-$38.0m -$21.5m -$11.0m -$7.5m
Compliance cost impact: The implementation costs related to this
measure are expected to be small, and the ongoing compliance costs are
expected to be minimal.
Extension of the beneficiary tax offset to interim income
support payments
Schedule 3 to this Bill amends the Income Tax Assessment Act 1936 and
the Income Tax Assessment Act 1997 to extend eligibility for the
beneficiary tax offset to drought affected taxpayers in receipt of interim
income support payments.
Date of effect: The beneficiary tax offset applies to interim income
support payments for the 2005-06 income year and later income years.
Proposal announced: This measure was announced in the
2006-07 Budget and the Minister for Revenue and Assistant Treasurer 's
Press Release No. 016 of 9 May 2006.
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09 2009-10
$1.0m $1.0m $1.0m $1.0m
Compliance cost impact: Negligible.
Simplified imputation system (share capital tainting rules)
Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 to
ensure that a company's share capital account will become tainted if it
transfers certain amounts to that account. If a company taints its share
capital account, a franking debit arises in the company's franking account.
If the company chooses to untaint its share capital account, an additional
franking debit may arise and untainting tax may be payable.
4
General outline and financial impact
Date of effect: The new share capital tainting rules will apply to transfers
made to a company's share capital account after the day this Bill is
introduced into Parliament. Some consequential amendments apply from
1 July 1998.
Proposal announced: This measure was announced in the then Minister
for Revenue and Assistant Treasurer's Press Release No. C104/02 of
27 September 2002.
Financial impact: Negligible.
Compliance cost impact: Nil.
Government grants
Capital gains tax exemption of expense-reimbursing government grants
Schedule 5 to this Bill amends the Income Tax Assessment Act 1997 to
exempt the recipients of the Unlawful Termination Assistance Scheme,
the Alternative Dispute Resolution Assistance Scheme and similar
expense-reimbursing government grants from capital gains tax (CGT).
This Schedule makes a further amendment to ensure capital losses, and
not just capital gains, are exempt from CGT.
Date of effect: These amendments will apply to income tax assessments
from 1 July 2005.
Proposal announced: This measure has not previously been announced.
Financial impact: Negligible.
Compliance cost impact: Negligible.
Medicare levy surcharge lump sum payment in arrears offset
Schedule 6 to this Bill amends the Income Tax Assessment Act 1997 to
provide an offset to certain taxpayers in respect of their Medicare levy
surcharge liability where that liability arose, or significantly increased, as
a result of the taxpayer receiving an eligible lump sum payment in arrears.
Date of effect: These amendments will apply to assessments for income
years commencing on or after 1 July 2005.
5
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Proposal announced: This measure was announced in the then
Minister for Revenue and Assistant Treasurer's Press Release No. 029 of
10 May 2005.
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09
$0.1m $0.1m $0.1m
Compliance cost impact: Minimal.
Reporting of employer superannuation contributions by
superannuation providers
Schedule 7 to this Bill amends the Superannuation Guarantee
(Administration) Act 1992 to require superannuation providers to report
details of superannuation contributions to the Australian Taxation Office.
Date of effect: This measure applies to the 2005-06 income year and later
years.
Proposal announced: This measure was announced in the Minister for
Revenue and Assistant Treasurer's Press Release No. 001 of
3 February 2006.
Financial impact: Nil.
Compliance cost impact: Negligible.
Exclusion for fringe benefits to address personal security
concern
Schedule 8 to this Bill amends the Fringe Benefits Tax Assessment
Act 1986 to exclude from reporting, fringe benefits provided to address
certain security concerns relating to the personal safety of an employee, or
an associate of the employee, arising from the employee's employment.
Date of effect: 1 April 2004.
Proposal announced: This measure was announced in the then
Minister for Revenue and Assistant Treasurer's Press Release No. 079 of
8 September 2005.
Financial impact: This measure will have these revenue implications:
6
General outline and financial impact
2006-07 2007-08 2008-09 2009-10
-$1.0m -$1.0m -$1.0m -$1.0m
Compliance cost impact: Minimal.
Pre-1 July 1988 funding credits
Schedule 9 to this Bill amends the Income Tax Assessment Act 1936 to:
· prevent the inappropriate use of pre-1 July 1988 funding
credits (funding credits) by ensuring that superannuation
schemes can only use them to reduce their taxation liability
in respect of contributions made for the purpose of funding
benefits that accrued before 1 July 1988; and
· allow regulations to be made to provide guidance to the
trustee of a superannuation scheme on how to work out the
amount of funding credits that can be applied to reduce the
taxation liability of the trustee in respect of contributions
made and to allow other methods of working out how the
trustee of a superannuation scheme can apply funding credits.
Date of effect: These amendments apply to the use of funding credits
on or after 9 May 2006 the date this measure was announced in the
2006-07 Budget. In addition, any new or outstanding objections or
amendments to past assessments will only be able to amend funding credit
use for that year/s up to the amount that can be claimed under the new
law.
Proposal announced: This measure was announced in the
2006-07 Budget and the Treasurer's Press Release No. 036 of
9 May 2006.
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09 2009-10
$150m $150m $150m $150m
Compliance cost impact: Minimal.
7
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Allow certain funds to obtain an Australian Business Number
Schedule 10 to this Bill amends the A New Tax System (Goods and
Services Tax) Act 1999 and the A New Tax System (Australian Business
Number) Act 1999 to allow certain funds that raise money for other
deductible gift recipients, to obtain an Australian Business Number so that
those funds can be exempt from income tax and receive input tax credits
for goods and services tax (GST) paid and other GST benefits.
Date of effect: 1 July 2005.
Proposal announced: This measure was announced in the
2006-07 Budget.
Financial impact: The financial impact of this measure is unquantifiable
but is expected to have an insignificant impact on income tax and GST
revenue.
Compliance cost impact: Minimal.
New deductible gift recipient categories
Schedule 11 to this Bill amends the Income Tax Assessment Act 1997 to
create five new general categories of deductible gift recipient to cover war
memorials, disaster relief, animal welfare, charitable services and
educational scholarships.
Date of effect: 1 July 2006.
Proposal announced: These amendments were announced by the
Government in the 2005-06 Budget and in the Treasurer's
Press Release No. 49 of 10 May 2005.
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09 2009-10
Nil -$11.0m -$12.0m -$13.0m
Compliance cost impact: Minimal.
8
General outline and financial impact
GST treatment of gift-deductible entities
Schedule 12 to this Bill amends the A New Tax System (Goods and
Services Tax) Act 1999 to ensure that:
· the goods and services tax (GST) charity concessions apply
as originally intended; and
· charities operating retirement villages, like other charities,
are required to be endorsed in order to access the GST
charitable retirement village concession.
Date of effect: These amendments will apply for tax periods that begin on
or after Royal Assent.
Proposal announced: The amendment dealing with gift-deductible
entities was announced in the Treasurer's Press Release No. 049 of
29 August 2002. The amendment dealing with the endorsement of
charitable institutions was announced in the Treasurer's Press Release No.
031 of 11 May 2004.
Financial impact: These amendments are expected to result in a small
but insignificant gain to GST revenue.
Compliance cost impact: This measure is not expected to impact
significantly on compliance costs.
Technical clarification of time for certain amended
assessments
Schedule 13 to this Bill amends the Tax Laws Amendment (Improvements
to Self Assessment) Act (No. 2) 2005 to clarify that the repeal of the
six-year amendment period for general anti-avoidance (Part IVA)
amendments only applies to assessments for the 2004-05 income year and
later income years, as originally intended by the Government.
Date of effect: This amendment will apply immediately after the
commencement of the Tax Laws Amendment (Improvements to
Self Assessment) Act (No. 2) 2005, (19 December 2005).
Proposal announced: This measure was announced in the
2006-07 Budget.
Financial impact: Nil.
9
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Compliance cost impact: Nil.
Increase in wine equalisation tax producer rebate
Schedule 14 to this Bill enhances the Government's assistance to the wine
industry by increasing the maximum amount of wine equalisation tax
(WET) producer rebate claimable by a wine producer (or group of
producers) each financial year.
The WET producer rebate scheme was announced by the Government in
the 2004-05 Budget. The scheme commenced on and from
1 October 2004 to provide assistance to each wine producer (or group of
producers) of up to $290,000 in WET rebates per annum. This effectively
exempts $1 million in domestic wholesale wine sales by a producer each
year.
From 2006-07, each wine producer or group of wine producers will be
able to claim up to $500,000 in WET rebates each year. This means the
effective WET-free threshold for a producer with respect to their domestic
wholesale wine sales in each financial year will be around $1.7 million.
The existing framework of eligibility rules and claiming arrangements
will not be altered by these amendments.
Date of effect: This measure takes effect on and from 1 July 2006.
Proposal announced: This measure was announced in the
2006-07 Budget and the Treasurer's Press Release No. 035 of
9 May 2006.
Financial impact: This measure will have these revenue implications:
2006-07 2007-08 2008-09 2009-10
-$25m -$33m -$33m -$35m
Compliance cost impact: This measure is not expected to impose any
additional costs to WET producer rebate claimants as it is an increase in
an amount that current claimants may claim, via the existing claiming
mechanism.
10
General outline and financial impact
GST treatment of residential premises
Schedule 15 to this Bill amends the A New Tax System (Goods and
Services Tax) Act 1999 (GST Act) to ensure that following the decision of
the Full Federal Court of Australia in Marana Holdings Pty Ltd v
Commissioner of Taxation [2004] FCAFC 307 supplies of certain types of
real property continue to be input taxed. This confirms the Government's
policy intent.
Date of effect: 1 July 2000.
Proposal announced: This measure was announced in the Minister for
Revenue and Assistant Treasurer's Press Release No. 006 of
27 February 2006.
Financial impact: Nil.
Compliance cost impact: Nil.
11
Chapter 1
Extension of the beneficiary tax offset to
Cyclone Larry and Cyclone Monica
income support payments
Outline of chapter
1.1 Schedule 1 to this Bill amends the Income Tax Assessment
Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997
(ITAA 1997) to extend eligibility for the beneficiary tax offset to farmers
and small business owners in receipt of Cyclone Larry and Cyclone
Monica income support payments.
Context of amendments
Cyclone Larry and Cyclone Monica income support payments
1.2 The Cyclone Larry income support payments provide income
support to farmers and small business owners whose income has been
adversely affected by Cyclone Larry.
1.3 The Prime Minister announced the Cyclone Larry income
support payments to farmers and small business owners on
22 March 2006.
1.4 The Cyclone Monica income support payments provide income
support to farmers and small business owners who have been adversely
affected by the cumulative effects of Cyclone Larry and Cyclone Monica
(eg, farmers and small business owners in the Cape York region that were
affected by flooding and damage caused by Cyclone Monica shortly after
suffering from the residual effects of Cyclone Larry).
1.5 The Prime Minister announced the Cyclone Monica income
support payments to farmers and small business owners on 26 May 2006.
1.6 The Cyclone Larry and Cyclone Monica income support
payments are equivalent to the maximum rate of Newstart allowance and
are administered by Centrelink.
13
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
1.7 The Prime Minister announced that the Cyclone Larry payments
will be available for 6 months from 22 March 2006 to 21 September 2006
and the Cyclone Monica payments will be available for 6 months from
29 May 2006.
Taxable status
1.8 A payment received by a person as income support, or as a
replacement for lost salary or wages or lost income, is taxable. The
Cyclone Larry and Cyclone Monica payments are therefore taxable as
they are received as ordinary income by the recipient.
1.9 The Newstart allowance is also a form of income support which
is received as ordinary income by the recipient. However, the Newstart
allowance is a rebatable benefit to which the beneficiary tax offset applies,
ensuring that a person who receives the Newstart allowance for the full
year and has no other income pays no tax on the Newstart income.
1.10 This amendment will extend the beneficiary tax offset to
Cyclone Larry and Cyclone Monica income support payments to ensure
consistent taxation treatment with the Newstart allowance.
Summary of new law
1.11 This measure amends:
· subsection 160AAA(1) of the ITAA 1936 to include
Cyclone Larry and Cyclone Monica income support
payments in the definition of a `rebatable benefit' to which
the beneficiary tax offset applies; and
· section 13-1 of the ITAA 1997 to list Cyclone Larry and
Cyclone Monica income support payments as a payment that
is allowed a tax offset.
Detailed explanation of new law
Include Cyclone Larry and Cyclone Monica income support payments in
the definition of `rebatable benefit' for beneficiary tax offset purposes
1.12 Subsection 160AAA(1) of the ITAA 1936 lists certain pensions,
benefits and payments that are considered to be a `rebatable benefit'.
14
Extension of the beneficiary tax offset to Cyclone Larry income support payments
1.13 Paragraph (a) of subsection 160AAA(1) includes payments
made under certain parts of the Social Security Act 1991 as rebatable
benefits, including the Newstart allowance.
1.14 The amendment to subsection 160AAA(1) of the ITAA 1936
includes Cyclone Larry and Cyclone Monica income support payments as
a `rebatable benefit' to which the beneficiary tax offset applies. This
ensures that taxpayers in receipt of Cyclone Larry and Cyclone Monica
income support payments are treated consistently with recipients of the
Newstart allowance. [Schedule 1, item 1, subsection 160AAA(1)]
1.15 Paragraph 160AAA(3) of the ITAA 1936 provides that where a
taxpayer receives an amount of `rebatable benefit' greater than the
tax-free threshold, the taxpayer may be entitled to a tax offset.
Include Cyclone Larry and Cyclone Monica income support payments in
the Division 13 guide of tax offsets
1.16 Section 13-1 of the ITAA 1997 lists payments that are allowed a
tax offset and the relevant provision of the ITAA 1936 or the ITAA 1997
that provides that offset. Payments are listed under headings classifying
the type of payment.
1.17 The first amendment to section 13-1 of the ITAA 1997 will
include Cyclone Larry and Cyclone Monica income support payments in
the list of payments that attract a tax offset and will direct readers to the
item in the table headed `social security and other benefit payments'.
[Schedule 1, item 2, section 13-1]
1.18 The second amendment to section 13-1 lists the reference to
Cyclone Larry and Cyclone Monica income support payments at
subsection 160AAA(3) under the item in the table headed `social security
and other benefit payments'. [Schedule 1, item 3, section 13-1]
Application and transitional provisions
1.19 These amendments are to apply to the 2005-06, 2006-07 and
2007-08 years of income.
15
Chapter 2
Cyclones Larry and Monica: Assistance
for affected businesses
Outline of chapter
2.1 Schedule 2 to this Bill provides tax-free status for Australian
Government payments to businesses adversely affected by Cyclone Larry.
These include the Cyclone Larry Business Assistance Fund payments and
payments for fuel excise relief.
2.2 Schedule 2 to this Bill also provides tax-free status for
Australian Government payments to businesses adversely affected by
flooding due to the combined impacts of Cyclones Larry and Monica.
Context of amendments
General
2.3 Generally, government assistance payments are treated as
assessable income, as either `ordinary income' under section 6-5, or
`subsidies' or `bounties' under section 15-10 of the Income Tax
Assessment Act 1997.
Cyclone Larry Business Assistance Fund
2.4 On 22 March 2006, the Prime Minister announced payments of
$10,000 for businesses adversely affected by Cyclone Larry. Those
businesses that can demonstrate significant losses can receive up to
$25,000. These payments are to be paid out of the Cyclone Larry
Business Assistance Fund.
Cyclones Monica and Larry Business Assistance Fund
2.5 On 26 May 2006, The Prime Minister announced payments of
$10,000 for businesses adversely affected by flooding due to the
combined impacts of Cyclones Larry and Monica. Those businesses that
can demonstrate significant losses can receive up to $25,000.
17
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Fuel excise relief
2.6 On 26 March 2006, the Prime Minister announced that any
excise paid on diesel or petrol fuel used by businesses for generating their
own electricity until normal services are restored are to be reimbursed by
the Government.
Detailed explanation of new law
2.7 This measure defines payments made under the Cyclone Larry
Business Assistance Fund, Cyclones Monica and Larry Business
Assistance Fund, and fuel excise relief programme as non-assessable,
non-exempt income. This has the effect of exempting such income from
tax while avoiding other interactions with taxation law.
2.8 A range of financial assistance measures have been provided for
those adversely affected by Cyclone Larry or adversely affected by
flooding due to the combined impacts of Cyclones Larry and Monica.
However, this measure only applies to payments made to businesses by
the Australian Government, and made directly under the Cyclone Larry
Business Assistance Fund, the Cyclones Monica and Larry Business
Assistance Fund, or the fuel excise relief programme.
2.9 The fuel excise relief programme has components relating to
businesses as well as households. This measure only deals with those
relating to businesses. [Schedule 2, item 1, paragraph 1(1)(b)]
Application and transitional provisions
2.10 This measure applies to the 2005-06 and 2006-07 income years.
[Schedule 2, item 1, subsection 1(1)]
18
Chapter 3
Extension of the beneficiary tax offset to
interim income support payments
Outline of chapter
3.1 Schedule 3 to this Bill amends the Income Tax Assessment
Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997
(ITAA 1997) to extend eligibility for the beneficiary tax offset to drought
affected taxpayers in receipt of interim income support payments.
Context of amendments
Exceptional circumstances relief payments
3.2 Welfare support for drought affected farmers in areas declared to
be in exceptional circumstances is mainly provided through exceptional
circumstances relief payments and is delivered by Centrelink on behalf of
the Department of Agriculture, Fisheries and Forestry.
3.3 Exceptional circumstances relief payments is a taxable payment
paid under the authority of the Farm Household Support Act 1992.
However, exceptional circumstances relief payments is a `rebatable
benefit' to which the beneficiary tax offset applies.
Interim income support payments
3.4 Interim income support payments are made to farmers in areas
where an exceptional circumstances application lodged by a state
demonstrates a prima facie case for full exceptional circumstances
assistance.
3.5 Interim income support is available for up to six months while
the case for full exceptional circumstances assistance is being considered.
3.6 In contrast to exceptional circumstances relief payments, interim
income support is a temporary payment paid under the general category of
emergency and general assistance payments. Emergency and general
assistance payments are not made under any specific legislation, rather
they are a payment made on ministerial direction, similar to an ex-gratia
payment.
19
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
3.7 In contrast to exceptional circumstances relief payments, interim
income support payments are not eligible for the beneficiary tax offset.
Summary of new law
3.8 This measure amends:
· subsection 160AAA(1) of the ITAA 1936 to include interim
income support payments in the definition of a `rebatable
benefit' to which the beneficiary tax offset applies; and
· section 13-1 of the ITAA 1997 to list interim income
support payments as a payment that is allowed a tax offset.
Detailed explanation of new law
Include interim income support payments in the definition of `rebatable
benefit' for beneficiary tax offset purposes
3.9 This measure amends subsection 160AAA(1) of the ITAA 1936
to include interim income support payments as a `rebatable benefit' to
which the beneficiary tax offset applies. This will ensure consistent
taxation treatment with exceptional circumstances relief payments.
[Schedule 3, item 1, subsection 160AAA(1)]
3.10 Subsection 160AAA(3) of the ITAA 1936 provides that where a
taxpayer receives an amount of `rebatable benefit', the taxpayer is entitled
to a tax offset.
3.11 Subsection 160AAA(1) of the ITAA 1936 lists certain pensions,
benefits and payments that are considered to be a `rebatable benefit'.
3.12 Paragraph (da) of subsection 160AAA(1) includes exceptional
circumstances relief payments under the Farm Household Support
Act 1992 as rebatable benefits. Paragraph (db) includes grants of financial
assistance also made under the Farm Household Support Act 1992 as a
`rebatable benefit'.
3.13 Interim income support payments are paid under the general
category of emergency and general assistance payments which are made
by ministerial direction and not under any specific legislation. As interim
income support payments are not made under the Farm Household
Support Act 1992 or otherwise included as a `rebatable benefit', they are
not rebatable benefits and as such are not currently entitled to the tax
offset.
20
Extension of the beneficiary tax offset to interim income support payments
Include interim income support payments in the Division 13 guide of tax
offsets
3.14 Section 13-1 of the ITAA 1997 lists payments that are allowed a
tax offset and the relevant provision of the ITAA 1936 or ITAA 1997 that
provides that offset. Payments are listed under headings classifying the
type of payment.
3.15 The first amendment to section 13-1 of the ITAA 1997 will
include interim income support payments in the list of payments that
attract a tax offset and will direct readers to the item in the table headed
`social security and other benefit payments'. [Schedule 3, item 2, section 13-1]
3.16 The second amendment to section 13-1 lists interim income
support payments under the item in the table headed `primary production'
and directs readers to the item in the table headed `social security and
other benefit payments'. [Schedule 3, item 3, section 13-1]
3.17 The third amendment to section 13-1 lists the reference to
interim income support payments at subsection 160AAA(3) under the
item in the table headed `social security and other benefit payments'.
[Schedule 3, item 4, section 13-1]
Application and transitional provisions
3.18 These amendments are to apply to the 2005-06 year of income
and later years of income.
21
Chapter 4
Simplified imputation system (share
capital tainting rules)
Outline of chapter
4.1 Schedule 4 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to ensure that a company's share capital account
will become tainted if it transfers certain amounts to that account. If a
company taints its share capital account, a franking debit arises in the
company's franking account. If the company chooses to untaint its share
capital account, an additional franking debit may arise and untainting tax
may be payable.
4.2 These rules replace the share capital tainting rules in the Income
Tax Assessment Act 1936 (ITAA 1936) with modifications to ensure that
they interact with the simplified imputation system and to overcome some
technical deficiencies.
Context of amendments
4.3 The simplified imputation system was part of the Government's
business tax reform package and applies from 1 July 2002. The share
capital tainting rules are an integral part of the imputation system.
In Press Release No. C104/02 of 27 September 2002, the then Minister for
Revenue and Assistant Treasurer announced that the share capital tainting
rules would be inserted into the ITAA 1997 as part of the further
implementation of the simplified imputation system.
4.4 Shareholders are taxed preferentially on distributions of share
capital. In contrast, shareholders are generally taxed at their marginal tax
rate on distributions of profits. The share capital tainting rules are
integrity rules designed to prevent a company from disguising a
distribution of profits as a tax-preferred capital distribution by transferring
profits into its share capital account and subsequently making
distributions from that account.
23
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Summary of new law
4.5 A company's share capital account will become tainted if it
transfers an amount to its share capital account from any other account,
other than:
· an amount that can be identified as share capital;
· certain amounts that are transferred under debt/equity
swaps;
· an amount that is transferred by a non-Corporations Act
company to remove shares with a par value;
· certain amounts that are transferred from an option premium
reserve;
· certain amounts that are transferred in connection with the
demutualisation of a non-insurance company;
· certain amounts that are transferred in connection with the
demutualisation of an insurance company at the time of the
demutualisation; and
· certain amounts that are transferred in connection with the
demutualisation of a life insurance company but after the
demutualisation.
4.6 If a company's share capital account becomes tainted, a franking
debit arises in the company's franking account at the end of the franking
period in which the transfer occurs. A tainted share capital account is
treated as a profit account and any subsequent distributions from that
account are unfrankable distributions (rather than returns of capital).
4.7 A company can make an irrevocable choice to untaint its share
capital account. If the company chooses to untaint its share capital
account, an additional franking debit may arise at the end of the franking
period in which the choice to untaint is made. Untainting tax may also be
payable at that time.
24
Simplified imputation system (share capital tainting rules)
Comparison of key features of new law and current law
New law Previous law
A company's share capital account
A company's share capital account
will become tainted if it transfers an
will become tainted if it transfers an
amount to its share capital account
amount to its share capital account
from any other account, other than:
from any other account, other than:
·
· an amount that can be
an amount that can be
identified as share capital;
identified as share capital;
·
· certain amounts that are
certain amounts that are
transferred under debt/equity
transferred under debt/equity
swaps;
swaps;
·
· an amount that is transferred
an amount that is transferred
by a non-Corporations Act
by a non-Corporations Act
company to remove shares with
company to remove shares with
a par value; and
a par value;
·
· certain amounts that are
certain amounts that are
transferred in connection with
transferred from an option
the demutualisation of a
premium reserve;
non-insurance company.
· certain amounts that are
transferred in connection with
the demutualisation of a
non-insurance company at the
time of the demutualisation;
· certain amounts that are
transferred in connection with
the demutualisation of an
insurance company at the time
of the demutualisation; and
· certain amounts that are
transferred in connection with
the demutualisation of a life
insurance company but after
the demutualisation.
If a company's share capital account If a company's share capital account
becomes tainted, a franking debit becomes tainted, a franking debit
arises in the company's franking arises in the company's franking
account at the end of the franking account at the time of tainting.
period in which the transfer occurs.
If a company chooses to untaint its If a company elects to untaint its
share capital account, an additional share capital account, an additional
franking debit may arise in the franking debit may arise in the
company's franking account at the company's franking account at the
end of the franking period in which time of untainting.
the choice is made.
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New Business Tax System (Untainting Tax) Bill 2006
New law Previous law
If a company chooses to untaint its If a company elects to untaint its
share capital account, untainting tax share capital account, untainting tax
may be payable within 21 days of the may be payable within 21 days of the
end of the franking period in which time of making the election.
the choice is made. Untainting tax is payable only if a
Untainting tax will be payable if the company has higher tax shareholders
company has higher tax members in in the tainting period. A company
the tainting period. A company has has higher tax shareholders in the
higher tax members in the tainting tainting period unless it only has
period unless it only has lower tax lower tax shareholders in that period.
members in that period. If a company only has lower tax
Untainting tax will also be payable shareholders in the tainting period,
by a company that only has lower tax no untainting tax is payable.
members in the tainting period if the A company only has lower tax
company's benchmark franking shareholders in the tainting period if,
percentage at either the time of in that period, it only has
tainting or the time of untainting is shareholders that are:
less than 100 per cent.
· other companies (other than
A company will only have lower tax life insurance companies); or
members in the tainting period if, in
· foreign residents.
that period, it only has members that
are:
· other companies (including
life insurance companies);
· complying superannuation
entities; or
· foreign residents.
Detailed explanation of new law
What is a share capital account?
4.8 A share capital account is:
· any account that the company keeps of its share capital; or
· any other account (whether or not it is called a share capital
account) that was created after 1 July 1998 where the first
amount credited to the account was an amount of
share capital.
[Schedule 4, item 20, subsection 975-300(1)]
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Simplified imputation system (share capital tainting rules)
4.9 If a company has more than one share capital account, those
accounts are taken to be a single account for the purposes of the
ITAA 1936 and the ITAA 1997. [Schedule 4, item 20, subsection 975-300(2)]
4.10 The concept of share capital is not defined in the ITAA 1997.
Under its ordinary meaning, share capital includes amounts received by a
company in consideration for the issue of shares.
A company's share capital becomes tainted when an amount is
transferred to the account
4.11 A company's share capital account becomes tainted if:
· the company transfers any amount (other than an excluded
amount) to its share capital account from any of its other
accounts; and
· the company was an Australian resident immediately before
the time of the transfer.
[Schedule 4, item 1, section 197-5 and subsection 197-50(1)]
When is an amount transferred from one account to another account?
4.12 An amount is transferred from one account to another where that
amount is moved from one account to another. This, in turn, requires the
balance of the first account to be reduced, while the balance of the second
account is increased by the same amount.
4.13 An amount is not transferred from one account to another where
the particular accounting entries result in the balances of both accounts
increasing in size. Accordingly, an accounting entry of the form `debit
asset, credit share capital account' does not represent a transfer in the
relevant sense. Furthermore, a transfer to the share capital account will
not arise if an expense account is debited at the same time that the share
capital account is credited.
Example 4.1
A company has a retained profits reserve balance of $1,000 at the
beginning of the 2006-07 income year. The company issues $100 in
shares on 1 September 2006 to an individual as consideration for
services rendered. The share issue is accounted for by debiting the
expense account by $100 and crediting the share capital account
by $100.
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The company does not derive any income nor does it incur any other
expenses during the income year. At the end of the income year, the
balance of the expense account ($100 debit) will be transferred to the
profit and loss account. On closure of its profit and loss account a
$100 debit will be made to the company's retained profits reserve. The
company's retained profits reserve is reduced by the net loss ($100)
incurred over the income year, not directly by the expense itself.
Therefore, no amount has been transferred from the company's
retained profits reserve to its share capital account.
Transfers to a share capital account that do not cause the account to
become tainted
Amounts that can be identified as share capital
4.14 A company's share capital account does not become tainted if an
amount is transferred to its share capital account that, at all times before
the transfer, can be identified in the company's books as share capital.
[Schedule 4, item 1, section 197-10]
Amounts transferred under debt/equity swaps
4.15 A company's share capital account does not become tainted if
the amount is transferred under a debt for equity swap. A debt for equity
swap is an arrangement under which a person discharges, releases or
otherwise extinguishes the whole or part of a debt that the company owes
to the person in return for shares (other than redeemable preference
shares) in the company. [Schedule 4, item 1, subsection 197-15(1)]
4.16 This exclusion will only apply to so much of the transferred
amount that does not exceed the lesser of:
· the market value of the shares issued by the company; and
· the amount of the debt that is discharged, released or
extinguished in return for the shares.
[Schedule 4, item 1, subsection 197-15(2)]
4.17 Amendments are made to the ITAA 1936 to ensure a consistent
outcome arises under the old share capital tainting rules with effect from
1 July 1998. [Schedule 4, items 15 and 16, subsection 160ARDM(2B) of the
ITAA 1936]
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Simplified imputation system (share capital tainting rules)
Amounts transferred by non-Corporations Act companies in removing
shares with a par value
4.18 A company's share capital account does not become tainted if
the company is not incorporated under the Corporations Act 2001 and
transfers an amount from its share premium account or its capital
redemption reserve to its share capital account where:
· the transfer is made under, or in accordance with, a law of
the Commonwealth, or of a State or Territory, that requires or
allows either or both of the company's share premium
account and capital redemption reserve to become part of the
company's share capital account; and
· the transfer is made as part of a process that leads to there
being no shares in the company that have a par value.
[Schedule 4, item 1, section 197-20]
Amounts transferred from option premium reserves
4.19 A company's share capital account does not become tainted if an
amount is transferred from an option premium reserve to its share capital
account where:
· the transfer is made because of the exercise of options to
acquire shares in the company; and
· the amount transferred represents option premiums that were
received by the company in consideration for the issue of the
options that have been exercised.
[Schedule 4, item 1, section 197-25]
4.20 Amendments are made to the ITAA 1936 to ensure a consistent
outcome arises under the old share capital tainting rules with effect from
1 July 1998. [Schedule 4, item 16, subsection 160ARDM(2C) of the ITAA 1936]
Amounts transferred in connection with the demutualisation of
non-insurance companies
4.21 A company's share capital account does not become tainted if an
amount is transferred to its share capital account where:
· the company is a non-insurance company that demutualises
and Division 326 in Schedule 2H to the ITAA 1936 applies
to the demutualisation; and
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New Business Tax System (Untainting Tax) Bill 2006
· the amount is transferred to the company's share capital
account in connection with the demutualisation within the
limitation period in relation to the demutualisation -- the
limitation period is defined in subsection 326-20(3) of
Schedule 2H to the ITAA 1936 to mean the period ending
two years after the demutualisation resolution day or such
later time as the Commissioner of Taxation (Commissioner)
allows.
[Schedule 4, item 1, subsection 197-30(1)]
4.22 This exclusion will only apply to so much of the transferred
amount that, together with any amounts that were previously transferred
in connection with the demutualisation, do not exceed the total capital
contributions amount. [Schedule 4, item 1, subsection 197-30(2)]
4.23 Where the company is not formed by the merger of two or more
mutual entities, the total capital contributions amount is the sum of all the
capital amounts that were contributed by the company's members before
demutualisation that were not allowed as an income tax deduction and
were not payments for goods or services provided by the company.
[Schedule 4, item 1, subsection 197-30(3)]
4.24 Where the company is formed by the merger of two or more
mutual entities, the total capital contributions amount is the sum of:
· all the capital amounts that were contributed before
demutualisation by persons that become members at or after
the time when the merger took place and were not allowed as
an income tax deduction or were not payments for goods or
services provided by the company; and
· the market values, at the time of the merger, of the entities
that merged to form the company, as determined by a
qualified valuer.
[Schedule 4, item 1, subsection 197-30(4)]
Amounts transferred in connection with the demutualisation of
insurance companies
4.25 A company's share capital account does not become tainted if an
amount is transferred to its share capital account where:
· the company is an insurance company that demutualises in
accordance with a demutualisation method specified in
Division 9AA of Part III of the ITAA 1936; and
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Simplified imputation system (share capital tainting rules)
· the amount was transferred in connection with the
demutualisation within the listing period in relation to the
demutualisation -- the listing period is defined in
subsection 121AE(6) of the ITAA 1936 to mean the period
ending two years after the demutualisation resolution day or
such later time as the Commissioner allows.
[Schedule 4, item 1, paragraphs 197-35(1)(a) to (c)]
4.26 This exclusion applies only to amounts transferred to the share
capital account of the issuing company. The issuing company is:
· if demutualisation method 1 (section 121AF) or method 2
(section 121AG) applies to the demutualisation, the
demutualising company; or
· if demutualisation method 3 (section 121AH), method 4
(section 121AI), method 5 (section 121AJ), method 6
(section 121AK) or method 7 (section 121AL) applies to the
demutualisation, the company that issues the ordinary shares
under the demutualisation.
[Schedule 4, item 1, paragraph 197-35(1)(d)]
4.27 This exclusion will only apply to the extent that the sum of:
· the transferred amount;
· all amounts that were previously transferred to the issuing
company's share capital account from another account of the
company in connection with the demutualisation; and
· all amounts that were previously transferred to the issuing
company's retained profit account in connection with the
demutualisation,
do not exceed the listing day company valuation amount. [Schedule 4,
item 1, subsection 197-35(2)]
4.28 The `listing day valuation amount' is defined in note 3 to table 1
in section 121AS of the ITAA 1936. [Schedule 4, item 1, subsection 197-35(3)]
4.29 In most cases the listing day valuation amount will be:
· if the demutualising company is a life insurance company,
the embedded value of the company; or
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New Business Tax System (Untainting Tax) Bill 2006
· if the demutualising company is a general insurance
company, the net tangible asset value of the company.
4.30 Amendments are made to the ITAA 1936 to ensure a consistent
outcome arises under the old share capital tainting rules with effect from
1 July 1998. [Schedule 4, items 17 and 18, subsections 160ARDM(4A) and (6) of
the ITAA 1936]
Amounts transferred in connection with post-demutualisation transfers
relating to life insurance companies
4.31 A company's share capital account does not become tainted if an
amount is transferred to its share capital account where:
· the company is a life insurance company that has
demutualised in accordance with a demutualisation method
specified in Division 9AA of Part III of the ITAA 1936; and
· the amount was transferred after the end of the listing period
in relation to the demutualisation -- the listing period is
defined in subsection 121AE(6) of the ITAA 1936 to mean
the period ending two years after the demutualisation
resolution day or such later time as the Commissioner allows.
[Schedule 4, item 1, paragraphs 197-40(1)(a) to (c)]
4.32 This exclusion applies to amounts transferred to the share capital
account of either:
· the demutualising company; or
· if demutualisation method 3 (section 121AH), method 4
(section 121AI), method 5 (section 121AJ), method 6
(section 121AK) or method 7 (section 121AL) applied to the
demutualisation, the company that issued the ordinary shares
under the demutualisation.
[Schedule 4, item 1, paragraph 197-40(1)(d)]
4.33 In the case of the demutualising company, the amount must be
transferred to the share capital account from an account of the company
consisting of shareholders' capital (within the meaning of the
Life Insurance Act 1995) in relation to a statutory fund (within the
meaning of that Act) and must have been part of such an account at the
time of the demutualisation. [Schedule 4, item 1, paragraph 197-40(1)(e)]
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Simplified imputation system (share capital tainting rules)
4.34 Paragraph 63(3)(a) of the Life Insurance Act 1995 applies to
determine whether an amount is transferred from an account of the
company consisting of shareholders' capital in relation to a statutory fund
under paragraph 197-40(1)(e). For these purposes, it is not relevant that
the transfer under the Corporation Act 2001 is from an account of a
different description.
4.35 In the case of the issuing company, the amount must be
transferred to the share capital account from a capital reserve created at
the time of or in connection with the demutualisation. [Schedule 4, item 1,
paragraph 197-40(1)(f)]
4.36 This exclusion will only apply to the extent that the sum of:
· the transferred amount;
· all amounts that were previously transferred to the
demutualising company's share capital account, or to the
issuing company's share capital account, as described in
subsection 197-40(1); and
· all amounts that were previously transferred, in connection
with the demutualisation, to the issuing company's share
capital account or retained profit account, as described in
section 197-35,
do not exceed the listing day company valuation amount. [Schedule 4,
item 1, subsection 197-40(2)]
4.37 The `listing day valuation amount' is defined in note 3 to table 1
in section 121AS of the ITAA 1936. [Schedule 4, item 1, subsection 197-40(3)]
4.38 In most cases the listing day valuation amount will be:
· if the demutualising company is a life insurance company,
the embedded value of the company; or
· if the demutualising company is a general insurance
company, the net tangible asset value of the company.
4.39 Amendments are made to the ITAA 1936 to ensure a consistent
outcome arises under the old share capital tainting rules with effect from
1 July 1998. [Schedule 4, items 17 and 18, subsections 160ARDM(4B) and (6) of
the ITAA 1936]
Example 4.2
Life Co demutualises on 1 January 2007. The demutualisation is in
accordance with demutualisation method 3 (section 121AH) in
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New Business Tax System (Untainting Tax) Bill 2006
Division 9AA of Part III of the ITAA 1936. Life Co's listing day
valuation amount (or embedded value) at the time of demutualisation
is $200 million.
At the time of the demutualisation:
· $110 million is transferred to Head Co's (the issuing company)
share capital account before the end of the `listing period' in
relation to the demutualisation;
· $30 million is transferred to Head Co's retained profit account
before the end of the `listing period' in relation to the
demutualisation;
· $25 million is transferred to a capital reserve created by
Head Co in connection with the demutualisation; and
· $35 million is retained in the shareholders' capital of the
statutory fund of Life Co.
Section 197-35 applies to ensure that Head Co's share capital account
does not become tainted by the $110 million transferred to that account
before the end of the `listing period' in relation to the demutualisation.
The cap in subsection 197-35(2) is not breached because the sum of
the amount transferred ($110 million) and the amount transferred to
Head Co's retained profit account in connection with the
demutualisation ($30 million) -- that is, $140 million in total -- does
not exceed the listing day valuation amount at the time of
demutualisation ($200 million).
In 2009 (ie, after the end of the `listing period' in relation to the
demutualisation), Head Co transfers the $25 million that was held in
the capital reserve created in connection with the demutualisation to its
share capital account. Section 197-40 applies to ensure that Head Co's
share capital account does not become tainted by the amount
transferred. The cap in subsection 197-40(2) is not breached because
the sum of the amount transferred ($25 million), the amount
transferred within the `listing period' to Head Co's share capital
account ($110 million) and the amount transferred to Head Co's
retained profit account in connection with the demutualisation
($30 million) -- that is, $165 million in total -- does not exceed the
listing day valuation amount at the time of demutualisation
($200 million).
In 2010, Life Co transfers the $35 million that was part of the
shareholders' capital of the statutory fund at the time of the
demutualisation to its share capital account. Section 197-40 applies to
ensure that Life Co's share capital account does not become tainted by
the amount transferred. The cap in subsection 197-40(2) is not
breached because the sum of the amount transferred ($35 million), the
amount transferred after the end of the `listing period' to Head Co's
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Simplified imputation system (share capital tainting rules)
share capital account from the capital reserve created in connection
with the demutualisation ($25 million), the amount transferred within
the `listing period' to Head Co's share capital account ($110 million)
and the amount transferred to Head Co's retained profit account in
connection with the demutualisation ($30 million) -- that is,
$200 million in total -- does not exceed the listing day valuation
amount at the time of demutualisation ($200 million).
What happens when the share capital account becomes tainted?
4.40 If a company's share capital account is tainted, then:
· a franking debit arises in the company's franking account;
· the account is generally taken not to be a share capital
account for the purposes of the ITAA 1936 and the
ITAA 1997; and
· any distributions from the account are taxed as unfranked
dividends in the hands of the shareholder.
A franking debit arises in the company's franking account
4.41 When an amount is transferred to a company's share capital
account that causes the share capital account to become tainted, a franking
debit arises in the company's franking account immediately before the
end of the franking period in which the transfer occurs. [Schedule 4, item 1,
subsection 197-45(1)]
4.42 The amount of the franking debit is calculated by applying the
formula:
transferred ×
corporate tax rate applicable franking
100% - corporate tax rate ×
amount percentage
4.43 The applicable franking percentage is the company's benchmark
franking percentage (determined under section 203-30 of the ITAA 1997)
for the franking period in which the tainting occurs. If the company has
not set a benchmark franking percentage by the end of the franking
period, it is taken to be 100 per cent. [Schedule 4, item 1, subsection 197-45(2)]
Example 4.3
A company's share capital account becomes tainted when an amount
of $700 is transferred to the account from another account. The
company has a benchmark franking percentage for the franking period
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New Business Tax System (Untainting Tax) Bill 2006
in which the tainting occurred of 80 per cent. Section 197-45 imposes
a franking debit at the end of the franking period of $240,
(ie, $700 × 30/70 × 80%).
The share capital account is taken not to be a share capital account
except where specified
4.44 If a company's share capital account is tainted, then the account
is generally taken not to be a share capital account for the purposes of the
ITAA 1936 and the ITAA 1997.
4.45 However, a tainted share capital account continues to be
recognised as a share capital account for the purposes of applying:
· subsection 118-20(6) of the ITAA 1997, which ensures that
a capital gain is not reduced by the amount of a non-portfolio
dividend paid by a non-resident company that is debited
against the company's share capital account;
· the share capital tainting rules (Division 197 of the
ITAA 1997);
· the definition of `paid-up share capital' in subsection 6(1) of
the ITAA 1936;
· subsection 44(1B) of the ITAA 1936, which deems
dividends debited against a share capital account to be paid
out of profits for certain purposes;
· section 46H of the ITAA 1936, which specifies a share
capital account to be a disqualifying account under the
dividend tainting rules; and
· subsection 159GZZZQ(5) of the ITAA 1936, which
specifies that an amount that is debited against a share capital
account is not an eligible non-capital amount under the
off-market share buy-back rules.
[Schedule 4, item 20, subsection 975-300(3)]
Distributions are taken to be unfrankable dividends
4.46 If a company's share capital account is tainted, then any
distributions from the account are taxed as dividends in the hands of the
shareholder. This is because subsection 975-300(3) applies to ensure that
a tainted share capital account is not regarded as a share capital account
for the purposes of paragraph (d) of the definition of a `dividend' in
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Simplified imputation system (share capital tainting rules)
subsection 6(1) of the ITAA 1936. In addition, the dividend is taken to be
an unfrankable distribution (see section 202-45 of the ITAA 1997 and
section 46M of the ITAA 1936).
How does the share capital account become untainted?
4.47 A company's share capital account remains tainted until the
company chooses to untaint the account. [Schedule 4, item 1,
subsection 197-50(2)]
4.48 A company can untaint its share capital account by making a
choice in the approved form given to the Commissioner. This choice is
made at the time the form is given to the Commissioner and cannot be
revoked. [Schedule 4, item 1, section 197-55]
What happens when the share capital account is untainted?
4.49 If a company chooses to untaint its share capital account, the
company may have:
· a further franking debit to its franking account; and
· a liability to pay untainting tax.
An additional franking debit may arise in the company's franking
account
4.50 If a company chooses to untaint its share capital account, an
additional franking debit will arise in the company's franking account if
its applicable franking percentage at the end of the franking period in
which the choice to untaint is made is higher than its applicable franking
percentage at the end of the franking period in which the share capital
account was tainted. [Schedule 4, item 1, section 197-65]
4.51 The applicable franking percentage at the end of the franking
period in which the choice to untaint is made is the company's benchmark
franking percentage (determined under section 203-30 of the ITAA 1997)
for that franking period. If the company has not set a benchmark franking
percentage by the end of the franking period, it is taken to be 100 per cent.
[Schedule 4, item 1, subsection 197-65(3)]
4.52 The amount of the additional franking debit is equal to the
excess of the amount worked out under the formula:
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New Business Tax System (Untainting Tax) Bill 2006
transferred ×
corporate tax rate applicable franking
100% - corporate tax rate ×
amount percentage
over the amount of the franking debits that arose at the time of tainting
under section 197-45 in relation to the transferred amount. [Schedule 4,
item 1, subsection 197-65(3)]
Example 4.4
A company's applicable franking percentage at the end of the franking
period in which the share capital account was tainted was 100 per cent.
Therefore, if the company chooses to untaint its share capital account,
no additional franking debit will arise in its franking account.
Example 4.5
A company's applicable franking percentage at both the end of the
franking period in which the share capital account was tainted and the
end of the franking period in which the choice to untaint is made is
80 per cent. Therefore, if the company chooses to untaint its share
capital account, no additional franking debit will arise in its franking
account.
Example 4.6
A company's share capital account becomes tainted when an amount
of $700 is transferred to the account from another account. The
company's benchmark franking percentage at the end of the franking
period in which the share capital account was tainted was 80 per cent.
Therefore, a franking debit of $240 was made to the company's
franking account at that time.
The company chooses to untaint its share capital account. Its
applicable franking percentage at the end of the franking period in
which the choice to untaint is made is 100 per cent. Therefore, a
franking debit of $60, (ie, ($700 × 30/70 × 100%) = $300 - $240)
will arise in its franking account at the end of the franking period in
which the choice to untaint is made.
The company may be liable to pay untainting tax
4.53 If a company chooses to untaint its share capital account, it may
be liable to pay untainting tax. Untainting tax is due and payable 21 days
after the end of the franking period in which the choice to untaint is made.
[Schedule 4, item 1, subsection 197-60(2) and section 197-70]
4.54 Untainting tax is imposed by section 3 of the New Business Tax
System (Untainting Tax) Bill 2006.
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Simplified imputation system (share capital tainting rules)
4.55 The amount of the liability to untainting tax depends on whether
the company is:
· a company with only lower tax members in relation to the
tainting period -- that is, a company that is wholly-owned by
other companies, complying superannuation entities or
foreign residents; or
· a company with higher tax members in relation to the
tainting period -- that is, a company that is not a company
with only lower tax members in relation to the tainting
period.
[Schedule 4, item 1, subsection 197-60(1)]
4.56 If a company that chooses to untaint its share capital account
only has lower tax members in relation to the tainting period, it will be
liable to untainting tax only if its applicable franking percentage at either
the end of the franking period in which the share capital account was
tainted or the end of the franking period in which the choice to untaint is
made was less than 100 per cent.
4.57 If a company that chooses to untaint its share capital account has
higher tax members in relation to the tainting period, it will always be
liable to untainting tax.
4.58 The amount of untainting tax that is payable is worked out by
applying the formula:
( )
applicable tax - section 197-45 franking debits + section 197-65 franking debits
amount
where:
· the applicable tax amount is the grossed-up tainting amount
at the time of the choice to untaint multiplied by the
applicable tax rate;
· the section 197-45 franking debits are the franking debits
that arose at the end of the franking period in which the share
capital account became tainted; and
· the section 197-65 franking debits are the further franking
debits that arise at the end of the franking period in which the
choice to untaint the share capital account was made.
[Schedule 4, item 1, section 197-60]
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New Business Tax System (Untainting Tax) Bill 2006
4.59 The applicable tax rate is:
· if the company only has lower tax members in relation to the
tainting period, the company tax rate (currently, 30 per cent);
· if the company has higher tax members in relation to the
tainting period, the highest marginal tax rate plus Medicare
levy and Medicare levy surcharge (from 1 July 2006,
47.5 per cent).
[Schedule 4, item 1, subsection 197-60(3)]
Example 4.7
A company's share capital account becomes tainted when an amount
of $700 is transferred to the account from another account. The
company's benchmark franking percentage at the end of the franking
period in which the share capital account was tainted was 80 per cent.
Therefore, a franking debit of $240 was made to the company's
franking account at that time.
The company chooses to untaint its share capital account. The
company only has lower tax members in relation to the tainting period.
The company's applicable franking percentage at the end of the
franking period in which the choice to untaint is made is 90 per cent.
Therefore, a franking debit of $30,
(ie, ($700 × 30/70 × 90%) = $270 - $240)
will arise in its franking account at the end of the franking period in
which the choice to untaint is made under section 197-65.
The company will be liable to pay untainting tax of $30, worked out as
follows:
· the applicable tax amount is $300,
(ie, $700 + ($700 × 30/70) = $1,000 × 30%);
· the section 197-45 franking debits are $240;
· the section 197-65 franking debits are $30;
· the amount of untainting tax is $30,
(ie, $300 - ($240 + $30)).
Example 4.8
A company's share capital account becomes tainted when an amount
of $700 is transferred to the account from another account. The
company's benchmark franking percentage at the end of the franking
period in which the share capital account was tainted was 80 per cent.
40
Simplified imputation system (share capital tainting rules)
Therefore, a franking debit of $240 was made to the company's
franking account at that time.
The company chooses to untaint its share capital account. The
company has higher tax members in relation to the tainting period.
The company's applicable franking percentage at the end of the
franking period in which the choice to untaint is made is 90 per cent.
Therefore, a franking debit of $30,
(ie, ($700 × 30/70 × 90%) = $270 - $240)
will arise in its franking account at the end of the franking period in
which the choice to untaint is made under section 197-65.
The company will be liable to pay untainting tax of $205, worked out
as follows:
· the applicable tax amount is $475,
(ie, $700 + ($700 × 30/70) = $1,000 × 47.5%);
· the section 197-45 franking debits are $240;
· the section 197-65 franking debits are $30;
· the amount of untainting tax is $205,
(ie, $475 - ($240 + $30)).
Example 4.9
A company's share capital account becomes tainted when an amount
of $700 is transferred to the account from another account. The
company's benchmark franking percentage at the end of the franking
period in which the share capital account was tainted was 100 per cent.
Therefore, a franking debit of $300 was made to the company's
franking account at that time.
The company chooses to untaint its share capital account. The
company has higher tax members in relation to the tainting period.
As the company's applicable franking percentage at the end of the
franking period in which the share capital account was tainted was
100 per cent, no further franking debit will arise under section 197-65.
The company will be liable to pay untainting tax of $175, worked out
as follows:
· the applicable tax amount is $475,
(ie, $700 + ($700 × 30/70) = $1,000 × 47.5%);
· the section 197-45 franking debits are $300;
· the section 197-65 franking debits are nil;
41
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
· the amount of untainting tax is $175,
(ie, $475 - ($300 + 0)).
How do the share capital tainting rules apply to consolidated groups?
4.60 If a subsidiary member of a consolidated group or multiple entry
consolidated (MEC) group transfers an amount to its share capital account
that causes the share capital account to become tainted, only the
subsidiary member's share capital account is tainted -- that is, the single
entity rule does not apply to cause the head company's account to become
tainted.
4.61 Franking debits that arise at the time of tainting (section 197-45)
or untainting (section 197-65) will arise in the franking account of the
head company because the consolidated group or MEC group has a single
franking account (see section 709-75). The applicable franking
percentage, which applies to determine the amount of the franking debits
that arise under sections 197-45 and 197-65, will be the head company's
benchmark franking percentage for the relevant franking period. If the
head company has not determined a benchmark franking percentage for
the relevant franking period, the applicable franking percentage will
default to 100 per cent.
4.62 Where a subsidiary chooses to untaint its share capital account,
any untainting tax liability is calculated on the basis of its position as a
company with either higher tax or lower tax shareholders.
4.63 If a subsidiary member joins a consolidated group or
MEC group with a tainted share capital account, no further franking debit
will arise under section 197-45. Any liability to untainting tax liability
will be determined on the basis of the subsidiary member's position as a
company with higher or lower tax shareholders.
4.64 If a subsidiary member leaves a consolidated group or
MEC group with a tainted share capital account, its share capital account
will remain tainted.
Machinery provisions
4.65 Machinery provisions are included that:
· impose the general interest charge on unpaid amounts of
untainting tax;
· allow the Commissioner to give a company a notice of its
liability to pay untainting tax; and
42
Simplified imputation system (share capital tainting rules)
· specify the evidentiary effect of such a notice.
[Schedule 4, item 1, sections 197-75, 197-80 and 197-85]
4.66 These machinery provisions are consistent with the machinery
provisions that applied under the old share capital tainting rules.
Application and transitional provisions
Application of the amendments
4.67 The new share capital tainting rules in Division 197 apply to
transfers made to a company's share capital account after the day this Bill
is introduced into Parliament. The changes to the definition of share
capital account apply from the date of Royal Assent. [Schedule 4, items 2, 14
and 30, section 197-5 of the Income Tax (Transitional Provisions) Act 1997]
4.68 The old share capital tainting rules effectively ceased to apply
from 1 July 2002. Therefore, amounts transferred to a company's share
capital account between 1 July 2002 and the day that this Bill is
introduced into Parliament will not cause the share capital account to be
tainted.
4.69 Consequently, any transfers to a company's share capital
account that occurred as an immediate result of the adoption of the
Australian Equivalent of the International Financial Reporting Standards
will not cause the share capital account to be tainted. Companies were
required to adopt those Standards on the first day of the first accounting
period beginning on or after 1 January 2005.
4.70 Some amendments are made to the old share capital tainting
rules in the ITAA 1936 with effect from 1 July 1998. These amendments
are beneficial to taxpayers as they reduce the circumstances in which a
company's share capital account becomes tainted. [Schedule 4, item 19]
Transitional provisions
4.71 Schedule 4 to this Bill inserts transitional rules into the
Income Tax (Transitional Provisions) Act 1997 to facilitate the untainting
of accounts that became tainted under the old share capital tainting rules
and had not been untainted before 1 July 2002. [Schedule 4, item 2,
section 197-10 of the Income Tax (Transitional Provisions) Act 1997]
4.72 Under the transitional rules, if a company had a tainted share
capital account as at 30 June 2002:
43
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
· the share capital account will be taken to be untainted from
1 July 2002 -- therefore any distribution from the account
between 1 July 2002 and the day after the introduction of this
Bill will be treated as a capital distribution;
· no franking debit or liability to untainting tax will arise at
that time;
· immediately after the day that this Bill is introduced into
Parliament, the share capital account will be taken to be
tainted to the same extent under Division 197 of the
ITAA 1997; and
· no franking debit will arise under section 197-45 of the
ITAA 1997 as a result of the share capital account becoming
tainted.
[Schedule 4, item 2, sections 197-15 and 197-20 of the Income Tax (Transitional
Provisions) Act 1997]
4.73 The company will be able to choose to untaint its share capital
account under section 197-55 of the ITAA 1997.
4.74 If the company chooses to untaint its share capital account, the
operation of sections 197-60 and 197-65 of the ITAA 1997 will be
modified as follows:
· the tainting amount is taken to include the amount that was
tainted under the old share capital tainting provisions;
· references to franking debits arising under section 197-45 of
the ITAA 1997 are taken to be references to franking debits
that arose under the former sections 160ARDQ
and 160ARDV of the ITAA 1936;
· the amount of the franking debits that arose under the former
section 160ARDQ or 160ARDV of the ITAA 1936 will be
converted into a tax paid basis -- this is achieved by
multiplying the amount of any Class A franking debits
by 39/61 and any Class C franking debits by 30/70; and
· no untainting tax will be payable if the company has only
lower tax members.
[Schedule 4, item 2, section 197-25 of the Income Tax (Transitional Provisions)
Act 1997]
44
Simplified imputation system (share capital tainting rules)
Consequential amendments
ITAA 1936
4.75 Consequential amendments to the ITAA 1936:
· modify the definition of `share capital account' in
subsection 6(1);
· insert a definition of `tainted';
· modify the definition of `tainting amount'; and
· repeal the former definition of `share capital account' in
section 6D.
[Schedule 4, items 3, 4, 21 and 22]
ITAA 1997
4.76 Consequential amendments to the ITAA 1997:
· modify the table of franking debits in section 205-30 so that
it includes references to the franking debits arising under
sections 197-45 and 197-65;
· modify the table of tax-related liabilities of the head
company of a consolidated group in subsection 721-10(2) to
update the reference to untainting tax; and
· insert definitions of `share capital account', `tainted',
`tainting amount'; and `untainting tax' into
subsection 995-1(1); and
· insert asterisks before various references to the term `share
capital account'.
[Schedule 4, items 5 to 9 and 23 to 29]
45
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
New Business Tax System (Untainting Tax) Bill 2006
Taxation Administration Act 1953
4.77 Consequential amendments to the Taxation Administration
Act 1953:
· modify the tables in section 8AAB that list provisions that
make persons liable to the general interest charge to include
section 197-60 of the ITAA 1997; and
· modify the table of tax-related liabilities in section 250-10 to
update the reference to untainting tax.
[Schedule 4, items 10 to 13]
46
Chapter 5
Government grants
Outline of chapter
Capital gains tax exemption of expense-reimbursing government grants
5.1 Schedule 5 amends the Income Tax Assessment Act 1997
(ITAA 1997) to exempt from capital gains tax (CGT), the recipients of the
Unlawful Termination Assistance Scheme, the Alternative Dispute
Resolution Assistance Scheme and similar expense-reimbursing
government grants from CGT.
5.2 This Schedule makes a further amendment to ensure capital
losses, and not just capital gains, are exempt from CGT.
Context of amendments
Unlawful Termination Assistance Scheme and the Alternative Dispute
Resolution Assistance Scheme grants
5.3 The Australian Government has established two financial
assistance schemes to support the WorkChoices reforms. These are the
Unlawful Termination Assistance Scheme and the Alternative Dispute
Resolution Assistance Scheme grants.
5.4 The grants provide eligible parties with a capped amount of
financial assistance. Any amount in excess of the cap will be borne by the
recipients of the financial assistance. The financial assistance is delivered
via a voucher.
5.5 Under the Unfair Termination Assistance Scheme, legal
practitioners or their firms will supply services to eligible participants.
The Commonwealth will pay for those services up to the capped amount.
5.6 Under the Alternative Dispute Resolution Assistance Scheme,
alternative dispute resolution providers or their firms will supply services
to eligible participants. The Commonwealth will pay for those services
up to the capped amount.
47
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
CGT status of grants payable under the Unfair Termination Assistance
Scheme and the Alternative Dispute Resolution Assistance Scheme
5.7 Under section 104-25 of the ITAA 1997, CGT event C2
(cancellation, surrender and similar endings) happens if an intangible
CGT asset such as a right to a grant is satisfied (among other cases). This
could technically give rise to CGT consequences on receipt or use of the
vouchers under the two grant Schemes.
CGT status of similar grants
5.8 There is the potential for recipients of other similar
expense-reimbursing government grants also to have CGT consequences.
Summary of new law
5.9 This Schedule amends subsection 118-37(2) of the ITAA 1997
specifically to exempt the Unlawful Termination Assistance Scheme and
Alternative Dispute Resolution Assistance Scheme grants. It also adds a
generic provision to exempt expense-reimbursing government grants
under government schemes established under an enactment or an
instrument of a legislative character.
5.10 This Schedule also amends the existing legislation so that not
only capital gains are exempt for specifically listed programmes, but also
capital losses.
5.11 This ensures that recipients of the Unlawful Termination
Assistance Scheme and the Alternative Dispute Resolution Assistance
Scheme grants, the specifically listed government programmes and more
generally expense-reimbursing government grants, do not have CGT
consequences as a result of receiving the grant.
48
Government grants
Comparison of key features of new law and current law
New law Current law
A capital gain or capital loss made A capital gain made from the:
from the: · General Practice Rural
· General Practice Rural Incentives Program or the
Incentives Program or the Rural and Remote General
Rural and Remote General Practice Program;
Practice Program; · Sydney Aircraft Noise
· Sydney Aircraft Noise Insulation Project; and
Insulation Project; · M4/M5 Cashback Scheme,
· M4/M5 Cashback Scheme; is exempt from CGT.
and
· Unlawful Termination
Assistance Scheme or the
Alternative Dispute Resolution
Assistance Scheme,
is exempt from CGT.
A capital gain or capital loss from a No equivalent.
reimbursement or payment of
expenses or receiving or using a
voucher from an Australian
government agency, a local
governing body or a foreign
government agency under a scheme
established under an enactment or an
instrument of a legislative character,
is exempt from CGT.
Detailed explanation of new law
Unlawful Termination Assistance Scheme and the Alternative Dispute
Resolution Assistance Scheme grants
5.12 The Australian Government has established two financial
assistance schemes to support the WorkChoices reforms. These are the
Unlawful Termination Assistance Scheme and the Alternative Dispute
Resolution Assistance Scheme grants, which are administered by the
Minister for Employment and Workplace Relations.
5.13 The grants provide eligible parties with a capped amount of
financial assistance. Any amount in excess of the cap will be borne by the
recipients of the financial assistance. The financial assistance is delivered
via a voucher.
49
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
5.14 Under the Unfair Termination Assistance Scheme, legal
practitioners or their firms will supply services to eligible participants.
The Commonwealth will pay for those services up to the capped amount.
5.15 Under the Alternative Dispute Resolution Assistance Scheme,
alternative dispute resolution providers or their firms will supply services
to eligible participants. The Commonwealth will pay for those services
up to the capped amount.
CGT status of grants payable under the Unfair Termination
Assistance Scheme and the Alternative Dispute Resolution Assistance
Scheme
5.16 Under section 104-25 of the ITAA 1997, CGT event C2
(cancellation, surrender and similar endings) happens if an intangible
CGT asset such as a right to a grant is satisfied (among other cases). This
could technically give rise to CGT consequences on receipt or use of the
vouchers under the two grant schemes.
5.17 There is already a CGT exemption provision that applies to
specific expense-reimbursing government grants. At present, this
provision (subsection 118-37(2)) disregards a capital gain for the
following grants:
· the General Practice Rural Incentives Program or the
Rural and Remote General Practice Program;
· the Sydney Aircraft Noise Insulation Project; and
· the M4/M5 Cashback Scheme (a scheme by the
New South Wales Government to reimburse tolls paid on two
motorways in Sydney).
5.18 In addition, section 118-14 of the ITAA 1997 provided a CGT
exemption to disregard a capital gain or capital loss made in the
1999-2000 or the 2000-01 income years in relation to the use of goods and
services tax (GST) Direct Assistance Certificates issued by the GST Start-
Up Assistance Office in the Treasury of the Australian Government and
associated with the introduction of the GST. These certificates were
conceptually similar to the vouchers under the two schemes for which a
CGT exemption to disregard a capital gain or capital loss is now being
provided.
50
Government grants
5.19 This amendment lists the Unlawful Termination Assistance
Scheme and Alternative Dispute Resolution Assistance Scheme grants to
ensure that recipients of the grants do not have a CGT consequence.
[Schedule 5, item 1, paragraph 118-37(2)(e)]
CGT status of similar grants
5.20 There is the potential for recipients of other similar
expense-reimbursing government grants to have CGT consequences.
5.21 These amendments also provide a generic CGT exemption to
disregard a capital gain or capital loss as a result of receiving a payment or
property as reimbursement or payment of expenses, or receiving or using
a voucher or certificate, under a scheme established by an Australian
government agency (as defined), a local governing body (as defined) or a
foreign government agency (as defined). The scheme needs to be
established under an enactment or an instrument of a legislative character.
5.22 This means that the scheme can be established by the Australian
Government or its authorities, by the state and territory governments or
their authorities, or by governments of (or part of) foreign countries or
their authorities.
5.23 The requirement that the scheme be established under an
enactment or an instrument of a legislative character would be satisfied
where the scheme is established that way either expressly or by necessary
implication. An enactment would include an Appropriation Act (or
equivalent) having regard to associated documentation such as budget
papers. An instrument of a legislative character would include regulations
(and similar instruments) and local government by-laws.
5.24 The CGT exemption extends only to those cases where the
receipt of the payment or property, or the receipt or use of the certificate
or voucher, in itself directly gives rise to the capital gain or capital loss. It
would not extend, for example, to cases where the payment, property,
voucher or certificate is compensation (a form of capital proceeds) for the
loss, destruction or transfer of an underlying asset. [Schedule 5, item 1,
paragraph 118-37(2)(a)]
5.25 Consistent with the approach taken with the GST Direct
Assistance Certificates and more generally with CGT exemptions such as
the main residence exemption, the amendments ensure that the
subsection 118-37(2) exemptions apply to disregard a capital loss as well
as a capital gain. [Schedule 5, item 1, subsection 118-37(2)]
51
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Application and transitional provisions
5.26 The amendments apply to assessments for the 2005-06 income
year and later income years.
52
Chapter 6
Medicare levy surcharge lump sum
payment in arrears offset
Outline of chapter
6.1 Schedule 6 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to provide an offset to certain taxpayers in respect
of their Medicare levy surcharge (in the legislation the Medicare levy
surcharge is sometimes referred to as MLS) liability where that liability
arose, or significantly increased, as a result of the taxpayer receiving an
eligible lump sum payment in arrears.
Context of amendments
6.2 In the 2005-06 Budget the Government announced that it would
provide concessional Medicare levy surcharge treatment for certain
taxpayers who receive lump sum payments in arrears, with effect from the
2005-06 income year.
6.3 The Medicare levy surcharge is payable if a taxpayer and all
their dependants do not have private patient hospital cover, (other than
because they are `prescribed persons' as defined in section 251U of the
Income Tax Assessment Act 1936 (ITAA 1936)), and their income for
Medicare levy surcharge purposes exceeds the threshold of $50,000 for
singles and $100,000 for families (plus additional amounts for more than
one child). The Medicare levy surcharge is 1 per cent of taxable income,
and is payable in addition to the 1.5 per cent Medicare levy.
6.4 For married taxpayers, both spouses pay the Medicare levy
surcharge on their separate taxable incomes if their family income exceeds
the family threshold and they are liable for the Medicare levy surcharge.
If only one member of a couple has private patient hospital cover but the
family income exceeds the family threshold, then both spouses may be
liable for the Medicare levy surcharge.
53
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
6.5 Taxpayers (and their spouses, where applicable) are currently
liable for the Medicare levy surcharge in cases where their income
exceeds the Medicare levy surcharge threshold due to the receipt of a
lump sum payment in arrears by either one, or both, members of a couple.
6.6 Concessional treatment of the increased tax liability arising from
the receipt of an eligible lump sum payment in arrears is currently
available through the lump sum in arrears tax offset (Subdivision AB of
Division 17 of the ITAA 1936), but no concessional treatment has been
available until now to offset a Medicare levy surcharge liability created by
a lump sum payment in arrears.
6.7 This measure will provide a similar concession to the lump sum
in arrears tax offset for the Medicare levy surcharge liability in the event
of an eligible lump sum payment in arrears.
Summary of new law
6.8 The ITAA 1997 will be amended to provide a tax offset to
certain taxpayers who, in the year in which they have received a
significant, eligible lump sum payment in arrears, have become liable for
the Medicare levy surcharge, (or an increased Medicare levy surcharge
liability), due to the receipt of the lump sum payment in arrears. The
amount of the offset will be the amount of the increased Medicare levy
surcharge liability created by the receipt of the eligible lump sum.
6.9 In cases where receipt of the lump sum payment in arrears alone
results in the taxpayer's spouse having a Medicare levy surcharge
liability, then the spouse will also be eligible for the offset.
Comparison of key features of new law and current law
New law Current law
A taxpayer who is liable for the A taxpayer who is liable for the
Medicare levy surcharge and Medicare levy surcharge pays a
receives a significant eligible lump Medicare levy surcharge of
sum payment in arrears in the current 1 per cent of their total taxable
year, will receive a tax offset equal to income (as defined for Medicare levy
the amount of the Medicare levy surcharge purposes) even if a
surcharge attributable to the lump significant proportion of that income
sum payment in arrears. If receipt of was a lump sum payment in arrears
the lump sum payment in arrears that related to a previous tax year. In
results in the creation of a Medicare some circumstances, the taxpayer's
levy surcharge liability for the spouse may also be required to pay
taxpayer's spouse, then the spouse the Medicare levy surcharge due to
will receive an offset equal to the the taxpayer's receipt of a lump sum
amount of that Medicare levy payment in arrears.
surcharge liability.
54
Medicare levy surcharge lump sum payment in arrears offset
Detailed explanation of new law
6.10 This amendment will insert Subdivision 61-L into the
ITAA 1997 to provide a tax offset to taxpayers who have incurred a
Medicare levy surcharge liability or an increased Medicare levy surcharge
liability in the current year due to the receipt of an eligible lump sum
payment in arrears. [Schedule 6, item 4]
Medicare levy surcharge liability
6.11 The Medicare levy surcharge is payable if a taxpayer and all
their dependants do not have private patient hospital cover, (other than
because they are `prescribed persons' as defined in section 251U of the
ITAA 1936), and their income for Medicare levy surcharge purposes
exceeds the threshold of $50,000 for singles and $100,000 for families
(plus additional amounts for more than one child). The Medicare Levy
Act 1986 and the A New Tax System (Medicare Levy Surcharge-Fringe
Benefits) Act 1999 set out the types of income included for the purpose of
determining liability for the Medicare levy surcharge.
6.12 Broadly, income for the purpose of determining whether a
Medicare levy surcharge liability exists includes a taxpayer's taxable
income (including any exempt foreign employment income), a taxpayer's
reportable fringe benefits amounts, and the net amount on which family
trust distribution tax has been paid, less post-June 1983 elements of an
eligible termination payment where the maximum tax rate is nil. If the
taxpayer has a spouse, it will also include the spouse's taxable income, the
spouse's reportable fringe benefits amounts, and the spouse's net amount
on which family trust distribution tax has been paid, less post-June 1983
elements of an eligible termination payment where the maximum tax rate
is nil.
Lump sum payments in arrears
6.13 Section 61-590 will define `MLS lump sum' for the purpose of
the Medicare levy surcharge. An `MLS lump sum' is a lump sum
payment of `eligible income' which includes eligible income for the
purpose of the lump sum in arrears tax offset contained in
subsection 159ZR(1) of the ITAA 1936, and a lump sum payment in
arrears of `exempt foreign employment income', to be defined in
subsection 995-1(1) of the ITAA 1997.
55
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
6.14 In general terms, an MLS sum means a lump sum payment of
eligible income that is included in the assessable income of the year of
income and accrued, in whole or in part, in an earlier year or years of
income. However, wage and salary income (which is part of eligible
income) and exempt foreign employment income are eligible MLS lump
sums, when they relate to a period of employment that ended more than
12 months before the date on which they were paid. [Schedule 6, item 4,
section 61-590]
Eligibility for the Medicare levy surcharge lump sum payment in arrears
offset
6.15 Broadly consistent with the treatment of eligible lump sums for
the purpose of the lump sum in arrears tax offset, a lump sum payment in
arrears will only be eligible for the Medicare levy surcharge lump sum
payment in arrears offset if the amount of the lump sum is equal to or
greater than ten per cent of taxable income for Medicare levy surcharge
purposes (excluding the spouse's income when there is a spouse) in the
current year, less the total lump sum payment in arrears. So, a taxpayer
will be eligible for this offset in the current year if:
eligible lump sum payment in arrears
10%
taxable income for M LS purposes - eligible lump sum payment in arrears
6.16 For simplicity, this test is described in paragraph 61-580(1)(d) in
terms of the value of the lump sum being greater than or equal to 1/11th of
the total income for Medicare levy surcharge purposes (excluding the
spouse's income when there is a spouse) in the current year. The effect is
the same as described in paragraph 6.15. [Schedule 6, item 4,
paragraph 61-580(1)(d)]
6.17 The use of a threshold test ensures that only significant lump
sums are eligible for the offset.
6.18 The offset will be available in situations where a Medicare levy
surcharge liability has arisen entirely due to the receipt of an eligible lump
sum payment in arrears, as well as cases when an existing Medicare levy
surcharge liability has been increased by the payment of an eligible lump
sum.
56
Medicare levy surcharge lump sum payment in arrears offset
Example 6.1
In 2005-06, Ellis, a single woman, earned income in the form of salary
of $42,000, and reportable fringe benefits of $5,000. She also received
a lump sum payment of $10,000 that related to back pay from 2002-03.
She does not have private patient hospital cover in 2005-06.
If Ellis had not received the lump sum payment her Medicare levy
surcharge income would have been $47,000, that is, wages and salaries
of $42,000 plus reportable fringe benefits of $5,000. As she would
have been below the $50,000 single Medicare levy surcharge
threshold, she would not have paid any Medicare levy surcharge.
But the receipt of the lump sum increases her Medicare levy surcharge
income to $57,000, which is over the Medicare levy surcharge
threshold for singles. Without the Medicare levy surcharge offset,
Ellis would be liable to a Medicare levy surcharge of $570.
However, Ellis will be eligible for the new Medicare levy surcharge
offset as her lump sum payment is eligible income (as it meets the
definition of `MLS lump sum' in section 61-590) and the size of her
lump sum satisfies the 10 per cent test. That is:
$10, 000 10
10%
=
$57, 000 - $10,000 47
Amount of the offset
6.19 If a lump sum payment in arrears meets the criteria set out in
sections 61-590 and 61-580, then the value of the offset will equal the
amount of Medicare levy surcharge liability attributable to that lump sum,
regardless of the taxpayer's income in previous years.
6.20 The offset will be available in situations where the Medicare
levy surcharge liability arose entirely due to the receipt of the lump sum
payment in arrears, as well as in situations where an existing Medicare
levy surcharge liability was increased by the payment of an eligible lump
sum. The amount of the offset will equal the amount of the Medicare levy
surcharge attributable to the lump sum payment in arrears. The amount of
offset available to a taxpayer can be represented as:
total MLS payable for total MLS payable,
amount of offset = the current year, including - disregarding
the lump sum payment the lump sum payment
57
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
6.21 The amount of the offset cannot exceed the Medicare levy
surcharge liability. [Schedule 6, item 4, subsection 61-585(1)]
Example 6.2
In Example 6.1, Ellis was eligible for the Medicare levy surcharge
lump sum payment in arrears offset because her eligible lump sum met
the 10 per cent test.
Using the formula in paragraph 6.20, the amount of her offset
entitlement is calculated as:
amount of offset = $570 - 0 = $570
The amount of Ellis's offset entitlement is $570, which is her full
Medicare levy surcharge liability, because in the absence of the lump
sum payment in arrears she would not have been liable for the
Medicare levy surcharge in the current tax year.
Offset for spouses
6.22 Under existing Medicare levy surcharge legislation, a family's
Medicare levy surcharge liability is determined by adding together both
spouses' incomes to ascertain whether the family Medicare levy surcharge
threshold has been reached (section 8D of the Medicare Levy Act 1986,
Division 4 of Part 3 of the A New Tax System (Medicare Levy Surcharge-
Fringe Benefits) Act 1999. Therefore, the receipt of a lump sum payment
in arrears by one spouse may affect the Medicare levy surcharge liability
of both themselves and their spouse. However, once the Medicare levy
surcharge family threshold has been reached, the amount of Medicare levy
surcharge payable by each spouse is calculated on the basis of their own
taxable income.
6.23 As noted in paragraph 6.20, this legislation may provide the
recipient of an eligible lump sum with an offset when their Medicare levy
surcharge liability has been increased by the receipt of the lump sum. If
receipt of the lump sum payment in arrears results in the creation of a
Medicare levy surcharge liability for the taxpayer's spouse, then the
spouse will receive an offset equal to the amount of that Medicare levy
surcharge liability. The spouse of a recipient of a lump sum payment in
arrears cannot be entitled to the offset unless the recipient of the lump sum
is also entitled to the offset. [Schedule 6, item 4, subsections 61-585(2) and 61-
580(2)]
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Medicare levy surcharge lump sum payment in arrears offset
Example 6.3
June and Bruce are a couple with three dependent children. They do
not have private patient hospital cover. In 2005-06, June earns
$40,000 and Bruce earns $50,000 in wages. However, in 2005-06
Bruce also receives a $20,000 lump sum worker's compensation
payment owed from 2003-04.
If Bruce had not received the lump sum payment in arrears, neither
June nor Bruce would have been liable to pay the Medicare levy
surcharge in 2005-06 as their family income was below $103,000 (the
Medicare levy surcharge threshold for a family with three children).
However, Bruce's lump sum brings their total family income to
$110,000, meaning that both Bruce and June are liable for the
Medicare levy surcharge.
Without the Medicare levy surcharge lump sum payment in arrears
offset, Bruce would be liable for a Medicare levy surcharge of $700
(1 per cent of $70,000) while June's Medicare levy surcharge liability
would have been $400 (1 per cent of $40,000).
Bruce's lump sum payment in arrears payment is eligible income (as it
meets the definition of `MLS lump sums' in section 61-590) and meets
the 10 per cent test:
eligible lump sum payment in arrears
10%
taxpayer 's taxable income for MLS purposes - eligible lump sum payment in arrears
$20, 000 2
10%
=
$70, 000 - $20,000 5
Hence Bruce will be eligible for the Medicare levy surcharge lump
sum payment in arrears offset. June will also be eligible for the offset
as her Medicare levy surcharge liability arose solely due to Bruce's
lump sum payment in arrears. Bruce and June will each be eligible for
an offset representing the full amount of their individual Medicare levy
surcharge liability: Bruce's offset will be $700 and June's offset will
be $400.
6.24 In cases where a lump sum payment in arrears is received by one
member of a couple and both members of the couple are already liable for
the Medicare levy surcharge (because their non-lump sum payment in
arrears income exceeds the family threshold), the offset will only be
available to the person who received the lump sum payment in arrears.
The Medicare levy surcharge liability of the taxpayer's spouse will be
59
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
unchanged by the lump sum payment in arrears and therefore they will not
be eligible for the offset.
Example 6.4
Rob and Lyn are a couple with one child. They do not have private
patient hospital cover.
In 2005-06, Rob earned $60,000 as a salesman and Lyn earned
$80,000 as an accountant. On the basis of this income they would be
liable for the Medicare levy surcharge because their family income
exceeds the family threshold of $100,000. Rob's Medicare levy
surcharge liability would be $600 and Lyn's liability would be $800.
However, in 2005-06 Lyn also received an eligible lump sum payment
in arrears of $30,000 due to work done in 2001-02 and 2002-03.
Hence Lyn's total taxable income is $110,000. In the absence of the
Medicare levy surcharge offset, this lump sum would increase her
Medicare levy surcharge liability from $800 to $1,100.
Lyn's lump sum payment in arrears is eligible income (as it meets the
definition of `MLS lump sums' in section 61-590) and meets the
10 per cent test:
$30, 000 3
10%
=
$110, 000 - $30,000 8
The amount of Lyn's offset would be equal to the amount of the
Medicare levy surcharge due to receipt of the lump sum, that is, $300.
Her remaining Medicare levy surcharge liability would be $800.
Rob would not be eligible for the Medicare levy surcharge offset as his
Medicare levy surcharge liability was not affected by Lyn receiving
the lump sum payment in arrears. His Medicare levy surcharge
liability would remain at $600.
Application and transitional provisions
6.25 These amendments made by Schedule 6 to this Bill apply to
assessments for income years commencing on or after 1 July 2005 as
announced in the 2005-06 Budget. This offset is claimable on assessment
when the Medicare levy surcharge liability is calculated. [Schedule 6, item 8,
section 61-575 of the Income Tax (Transitional Provisions) Act 1997]
Consequential amendments
6.26 Notes identifying the offset are added to:
60
Medicare levy surcharge lump sum payment in arrears offset
· the end of subsection 10(1) of the A New Tax System
(Medicare Levy Surcharge-Fringe Benefits) Act 1999;
· the end of subsection 251S(1) of the ITAA 1936; and
· the end of section 5 of the Medicare Levy Act 1986.
[Schedule 6, items 1, 2 and 9]
6.27 The Taxation Administration Act 1953 is amended to add
reference to the offset in section 45-340 in Schedule 1 and
section 45-375 in Schedule 1. [Schedule 6, items 10 and 11]
6.28 Three definitions are added to the Dictionary. [Schedule 6,
items 5 to 7, subsection 995-1(1), definitions of `exempt foreign employment income',
`Medicare levy surcharge', and `MLS lump sums']
61
Chapter 7
Reporting of employer superannuation
contributions by superannuation
providers
Outline of chapter
7.1 Schedule 7 to this Bill amends the Superannuation Guarantee
(Administration) Act 1992 to require superannuation providers to report
details of superannuation contributions to the Australian Taxation Office
(ATO).
7.2 This Schedule also amends the Superannuation Guarantee
(Administration) Act 1992 to allow the Commissioner of Taxation
(Commissioner) to impose administrative penalties on superannuation
providers for failure to provide details of the contributions.
Context of amendments
7.3 The Superannuation Contributions Tax (Assessment and
Collection) Act 1997 required superannuation providers to report, on an
annual basis, information necessary for the Commissioner to determine
superannuation surcharge liabilities. The specific information required is
set out in the regulations to this Act.
7.4 This information is used by the ATO to monitor compliance
with the superannuation guarantee arrangements.
7.5 Following the abolition of the surcharge, superannuation
providers will not be required to report information relating to the
2005-06 and later income years. This information will therefore no longer
be reported to the ATO.
Summary of new law
7.6 Schedule 7 allows the Commissioner to require superannuation
providers to report prescribed information that is reasonably necessary to
assist in the administration of the superannuation guarantee arrangements.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
7.7 The information that superannuation providers will be required
to report to the ATO are details of employer and total contributions.
Where amounts are transferred between superannuation funds or
retirement savings accounts (RSAs) the transferring superannuation
provider must provide the receiving superannuation provider with
equivalent information. Superannuation providers must report this
information on a statement that is in the approved form.
Comparison of key features of new law and current law
New law Current law
A superannuation fund or RSA Until the abolition of the surcharge, a
provider will be required to report to superannuation fund or RSA
the Commissioner, details of provider was required to report to the
employer and total contributions Commissioner, details of employer
made to a superannuation fund or and total contributions made to a
RSA under the Superannuation superannuation fund or RSA. This
Guarantee (Administration) Act information was required under the
1992. Superannuation Contributions
Tax (Assessment and Collection)
Act 1997.
Detailed explanation of new law
7.8 The legislation requires a superannuation fund or RSA provider
to provide the Commissioner with a statement which sets out:
· the total of all employer contributions made on behalf of an
employee to the superannuation fund or RSA in a year; and
· the total of all contributions made to the fund or RSA for the
benefit of that employee in the year.
[Schedule 7, item 3, section 78]
7.9 Contributions include payments of superannuation guarantee
shortfall components and payments from the Superannuation Holding
Accounts Special Account into the superannuation fund or RSA.
7.10 `Superannuation provider' has the same meaning as that given in
the Superannuation (Government Co-contributions for Low Income
Earners) Act 2003. This Act defines `superannuation provider' to
include:
· the trustee of a complying superannuation fund;
64
Reporting of employer superannuation contributions by superannuation providers
· the provider of an RSA; or
· the trustee of a constitutionally protected fund.
7.11 The statement to be given by the superannuation provider to the
Commissioner must be in the approved form. The definition of `approved
form' in the Superannuation Guarantee (Administration) Act 1992 is
linked to the definition in section 388-50 in Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953). This ensures that, unless
specifically excluded, the other provisions of the TAA 1953 relating to
approved form apply to this statement. This includes the power to allow
the Commissioner to extend the due date of lodgement of an approved
form. [Schedule 7, item 3, paragraph 78(1)(c)]
7.12 A superannuation provider is only required to give the
Commissioner a statement in the approved form in respect of employees
who had a contribution made for their benefit in the year. This ensures a
provider is not required to provide a statement in respect of a member
who has not had contributions made for their benefit during the relevant
year. [Schedule 7, item 3, paragraph 78(1)(b)]
7.13 When amounts are transferred between superannuation
providers, the superannuation provider transferring these amounts must
provide the superannuation provider to which these funds are transferred
with a statement in the approved form, that sets out details of employer
and total contributions transferred. This statement is required to be
provided within 30 days after the day on which the amount is transferred.
[Schedule 7, item 3, section 78A]
7.14 Regulations to the Superannuation Guarantee (Administration)
Act 1992 will specify the type of information required and the date by
which it is required.
7.15 To encourage compliance with these requirements,
administrative penalties of 5 penalty points will be imposed upon
superannuation providers that do not provide statements in the approved
form within the time prescribed. The penalty will be imposed on a per
member basis rather than a statement basis. That is, a superannuation
provider will be liable to an administrative penalty of 5 penalty points for
each relevant member in respect of whom the provider has not provided
the Commissioner with a statement in the approved form and within the
time prescribed.
7.16 Penalty provisions within the TAA 1953 have been amended to
allow for the Commissioner to impose the administrative penalties in the
Superannuation Guarantee (Administration) Act 1992 and also ensure that
the Commissioner has the power to remit the new penalty where the
65
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Commissioner decides that the particular circumstances of the case
warrant such a remission. [Schedule 7, items 4 and 5, paragraphs 298-5(b) and (c)]
Application and transitional provisions
7.17 These amendments will apply to income years from 1 July 2005.
The amendments allow for regulations to take effect from this date.
[Schedule 7, item 6]
66
Chapter 8
Exclusion for fringe benefits to address
personal security concern
Outline of chapter
8.1 Schedule 8 to this Bill amends the Fringe Benefits Tax
Assessment Act 1986 (FBTAA 1986) to exclude from reporting, fringe
benefits provided to address certain security concerns relating to the
personal safety of an employee, or an associate of the employee, arising
from the employee's employment.
Context of amendments
8.2 The provision of a benefit by an employer to an employee (such
as residential burglar alarms and drive-by security patrols) to protect
against general or specific security risks, when not engaged in business
activities, are generally fringe benefits subject to fringe benefits tax
(FBT).
8.3 The taxable value of a fringe benefit may be reduced by the
application of the `otherwise deductible' rule. However this rule will
generally not apply to personal security protection of a person and their
family at their home as it is regarded as a private expense and therefore is
not deductible to the employee.
8.4 Consequently, under Part XIB of the FBTAA 1986, the
employee may have a reportable fringe benefit amount arising from the
fringe benefit provided.
8.5 An employee's reportable fringe benefits total for a year of
income is the sum of each of the employee's reportable fringe benefit
amount for the year of income, where this sum is more than $1,0001. This
enables the employee's reportable fringe benefit amount to be taken into
account in income tests in order to determine entitlement to income-tested
government benefits (eg, family tax benefit), liability to tax surcharges
1 In their Joint Press Release of 7 April 2006, the Prime Minister and the Treasurer
announced that the fringe benefits reporting exclusion threshold will be increased from
$1,000 to $2,000, effective from 1 April 2007.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
(eg, the Medicare levy surcharge) and income-tested obligations (eg, child
support payments).
8.6 On 8 September 2005, the then Minister for Revenue and
Assistant Treasurer announced that the Government would amend the law
so that employers who provided personal security services to employees
who had received threats due to their line of work would not have to
report these fringe benefits on the employee's payment summaries
(the reporting exclusion).
8.7 The Government is providing this reporting exclusion because
some employees require certain security services outside of employment
as a result of a credible threat of attack to them or their associates by
reason of their employment.
Summary of new law
8.8 Schedule 8 amends section 5E of the FBTAA 1986 so that a
fringe benefit provided to address a security concern:
· relating to the personal safety of the employee, or an
associate of the employee; and
· arising in respect of the employee's employment,
is an excluded fringe benefit, subject to certain conditions.
8.9 For the reporting exclusion to apply, the provision of a fringe
benefit to address a security concern must be consistent with a threat
assessment made by a person recognised to be competent to make threat
assessments by a relevant industry body, government body or the
Commissioner of Taxation (Commissioner).
Comparison of key features of new law and current law
New law Current law
The provision of a benefit to address The provision of a benefit to address
personal security concerns of an personal security concerns of an
employee, when not engaged in employee, when not engaged in
business activities, is generally a business activities, is generally a
fringe benefit subject to FBT. fringe benefit subject to FBT.
A fringe benefit provided to address Consequently, the employee may
the personal security concerns of an have a reportable fringe benefit
68
Exclusion for fringe benefits to address personal security concern
New law Current law
employee when not engaged in amount included on their payment
business activities is an excluded summary.
fringe benefit, subject to certain
conditions, and is not required to be
included on their payment summary.
Detailed explanation of new law
A security concern relating to personal safety
8.10 For the purposes of this provision, a security concern only exists
if the facts and circumstances establish a basis for concern in relation to
the personal safety of an employee, or an associate of the employee.
[Schedule 8, item 1, subparagraph 5E(3)(l)(i)]
8.11 Examples of concerns for the personal safety of an employee, or
associate, might arise from (but are not restricted to) a threat of death,
kidnapping, assault or serious bodily harm.
8.12 Concerns that do not relate to the personal safety of the
employee, but rather relate more to the property of the employee, will not
satisfy the requirements for claiming a reporting exclusion.
A security concern that arises in respect of employment
8.13 Under the FBTAA 1986, `in respect of', in relation to the
employment of an employee, includes by reason of, by virtue of, or for or
in relation directly or indirectly to, that employment. [Schedule 8, item 1,
subparagraph 5E(3)(l)(ii)]
8.14 `Employment', in relation to a person, means the holding of any
office or appointment, the performance of any functions or duties, the
engaging in of any work, or the doing of any acts or things that results,
will result or has resulted in the person being treated as an employee.
8.15 `Employee' means a current employee, a future employee or a
former employee. `Current employee' means a person who receives, or is
entitled to receive, salary or wages. A `future employee' means a person
who will become a current employee. A `former employee' means a
person who has been a current employee.
8.16 For the purposes of the reporting exclusion, a security concern
relating to the personal safety of the employee must arise in respect of the
employee's employment.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Example 8.1
Catherine, an employee of a business, has received threats from an
identified source because of work duties done by her on behalf of the
business.
On the basis of these threats, Catherine's employer has sought advice
from a security expert. The security expert, having given
consideration to the facts and circumstances surrounding these threats,
advises following a security assessment that there is a significant risk
to Catherine's safety.
These threats to Catherine would form the basis for a security concern
under paragraph 5E(3)(l).
8.17 This is irrespective of whether the security concern arises in
respect of the employment of a former, current or a future employee.
Example 8.2
Continuing on from Example 8.1, Catherine subsequently ceases
working for the business and is now a former employee for the
purposes of FBT.
Given her operational knowledge of the business the security expert
concluded that a security concern still exists in relation to Catherine's
safety.
This security concern arises in respect of Catherine's employment for
the purposes of subsection 5E(3).
8.18 Certain public officials and certain proprietors and employees of
businesses may have security concerns which arise due to the nature of
their responsibilities and the contacts that they make in the course of their
duties or which arise because of their operational duties. Consequently a
security concern may arise, for the purposes of the reporting exclusion, in
the absence of demonstrated threats from identified individuals or parties.
8.19 A security concern exists where there is a risk to the employee's
personal safety specifically connected to the nature of the work carried on
by the employee, regardless of whether there were direct threats from
identified individuals or parties.
Example 8.3
Anupam is a senior public official responsible for law enforcement.
There is some history of personal security risks associated with that
position. While he has not been subject to a direct threat to his life, his
safety may be at risk due to his responsibility for the management of
operational matters within his jurisdiction.
70
Exclusion for fringe benefits to address personal security concern
Subject to the threat assessment, this could form the basis for a security
concern under section 5E by virtue of the nature of Anupam's
employment.
A fringe benefit provided to address a security concern
8.20 The proposed exclusion would only apply to fringe benefits that
directly address the security concern. [Schedule 8, item 2, paragraph 5E(3)(l)]
8.21 Security measures that address a security concern would emerge
from the threat assessment process and would form part of the
recommendations of the threat assessment (see below).
8.22 Fringe benefits that are not consistent with a threat assessment
carried out by the recognised security consultant would not be eligible for
this reporting exclusion.
8.23 Depending on the nature of the threat assessment, types of
security measures that address security concerns might include (but are
not restricted to) an employer-provided residential burglar alarm, drive-by
security patrols, personal bodyguards, personal protective equipment and
protective modifications to a motor vehicle.
8.24 Fringe benefits that do not address a security concern are not
excluded from reporting.
Example 8.4
Continuing from Example 8.3, given that the security risks relating to
Anupam, form the basis for a security concern under section 5E, his
employer engages a security expert from within the agency to make a
threat assessment. Protective measures to Anupam and his family at
his home are based on the recommendations of the recognised security
expert.
The employer-provided protective measures that are subsequently
provided include home security systems and drive-by patrols. The
amounts arising from these fringe benefits would be excluded from
reporting.
8.25 Where the security concern relating to an employee or
associate has ended, any fringe benefits provided to them would not be
excluded fringe benefits. The security concern may end where the basis
for the security concern no longer exists.
Example 8.5
The security concern relating to Catherine, from Example 8.2, has
subsequently ended as the identified source of the security risk has
71
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
since been arrested and incarcerated. The security expert, in reviewing
the threat assessment, is of the view that a security concern no longer
exists. The employer continues to provide fringe benefits to protect
Catherine at her home after the security concern has ended. The
amounts arising from these fringe benefits would no longer be
excluded fringe benefits.
Threat assessment
8.26 It is commonplace for employers to undertake threat
assessments to address security risks before providing protective
measures.
8.27 A fringe benefit would only be an excluded fringe benefit where
its provision is consistent with a threat assessment and that threat
assessment is made by a person who is recognised as being competent to
make threat assessments by the relevant industry body, government body
or the Commissioner. [Schedule 8, item 2, subsection 5E(6)]
8.28 For the purpose of the reporting exclusion, the threat assessment
must be made in relation to the relevant employee or associate. The threat
assessment would identify and analyse the facts and circumstances
relating to the security concern and provide advice on measures to treat
the security concern.
8.29 It is expected that the threat assessment would be based on (or
consistent with) the relevant Australian/New Zealand Standard or
equivalent industry standard practices.
8.30 This requirement ensures that the types of benefits provided to
the employee would not be unrelated to the identified security concern or
disproportionate to the security concern faced by the employee.
8.31 The threat assessment is not required to take an approved form.
8.32 It is recognised that there will be situations where, for various
reasons, employers will need to provide fringe benefits to employees to
address a security concern prior to the completion of the threat
assessment.
8.33 An employer who provides fringe benefits to address a security
concern prior to the completion of the threat assessment will not be
precluded from excluding those fringe benefit amounts from reporting
once the threat assessment has been made. The fringe benefits must still
be consistent with the threat assessment.
72
Exclusion for fringe benefits to address personal security concern
8.34 Where fringe benefits are provided to address a security concern
in the absence of a threat assessment, the employer will need to report the
fringe benefit amounts on the recipient employee's payment summary.
However, should these fringe benefits subsequently meet the conditions to
be an excluded fringe benefit, the employer may correct an amount, on a
payment summary, based on the procedures set out by the Commissioner.
Example 8.6
Benjamin is an employee of a business which provided him with fringe
benefits to address a perceived security risk to his personal safety in
the 2004-05 income year. The reportable amounts arising from those
fringe benefits were reported on his payment summary at the time.
The employer subsequently became aware of the paragraph 5E(3)(l)
reporting exclusion. The employer would be required to seek a threat
assessment in relation to Benjamin concerning the fringe benefits
provided so that the amounts on the payment summary can be
corrected.
A person recognised as being competent to make threat assessments
8.35 A fringe benefit would only be an excluded fringe benefit where
its provision is consistent with a threat assessment, in relation to the
employee or associate. This threat assessment must be made by a person
who is recognised to be competent to make threat assessments by the
relevant industry body, government body or the Commissioner.
8.36 There are varying licensing and oversight conditions for the
security industry in different jurisdictions. As such, the conditions
concerning the competency of the person making the threat assessment are
designed to operate in light of the different circumstances in each
jurisdiction.
8.37 Relevant industry bodies would only include organisations or
associations that are capable of, as a part of their business operations,
accrediting or recognising the competency of persons to carry out threat
assessments. In some jurisdictions, these would often be government
approved organisations or associations.
8.38 Under the FBTAA 1986, `government body' means the
Commonwealth, a State, a Territory or an authority of the
Commonwealth, a State or a Territory.
8.39 Relevant government bodies would include only government
bodies that could carry out threat assessments as a part of their business
operations or which recognise or accredit the competency of persons to
carry out threat assessments as a part of their business operations.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
8.40 In the absence of a relevant industry body or a relevant
government body, the Commissioner has the discretion to recognise a
person as being capable of carrying out threat assessments.
8.41 In exercising this discretion, the Commissioner will take into
account the qualifications and experience of the person seeking to make
the threat assessment and whether the person's qualifications and
experience would be equivalent to a person recognised by the relevant
industry or government body as being competent to make the threat
assessment.
8.42 It is expected that a person, in demonstrating their competence
to make a threat assessment, would have completed tertiary or vocational
qualifications in security risk management. The experience and
qualifications of a competent person may have been acquired
internationally.
Application and transitional provisions
8.43 The amendments in relation to this reporting exclusion apply
retrospectively from 1 April 2004. [Schedule 8, item 3]
8.44 The retrospective application of the amendments can affect the
entitlement to income-tested government benefits, liability to tax
surcharges and income-tested obligations in past years.
8.45 Applying the amendments retrospectively from 1 April 2004
addresses the concerns of individuals affected by the application of the
current law by excluding from reporting fringe benefits provided to
address certain security concerns.
74
Chapter 9
Pre-1 July 1988 funding credits
Outline of chapter
9.1 Schedule 9 to this Bill amends the Income Tax Assessment
Act 1936 (ITAA 1936) to:
· prevent the inappropriate use of pre-1 July 1988 funding
credits (funding credits) by ensuring that superannuation
schemes can only use them to reduce their taxation liability
in respect of contributions made for the purpose of funding
benefits that accrued before 1 July 1988; and
· allow regulations to be made to provide guidance to the
trustee of a superannuation scheme on how to work out the
amount of funding credits that can be applied to reduce the
taxation liability of the trustee in respect of contributions
made and to allow other methods of working out how the
trustee of a superannuation scheme can apply funding credits.
Context of amendments
9.2 Since 1 July 1988 most contributions (eg, employer and other
deductible contributions) to superannuation schemes have been subject to
a 15 per cent tax. Funding credits were granted to unfunded
superannuation schemes so that contributions made after 1 July 1988 to
fund benefits that accrued prior to 1 July 1988 are not taxed. This ensures
equity with funded superannuation schemes which only pay tax on
contributions from 1 July 1988.
Example 9.1
In a funded superannuation scheme contributions are made each year
for members. In an unfunded scheme contributions are not made each
year but could be made as a one-off contribution immediately before a
benefit payment is to be made. This is illustrated below for a member
who commenced work in 1968 and retires in 2008.
1968 1988 2008
75
Commences 15% contributions tax Retires and
introduced benefit paid
work
Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Funded scheme -- contributions are made each year since 1968 to
fund the benefit, hence only those contributions made since 1988 have
been taxed.
Unfunded scheme -- a one-off contribution is made in 2008 to fund
the benefit, the contribution covers the whole period 1968 to 2008 but
because it was made in 2008 the entire contribution will be subject to
15 per cent tax (in the absence of funding credits). Funding credits can
be used so that the part of the contribution made to fund pre-1988
benefits will not be taxed. This ensures equity with funded schemes.
9.3 However, the current law does not ensure that superannuation
schemes can only use funding credits to reduce their taxation liability in
respect of contributions made for the purpose of funding benefits that
accrued before 1 July 1988.
9.4 To address this unintended outcome, these amendments will
ensure that the policy objective -- that is, funding credits can only be
used to reduce tax on contributions made in respect of pre-1 July 1988
benefits -- will be achieved.
Summary of new law
9.5 These amendments provide that funding credits can only apply
to reduce tax on contributions that are used to fund liabilities that accrued
prior to 1 July 1988.
9.6 These amendments apply to the use of funding credits on or after
9 May 2006 the date this measure was announced in the 2006-07 Budget.
9.7 In addition, any new or outstanding objections or requests for
amendment to past assessments will only be able to amend funding credit
use for that year/s up to the amount that can be claimed under the new
law.
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Pre-1 July 1988 funding credits
Comparison of key features of the new law and current law
New law Current law
Funding credits can only apply to reduce Funding credits can apply to reduce tax
tax on contributions that are used to on contributions that are used to fund
fund liabilities that accrued prior to liabilities that accrued both before and
1 July 1988. after 1 July 1988.
Detailed explanation of the new law
9.8 Since 1 July 1988 most contributions (eg, employer and other
deductible contributions) to superannuation schemes have been subject to
a 15 per cent tax. Funding credits were granted to unfunded
superannuation schemes so that contributions made after 1 July 1988 to
fund benefits that accrued prior to 1 July 1988 are not taxed. This ensures
equity with funded superannuation schemes which only pay tax on
contributions from 1 July 1988.
9.9 However, the current law does not adequately restrict funding
credit use to that covered by the original policy intent. In particular,
funding credits can be used to reduce tax on contributions paid in respect
of benefits that accrued after 1 July 1988, rather than just allowing use of
funding credits for contributions paid in respect of pre-1 July 1988
benefits.
9.10 The current law does include provisions designed to restrict the
inappropriate use of funding credits but, in practice, these provisions have
not been effective in limiting their use as intended.
9.11 The key fault in the previous law was that it assumed that
unfunded schemes would only be funded (ie, have contributions made)
when a benefit was due to be paid out.
9.12 Subsection 275B(2) of the ITAA 1936, in effect, limits the
amount of funding credits that can be used in a year to the total amount of
taxable contributions for the year less taxed post-1983 benefits paid out
during that year. (Post-1983 benefits were used rather than post-1988
benefits as schemes already had to calculate the post-1983 benefit
component and it avoided introducing another benefit component for
schemes to administer.) The intention was that the residual amount would
broadly represent those contributions that funded pre-1 July 1988 benefits.
9.13 However, if large one-off contributions are made in a year (eg, if
the employer has moved to fully fund the scheme) with few benefit
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
payments made in that year, then funding credits can be used to reduce tax
on a significant amount of those contributions. This would be over and
above the amount of those contributions that may have been intended to
fund pre-1 July 1988 benefits.
9.14 As a result a scheme is able to effectively
avoid tax on some contributions made in respect of post-1 July 1988
benefits -- contributions that should be subject to tax.
9.15 To address the unintended outcome of funding credits being
used to reduce tax on contributions paid in respect of benefits that accrued
after 1 July 1988, the amendments replace the existing formula-based rule
with a principle-based rule, that funding credits can only be used to reduce
tax on contributions made in respect of pre-1 July 1988 benefits. [Schedule
9, item 1]
9.16 These amendments also allow regulations to be made to provide
guidance to the trustee of a superannuation scheme on how to work out
the amount of funding credits that can be applied to reduce the taxation
liability of the trustee in respect of contributions made, and to allow other
methods of working out how the trustee of a superannuation scheme can
apply funding credits. It is anticipated that the regulations will set out
rules for actuaries to follow in determining the amount of funding credits
that can be used. [Schedule 9, item 2]
Application and transitional provisions
9.17 These amendments will apply to the use of funding credits on
or after 9 May 2006 the date this measure was announced in the 2006-07
Budget. [Schedule 9, item 5]
9.18 In addition, any new or outstanding objections or requests for
amendment to past assessments will only be able to amend funding credit
use for that year/s up to the amount that can be claimed under the new
law. [Schedule 9, item 5]
9.19 This is designed to ensure that the new law cannot be avoided by
superannuation schemes adjusting previous years' returns in order to use
as many funding credits as possible under the current law.
Consequential amendments
9.20 These amendments repeal the following provisions as they are
no longer required:
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Pre-1 July 1988 funding credits
· subsection 275B(3) which defines `pension component';
· subsection 275B(6) which defines `1988-89' and future
years for the purposes of subsection 275B(2);
· subsection 275B(7) which contains definitions used in
subsection 275B(2) and section 275C; and
· section 275C which defines `accrual period for a
superannuation pension' for the purposes of
subsection 275B(7).
[Schedule 9, items 3 and 4]
79
Chapter 10
Allow certain funds to obtain an Australian
Business Number
Outline of chapter
10.1 Schedule 10 to this Bill amends the A New Tax System (Goods
and Services Tax) Act 1999 (GST Act) and the A New Tax System
(Australian Business Number) Act 1999 (ABN Act) to allow certain funds
that raise money for other deductible gift recipients (DGRs), to obtain an
Australian Business Number (ABN) so that those funds can be exempt
from income tax and receive input tax credits for goods and services tax
(GST) paid and other GST benefits.
Context of amendments
10.2 Division 30 of the Income Tax Assessment Act 1997
(ITAA 1997) allows a tax deduction to taxpayers who make a gift or
contribution to a fund, authority or institution which is a DGR, subject to
some conditions.
10.3 Public ancillary funds and prescribed private funds are DGRs
under Subdivision 30-A of the ITAA 1997. Section 50-20 of the
ITAA 1997 provides an income tax exemption to non-charitable public
ancillary funds and prescribed private funds which donate to DGRs that
are income tax exempt, whether or not the DGR is a charity.
10.4 A public ancillary fund is a fund established and maintained
solely for the purpose of providing money, property or benefits to other
DGRs or for the establishment of DGRs.
10.5 A prescribed private fund is a trust fund established by
businesses, families and individuals for philanthropic purposes to receive
tax deductible donations to be used for similar purposes as a public
ancillary fund. Prescribed private funds differ from public ancillary funds
in that while they must meet all the criteria required of public ancillary
funds, they may but are not required to seek contributions from the public.
They must also be prescribed in the Income Tax Assessment Regulations
1997.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
10.6 As an integrity measure, for an entity to be a DGR and exempt
from income tax it must be endorsed by the Commissioner of Taxation
(Commissioner). Endorsement requires the entity to have an ABN.
10.7 To be eligible to receive an ABN an entity must carry on an
`enterprise' within the meaning of the GST and ABN Acts. The definition
of `enterprise' does not cover most public ancillary funds and prescribed
private funds that are not charities. As a result, they are not entitled to
have an ABN.
Summary of new law
10.8 Schedule 10 amends the definition of `enterprise' in both the
GST Act and the ABN Act so that non-charitable public ancillary funds
and prescribed private funds can obtain an ABN and will, where
applicable, be entitled to be endorsed as income tax exempt. This
amendment will also ensure that the DGR status of non-charitable public
ancillary funds and prescribed private funds is maintained and these
entities can receive input tax credits for GST included in their acquisitions
and importations.
10.9 As these entities will become DGRs for income tax purposes,
they will also become gift-deductible entities for GST purposes and be
able to access the GST concessions available to these entities.
Comparison of key features of new law and current law
New law Current law
Public ancillary funds and prescribed Public ancillary funds and prescribed
private funds can obtain an ABN private funds which are not
even if they are not charitable, and charitable are not eligible for an
where applicable, can obtain an ABN and are not eligible for an
income tax exemption, DGR status income tax exemption, DGR status
and claim input tax credits for GST and to claim input tax credits for
purposes. GST purposes.
Detailed explanation of new law
10.10 Prescribed private funds and public ancillary funds are funds
established for the purposes of providing money, property or benefits to
other DGRs. The ITAA 1997 allows public ancillary funds and
prescribed private funds to be endorsed as income tax exempt if they are
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Allow certain funds to obtain an Australian Business Number
charitable funds. This requires that these funds distribute money, property
and benefits only to DGRs that are endorsed by the Commissioner as
charities.
10.11 However, not all DGRs are endorsed as charities, and some
DGRs, such as public ambulance services and research authorities, are
income tax exempt but not charities. It is a well-established principle of
the existing common law that a government body is not a charitable
institution simply because it is performing a government responsibility.
10.12 Public ancillary funds and prescribed private funds that are not
charitable because they distribute to non-charitable DGRs do not meet the
definition of `enterprise' and are therefore not entitled to have an ABN.
This amendment allows the trustees of public ancillary funds and
prescribed private funds to obtain an ABN regardless of their charitable
status, by expanding the definition of an `enterprise' in the GST and ABN
Acts. The amendment to the GST Act will enable non-charitable public
ancillary funds and prescribed private funds to register for GST purposes
and therefore claim input tax credits. [Schedule 10, items 1 and 3,
paragraph 38(1)(h) of the ABN Act and paragraph 9-20(1)(h) of the GST Act]
10.13 This amendment to the GST Act, in conjunction with the
amendment to the ABN Act, will enable non-charitable public ancillary
funds and prescribed private funds to qualify as DGRs and fully access
the GST concessions which are available to all gift-deductible entities,
regardless of whether or not they are charities. These concessions
include: GST-free status for certain supplies for nominal consideration;
GST-free status for certain sales of donated second hand goods; GST-free
status for raffles and bingo; and the availability of input tax credits for
reimbursements made to volunteers. Furthermore, input tax credit
adjustments will not be required where an item acquired is gifted.
Distributions from a trust that is a member of a GST group to a public
ancillary fund or prescribed private fund will not cause the trust to lose its
status as a member of the GST group.
10.14 Since these funds were effectively input taxed under the current
GST law, some of these benefits and others were already available to non-
charitable public ancillary funds and prescribed private funds. However,
these amendments will allow these funds to be able to enjoy the benefit of
all GST concessions for DGRs on a similar basis to charitable funds.
Application and transitional provisions
10.15 These amendments apply from 1 July 2005 to align with the
commencement of section 50-20 of the ITAA 1997. [Schedule 10, item 5]
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
10.16 Taxpayers and DGRs will not be worse-off as a result of these
amendments and will benefit from being able to take advantage of the
concessions in section 50-20 of the ITAA 1997.
Consequential amendments
10.17 Both the ABN and the GST Act will also be amended to ensure
that the changes to the definition of `enterprise' will not be excluded by
the provisions in both Acts, which outline the exclusions to the definition
of `enterprise'. [Schedule 10, items 2 and 4, paragraph 38(2)(c) of the ABN Act and
paragraph 9-20(2)(c) of the GST Act]
84
Chapter 11
New deductible gift recipient categories
Outline of chapter
11.1 Schedule 11 to this Bill amends the Income Tax Assessment
Act 1997 (ITAA 1997) to create five new general categories of deductible
gift recipient (DGR).
Context of amendments
11.2 Subsection 30-15(2) of the ITAA 1997 allows a tax deduction to
taxpayers who make a gift or contribution to a fund, authority or
institution covered by the tables in Subdivision 30-B, subject to some
conditions.
11.3 There are more than 30 existing general DGR categories.
Organisations which meet the criteria under these categories can request
endorsement from the Commissioner of Taxation (Commissioner) as a
DGR. Gifts of $2 or more in cash or property to DGRs may be tax
deductible.
11.4 In the 2005-06 Budget, the Government announced that it would
establish five new DGR categories to cover war memorials, disaster relief,
animal welfare, charitable services and educational scholarships.
Summary of new law
11.5 These amendments streamline current DGR specific listing
arrangements and provide a more consistent framework for assessing
applications for DGR status.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
11.6 This measure allows taxpayers to claim an income tax deduction
for certain gifts of money or property to the following types of
organisations that are endorsed as DGRs:
· public funds established and maintained for the
reconstruction or critical repair of a damaged war memorial;
· public funds established and maintained by a public
benevolent institution solely to provide money to assist in
providing relief to people (including assistance to re-establish
a community) in distress as a result of declared natural or
man-made disasters in a developed country, and public funds
established and maintained for charitable purposes solely to
provide money for relief of people and re-establishing a
community in distress as a result of declared disasters which
occur in Australia;
· charitable institutions with a principal activity of providing
short-term direct care to animals that are lost, mistreated,
without owners and/or are rehabilitating those animals if they
are orphaned, sick or injured;
· charitable institutions that would be a public benevolent
institution except that they also undertake activities that
would fall under the existing DGR categories of a health
promotion charity and/or a harm prevention charity; and
· public funds that are established for charitable purposes
solely to provide money for scholarships, bursaries or prizes
to promote education where entry is open to persons at a
national, state, territory or regional level.
Comparison of key features of new law and current law
New law Current law
Funds, authorities or institutions that These funds, authorities or
meet the criteria of the categories of institutions cannot be endorsed under
war memorials, disaster relief, a general DGR category.
animal welfare, charitable services or
educational scholarships will be
eligible for endorsement as a DGR
under one of these new general
categories.
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New deductible gift recipient categories
Detailed explanation of new law
11.7 These amendments establish five new DGR categories to cover
war memorials, disaster relief, animal welfare, charitable services and
educational scholarships.
War memorials
11.8 A public fund is eligible to be endorsed by the Commissioner as
a DGR if it is set up solely to provide funds for the reconstruction or
critical repair of a war memorial. [Schedule 11, item 6, item 5.1.3 in the table in
subsection 30-50(1)]
11.9 The term `war memorial' follows the ordinary dictionary
meaning. The structure must be clearly identifiable as a memorial. It
must also be a memorial:
· situated in Australia (including its external territories and
territorial seas);
· that either commemorates events in a conflict in which
Australia was involved or commemorates people (most of
whom are Australian) who participated on Australia's behalf
in a conflict;
· that is a focus for public commemorations; and
· that is solely or mainly used for public commemorations.
[Schedule 11, item 6, item 5.1.3 in the table in subsection 30-50(1)]
11.10 This general DGR category would not include funds established
for:
· repairing public amenities such as community memorial
halls, swimming pools, club buildings, hospitals and sports
grounds, even if they are named as a memorial or contain a
plaque;
· repairing memorials to individuals;
· repairing memorials operated for a commercial purpose;
· maintaining memorials; and
· maintaining or repairing memorial surrounds.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
11.11 Examples of memorials eligible for DGR status would include
structures such as statues, honour rolls, decorative gates, monuments,
obelisks, ornamental bridges and fountains, that are a focus for public
commemorations. Trees may be considered war memorials where it can
be demonstrated that they are the memorial and not the memorial
surrounds.
Example 11.1
The Goulding Memorial consists of a decorative gate at the entrance to
a community garden. The decorative gate is inscribed with a
dedication to the Australian soldiers who fought in the Vietnam War
and is the focus of community commemorations. The decorative gate
meets the criteria of a war memorial but the community garden does
not. Accordingly, any public fund established to replace the trees,
pathways or gardens would not be eligible for endorsement under the
war memorials category as it would not be limited to critical repair of
the memorial structure (the gate).
Example 11.2
Each ANZAC Day, Martinville residents gather for commemorations
at their local World War I memorial which consists of a row of elm
trees -- one tree and one plaque for each fallen soldier from
Martinville. The community accepts that the row of trees is a single
memorial to the town's World War I victims, not a collection of
separate memorials to individuals. The trees of the Martinville
Memorial were severely damaged and many of the trees were uprooted
during a storm. A public fund is established to collect funds for the
repair and replacement of the damaged and destroyed trees. This
public fund is eligible for endorsement under this general category as
the trees qualify as a single memorial and the work required qualifies
as critical repair or reconstruction.
11.12 Reconstruction of a war memorial would involve repairing
significant and unforseen damage to a memorial resulting from an event
such as fire, vandalism, flooding or earthquake. Critical repair arises
where a failure to repair the damage (however caused) could endanger
public safety and significantly compromise the structural integrity of the
memorial.
Example 11.3
A part of the supporting structure of the Smithville Community
Memorial statue for World War II veterans sustained severe damage
due to a lightning strike, resulting in a risk to public safety from the
damaged memorial. The memorial is used for Smithville Community
commemorations. A public fund is set up to collect funds to repair the
damage. This public fund is eligible for endorsement as a DGR
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New deductible gift recipient categories
because it is collecting funds to be used to repair critical damage of an
eligible memorial.
11.13 Reconstruction also extends to replacing a memorial which is
badly damaged and cannot be repaired. DGR funds can only be used to
build a similar memorial and cannot be used to expand or significantly
alter the memorial.
11.14 Reconstruction and critical repair do not cover maintenance,
expansion or improvement of an existing memorial, repairs that are
routine in nature, or repairs that are desirable but not essential.
Example 11.4
A group of Happyville residents has set up a public fund to add a bell
tower to the town's memorial commemorating Australian World War I
victims. This public fund is not entitled to DGR status under the
general category because the fund is established for expanding a war
memorial, not for its critical repair or reconstruction.
11.15 DGR support extends to gifts made to eligible public funds for a
maximum period of two years. This time limit applies to ensure that the
DGR funds are collected for reconstruction and critical repair and not for
maintenance of memorials.
11.16 Once the two years has ended, the public fund cannot continue
to collect tax deductible donations, however it may continue to operate to
complete reconstruction or critical repairs to the memorial for which DGR
support was initially conferred.
11.17 A public fund can only provide funds for the reconstruction or
critical repair of one war memorial.
Disaster relief
11.18 Public funds established solely to assist in providing relief to
people (including assistance to re-establish a community) in distress as a
result of declared natural or man-made disasters may be eligible for
endorsement by the Commissioner. The criteria for endorsing those funds
providing relief in Australia differ from those providing relief in a
developed country. [Schedule 11, item 4, item 4.1.5 in the table in
subsection 30-45(1); item 5, section 30-46; item 8, item 9.1.2 in the table in
subsection 30-80(1); and item 11, section 30-86]
11.19 DGR status through the disaster relief category is only extended
to developed countries, where a developed country is one that has not
been declared by the Minister for Foreign Affairs as a developing country.
Disasters which occur in countries classified by the Minister for Foreign
Affairs as developing countries may be eligible for DGR support under
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
the international affairs DGR general category (section 30-80 of the ITAA
1997). [Schedule 11, item 8, item 9.1.2 in the table in subsection 30-80(1)]
11.20 An eligible disaster under this category must meet both of the
following conditions:
· it developed rapidly; and
· it resulted in the death, serious injury or other physical
suffering of a large number of people, or in widespread
damage to property or the natural environment.
[Schedule 11, items 5 and 11, sections 30-46 and 30-85]
11.21 A disaster might be considered to have `developed rapidly' if it
developed over a number of weeks, but not if it developed over a number
of years.
Example 11.5
Cyclone Bob developed off the coast of Queensland, remaining over
the ocean for 14 days before crossing the coast and causing significant
damage to Smallville. For the purposes of this category, Cyclone Bob
is considered to have developed rapidly.
Example 11.6
A bushfire started in thick forest in a remote area of New South Wales.
The fire burned for 21 days, growing in intensity before it reached the
city of Albie, causing substantial damage. For the purposes of this
category, the fire is considered to have developed rapidly.
Example 11.7
Mickleborg had not received rain for two years. Mickleborg's local
council started introducing water restrictions to preserve the town's
water supply. One year later, Mickleborg had still not received rain
and the town was declared to be in drought. For the purposes of this
category, the drought did not develop rapidly.
11.22 Examples of disasters which are likely to be eligible under this
category include: fire, earthquake, flood, storm (including hailstorm),
cyclone (including typhoon and hurricane), storm surge, tornado,
landslide, tsunami, meteorite strike, volcanic eruption, plague, terrorist
act, large scale transport accident or chemical accident, epidemic or
war-like action. Crop and animal diseases may qualify if these developed
rapidly and resulted in significant damage to property or the natural
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New deductible gift recipient categories
environment which affected a large area or injury to a large number of
people.
Example 11.8
Mr Smith's pumpkin crop is destroyed by a disease. A public fund is
set up to relieve the hardship of Mr Smith due to the loss of income.
This public fund is not eligible for endorsement under the disaster
relief category because the crop disease did not affect a sufficiently
large area to attract a declaration of a disaster or a state of emergency
from the relevant minister.
Example 11.9
Mr Brown's pumpkin crop was one of many crops in the region
destroyed by disease. The relevant state or territory minister declares
the effect of this crop disease as a disaster. A public fund which is set
up to relieve distress in the region as a result of the crop disease would
be eligible for endorsement under this category.
11.23 Funds for relief from global warming, drought, land salinity, and
soil erosion would not be eligible for this category as they do not develop
rapidly.
11.24 In providing relief after a declared disaster, public funds can be
used to assist in the delivery of short to medium-term relief and recovery
efforts to alleviate hardship and suffering in communities severely
affected by eligible disasters. Public funds may also use donations to
prevent a community from facing further danger from the disaster.
Example 11.10
Much of Porpoise Spit was destroyed or badly damaged in a recent
cyclone. A public fund is set up to provide relief to the residents of
Porpoise Spit as a result of the cyclone. The public fund also provides
funds to prevent an imminent landslide which may occur as a result of
the loss of a significant number of trees which were destroyed during
the cyclone. The public fund is eligible for endorsement as a DGR.
Disasters that occur within Australia
11.25 A public fund is eligible to be endorsed by the Commissioner as
a DGR where it is established and maintained for charitable purposes
solely to provide funds for the relief (including assistance to re-establish a
community) of people in Australia who have suffered a disaster which is
declared and meets the relevant criteria. [Schedule 11, item 4, item 4.1.5 in the
table in subsection 30-45(1); and item 5, section 30-46]
11.26 For the purposes of this category, an event must be declared by
or with the approval of the relevant state or territory minister as a disaster
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
or state of emergency, in addition to meeting the other conditions outlined
in paragraph 11.20. [Schedule 11, item 5, section 30-46]
Example 11.11
Nick's house, which is situated in Australia, was flooded due to a burst
water pipe. A public fund is established to provide funds to help repair
Nick's house and replace his damaged furniture. This public fund is
not eligible for endorsement as a DGR under this category for a
number of reasons. First, the event was not declared by the relevant
state or territory minister as a disaster or state of emergency.
Secondly, it did not cause widespread damage across the community
and finally, this public fund is not established for public charitable
purposes as it is established for the benefit of an individual, not a
community.
11.27 Gifts made to a public fund under this category are deductible
for two years from the date of the disaster or emergency specified in the
state or territory minister's declaration (or a declaration made with the
approval of the state or territory minister), or otherwise on the date of the
declaration. Once the two years have ceased, the public fund cannot
continue to collect tax deductible donations, but it may continue to
operate in undertaking purposes for which DGR status was conferred
under the category. [Schedule 11, item 5, section 30-46]
Example 11.12
Numerous community buildings in Mt Wannamanna, Australia, were
damaged in a recent storm and the process of rebuilding was slow due
to a lack of funds. A public fund was set up six months after the date
of the disaster, as declared by the state minister, to provide funds to
assist with the reconstruction. This public fund can receive DGR
status because the disaster was declared by the minister, and had
caused widespread damage; however DGR status can only be received
for a maximum period of one and a half years (ie, ending two years
after the disaster occurred).
Disasters that occur in a developed country
11.28 A public fund is eligible to be endorsed by the Commissioner as
a DGR where it is established and maintained by a public benevolent
institution solely to provide funds for the relief (including assistance to re-
establish a community) of people in a developed country that has suffered
a disaster recognised by the Treasurer. [Schedule 11, item 8, item 9.1.2 in the
table in subsection 30-80(1); and item 11, section 30-86]
11.29 The Treasurer's recognition of a disaster must be announced
publicly and must specify the day (or the first day) the disaster is taken to
have occurred or commenced. [Schedule 11, item 11, section 30-86]
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New deductible gift recipient categories
Example 11.13
Ycart, a town situated in a developed country, sustained severe damage
as a result of a tsunami leading the Treasurer to recognise it as a
disaster for tax deductibility purposes. An existing Australian public
benevolent institution, the Giving Society, set up a public fund to
collect funds to assist with the relief of people in the Ycart community.
The public fund is eligible for endorsement as a DGR under the
disaster relief category.
11.30 The public benevolent institution should ensure that the funds
provided by the public fund are used solely for the purpose intended. This
could be met where the delivery of relief and recovery assistance in the
developed country is undertaken by an agent appointed by the public
benevolent institution, based in the disaster-affected country, working on
the public benevolent institution's behalf.
11.31 DGR support under this category will be restricted to a
maximum period of two years after the date of the disaster specified in the
Treasurer's declaration. Once the two years have ceased, the public fund
cannot continue to collect tax deductible donations, however it may
continue to operate in undertaking the principal purpose to which DGR
status was conferred under the category. [Schedule 11, item 11, section 30-86]
Animal welfare
11.32 A charitable institution is eligible to be endorsed by the
Commissioner as a DGR where its principal activity is one or both of:
· providing short-term direct care to animals (but not only
native wildlife) that have been lost, mistreated or are without
owners; and/or
· rehabilitating orphaned, sick or injured animals (but not only
native wildlife) that have been lost, mistreated or are without
owners.
[Schedule 11, item 4, item 4.1.6 in the table in subsection 30-45(1)]
Example 11.14
Furry Friends is a charitable institution whose principal activity is to
provide short-term care for lost and injured cats, dogs and horses.
Furry Friends' intent is to find new homes for all of the animals it
shelters. While some animals take longer than others to find new
homes, the majority are eventually given new homes. However,
Furry Friends has difficulty in finding homes for some of its horses
and these are cared for by Furry Friends for the rest of their lives.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
As Furry Friends' main activity is to provide short-term direct care to
injured and lost animals, it is eligible for endorsement under this
category. The long-term care that Furry Friends provides to a small
portion of its animals does not affect its eligibility for endorsement.
Example 11.15
Animal Care is a charitable institution which rehabilitates injured
wildlife that have been brought in by the public and also operates a
shelter for lost and unowned pets. Animal Care releases the majority
of the wildlife back into their natural environment. Animal Care also
aims to find new homes for all the pets it cares for. However, due to
the large volume of pets coming to Animal Care, many are put down
because they cannot be given new homes. Animal Care is eligible for
endorsement under this category because it rehabilitates injured
animals and provides short-term care to animals without owners.
11.33 The animal welfare DGR category will not extend to the
endorsement of organisations which are established solely to protect
native animals. Public funds which are established solely to protect native
animals may be eligible for DGR endorsement under the existing general
category of environmental organisations (section 30-55 of the ITAA
1997). [Schedule 11, item 4, item 4.1.6 in the table in subsection 30-45(1)]
Example 11.16
Zulu Animals operates a fleet of vehicles which rescue native animals
that have been injured by natural disasters or cars. Zulu Animals does
not rescue or rehabilitate any non-native animals. Zulu Animals
rehabilitates the native animals until they return to full health. As
Zulu Animals only cares for native animals, it is not eligible for
endorsement under this category. It should instead apply for
endorsement under the environmental organisations DGR category.
11.34 Charitable institutions which are endorsed under this category
may undertake other minor activities which further their charitable
purpose, such as providing veterinary services and promoting the
prevention of cruelty to animals. However, the principal activity of the
organisation must be to provide one or both of short-term direct care to
animals that have been lost, mistreated or are without owners or the
rehabilitation of those animals that are sick or injured.
Example 11.17
Ardnas Inc is a charitable animal rescue institution which rehabilitates
native and non-native animals that have been hit by cars or injured by
natural disasters. Ardnas Inc also operates a shelter for unwanted
animals and provides an animal hospital service to members of the
public. This animal hospital service only accounts for a small portion
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New deductible gift recipient categories
of Ardnas Inc's activities. As the principal activity of Ardnas Inc is
rehabilitating injured animals, it is eligible for endorsement under this
general category.
Example 11.18
Alix's Animals is a charitable institution which has a principal activity
of providing short-term direct care, through its pet shelter, to pets that
no longer have owners. To help fund the pet shelter, Alix's Animals
also operates a boarding kennel and an opportunity shop which sells
second hand animal accessories. Both of these activities are minor
activities and therefore do not affect Alix's Animals' eligibility for
endorsement under this category.
11.35 Institutions which have a principal purpose of advocating a
political party or cause, attempting to change the law or government
policy, or promoting a particular point of view are not charitable, and are
therefore not eligible for endorsement under the animal welfare general
category. However, if an entity's activities are otherwise charitable, the
presence of political, lobbying or promotional activity that is only
incidental to the dominant charitable purpose, will not prevent the
institution from being a charity.
Example 11.19
Abba Animals is an institution which has the principal activity of
providing information and lobbying the government on animal rights
and educating the public on how to care for their pets. Abba Animals
would not be eligible for endorsement under this category even if it
was a charitable institution as it is not providing animals with short-
term direct care or rehabilitation.
11.36 Groups which are not charitable include those which are
opposed to vivisection or the use of animals for research, anti-livestock
production groups, anti-whaling groups, anti-logging groups and
anti-circus groups.
Charitable services
11.37 A charitable institution is eligible to be endorsed by the
Commissioner as a DGR where it would have been a public benevolent
institution except that in addition to its public benevolent institution
activities it undertakes one or both of the following:
· it also promotes the prevention or the control of disease in
human beings (but not as a principal activity); and/or
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· it also promotes the prevention or the control of behaviour
that is harmful or abusive to human beings (but not as a
principal activity).
[Schedule 11, item 4, item 4.1.7 in the table in subsection 30-45(1)]
11.38 A public benevolent institution is a not-for-profit institution
organised for the direct relief of poverty, sickness, suffering, distress,
misfortune, disability or helplessness. The characteristics of a public
benevolent institution are:
· it is set up for needs that require benevolent relief;
· it relieves those needs by directly providing services to
people suffering them; and
· its dominant purpose must be to provide benevolent relief.
Example 11.20
Gift Givers is a charitable institution whose objectives are relieving
poverty and improving health outcomes of people suffering from
arthritis. It carries out its objectives by providing hostel
accommodation for the homeless (which accounts for 45 per cent of its
activities), and by providing health information about arthritis to health
professionals, carers and the public. The provision of health
information accounts for 45 per cent of its activities. It also prepares
and publishes research papers about poverty, but these activities are
minor in extent and importance.
Gift Givers would qualify as a public benevolent institution but for its
work on health information about arthritis. As the provision of health
information is not its principal activity, Gift Givers is eligible for
endorsement under this category.
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New deductible gift recipient categories
11.39 The charitable services category does not provide DGR status to
organisations that are established solely to promote the prevention or the
control of disease in human beings; or solely to promote the prevention or
the control of behaviour that is harmful or abusive to human beings.
Where an institution falls into the former category, it may be eligible for
endorsement under section 30-20 of the ITAA 1997 (as a health
promotion charity). Where an institution falls into the latter category, it
may be eligible for endorsement under section 30-45 of the ITAA 1997
(as a harm prevention charity). [Schedule 11, item 4, item 4.1.7 in the table in
subsection 30-45(1)]
Example 11.21
Helping Hands is an organisation which has a principal activity of
promoting the prevention or control of harmful or abusive behaviour
among humans. Helping Hands is not eligible for endorsement under
this category. Helping Hands should instead apply for endorsement
under the category of harm prevention charity.
11.40 A charitable institution which is endorsed under the charitable
services category will also be eligible for a capped fringe benefits tax
(FBT) rebate. The rebate is equal to 48 per cent of the gross FBT payable,
subject to the capping threshold. The maximum grossed-up value of
benefits that can be provided to any one person employed by the
institution (without losing the concession) is $30,000.
Educational scholarships
11.41 A public fund established for charitable purposes is eligible for
endorsement as a DGR by the Commissioner if its sole purpose is to
provide money for scholarships, bursaries or prizes that promote
education. [Schedule 11, item 1, item 2.1.13 in the table in subsection 30-25(1); and
item 2, section 30-37]
11.42 Scholarships and bursaries are ongoing or one-off benefit
payments, which are open to students at a national, state, territory or
regional level, and which usually comprise payment for school fees,
textbooks and other related educational expenses such as to cover
uniforms, travel or boarding costs. Scholarships and bursaries may be
awarded to fund education at a particular school or higher education
institution. Scholarships and bursaries are usually awarded on the basis of
merit or for reasons of equity. For the purposes of this category, reasons
of equity would cover students who are experiencing socio-economic
disadvantage or hardship.
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Example 11.22
Sandra is a student at Eastern Girls' College. Sandra's parents are
experiencing financial hardship and can no longer pay her school fees,
and she will have to move to another school. A public charitable fund
is set up to collect funds to provide a bursary to Sandra to assist with
the payment of her school fees to Eastern Girls' College. The public
fund is not eligible for endorsement under this category because the
bursary is open to just one student. The bursary would need to be open
to all students in necessitous circumstances from at least a region to
qualify.
Example 11.23
A charitable fund is set up to provide scholarships to students from
a remote area to attend higher education training. The scholarship
is open to students in the rural areas of Western Australia,
Northern Territory and South Australia. Eligibility is assessed against
a set of criteria to determine the greatest level of need, including
economic circumstances, distance from the nearest school and the
student's academic ability. The public fund is eligible for endorsement
under this category as it is open to a region of 200,000 people or more
and its award is based on assessment against an objective set of
criteria.
11.43 A prize is an award of money or property, which is open to
students at a national, state, territory or regional level, and is usually
conferred for reasons of merit such as academic achievement, but may
also include reasons of equity.
11.44 Taxpayers may claim a tax deduction when they donate to a
public fund which has a sole charitable purpose of providing money for
eligible scholarships, bursaries or prizes which are:
· awarded to Australian citizens or permanent residents on a
merit basis or for reasons of equity;
· open to individuals or groups of individuals throughout the
nation, a state, a territory or a region (where a region is at
least 200,000 people); and
· for the purpose of promoting education in pre-school,
primary school, secondary school or tertiary courses in
Australia; and/or
· allows recipients to further courses of study they began at
educational institutions in Australia at educational
institutions overseas.
[Schedule 11, item 2, section 30-35]
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New deductible gift recipient categories
11.45 The scholarship, bursary or prize must be open only to students
who are Australian citizens or permanent residents of Australia. For the
purposes of this category, the definition of these terms will be those used
in the Australian Citizenship Act 1948 or subsequent Acts. [Schedule 11,
item 2, section 30-37]
11.46 Under this category, the definitions of pre-school, primary
school, secondary or tertiary courses have the same meaning as in the
A New Tax System (Goods and Services Tax) Act 1999. [Schedule 11, item 2,
section 30-35 and items 19 to 22, subsection 995-1(1)]
Example 11.24
Julieanne sets up a public fund to provide money for a scholarship to
attend a class conducted by her to teach interested individuals how to
crochet. The public fund advertises the crochet scholarship throughout
the Australian Capital Territory. Although the public fund is set up to
fund a scholarship for educational purposes and the scholarship is open
to students across a territory, the public fund is not eligible for
endorsement under this category as Julieanne's course does not meet
the definitions of a pre-school, primary school, secondary or tertiary
course.
11.47 The scholarship, bursary or prize must be for the promotion of
education, but does not cover community service awards. The promotion
of education includes music, sport and agriculture, provided that the
course is a pre-school, primary school, secondary or tertiary course.
Example 11.25
A public fund is set up for charitable purposes to provide funds for a
scholarship to attend Wenton High School. The scholarship is open to
students throughout the region to pursue their high school studies. The
scholarship will be awarded to the student who has the most promising
talent at playing football and also has good academic results. This
public fund will be eligible for endorsement under this category
because it promotes education, it is awarded on a merits basis and is
provided for attendance at a secondary school course.
Example 11.26
A public fund is set up for charitable purposes to provide funds for a
scholarship to attend the Acme Music Academy, which is not a
registered training organisation (and therefore does not qualify as a
tertiary course). The scholarship is open to promising music students
across the nation and will be awarded to the best musician. As the
Acme Music Academy is not a registered training organisation, the
public fund does not fund scholarships to attend a tertiary course.
Therefore, the public fund is not eligible for endorsement under this
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category because the Acme Music Academy does not provide courses
which qualify as a pre-school, primary, secondary or tertiary course.
Example 11.27
West High School provides a prize each year for a student who has
demonstrated a high level of community service to the school. A
charitable public fund is established to expand the scope of the prize to
open it to all students in the region who have demonstrated community
service to the state. The public fund is not eligible for endorsement
under this category, because it is not for the promotion of education in
a pre-school, primary, secondary or tertiary course.
11.48 Scholarships, bursaries and prizes cannot be awarded in
substitute for paying reduced school fees. Donations to public funds
established for charitable purposes to provide funds for scholarships,
bursaries and prizes must be made voluntarily and cannot result in
reduced payment of school fees for the donor's relative or associate.
Example 11.28
Tetra College set up a public fund to collect funds for scholarships for
its students. Enrolment in Tetra College is conditional on the child's
parents making a payment to the public fund in return for reduced
school fees. In turn each student is nominally given a `scholarship' to
the value of the payment. The public fund is not eligible for
endorsement under this category because the payment to the fund was
compulsory, only students of Tetra College were eligible to receive the
scholarship and the scholarship was not awarded on a merit basis.
11.49 Entry to the scholarship, bursary or prize must be open to
students at a national, state, territory or regional level. However, the
public fund may impose a reasonable criterion or eligibility conditions to
ensure that the scholarship, bursary or prize is appropriately targeted on
the basis of academic merit or for reasons of equity.
Example 11.29
A public fund is established for charitable purposes to fund a
scholarship. The scholarship is open to all students from Victoria with
a Masters degree in botany (from any institution) to complete a
Doctoral degree in botany at North University (which is situated in
Australia). As the scholarship is open to the state, restricting access to
the students who have studied botany does not preclude eligibility for
DGR status under this category.
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New deductible gift recipient categories
Example 11.30
A public fund is established to fund a scholarship. The scholarship is
open to children whose parents are members of a nationwide club.
While the scholarship is open to the nation, restricting access to the
children of parents at a particular club goes beyond restricting
eligibility to ensure the scholarship is awarded on the basis of merit or
equity. Therefore, restricting eligibility in this way prevents eligibility
for DGR status under this category, even if it was a charitable fund.
11.50 The scholarship, bursary or prize must be open to students
across the region, state, territory or nation. It is not sufficient to simply
collect donations across the region while only students at a particular
school are eligible to enter.
Example 11.31
Mt Atom Secondary School conducts an annual speech and award
night. Each year, the top student in each subject is awarded a prize and
the dux of the school is awarded a scholarship to attend the Australian
university of their choice. The prizes and the scholarship are only
open to students at the school. A public, charitable fund is established
to collect donations from the community. This fund is not eligible for
endorsement under this category as the prizes and the scholarship are
only open to all students at the school. Endorsement as a DGR under
this category can only be given where the prizes and scholarship are
open to students from at least the region. It is not sufficient to only
collect donations from the region.
11.51 Scholarships, bursaries and prizes that allow students to
complete a component of a course commenced in Australia at an overseas
institution are eligible under this category.
Example 11.32
A public charitable fund is established to provide a prize to allow the
top student studying their final year of Japanese history in an
Australian university to complete their final year at a Japanese
university. The Japanese component of the course will be credited
towards the Australian course. The prize is open to all second-year
Japanese history students in Australia (who are Australian citizens or
permanent residents) and will be awarded to the student with the
highest marks. The public fund is eligible for DGR endorsement under
this category.
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Application and transitional provisions
11.52 These amendments apply after 30 June 2006. [Schedule 11,
item 23]
11.53 To differentiate between the new disaster relief category and the
existing international affairs category in section 30-80, references to
`relief fund' are substituted by `a developing country relief fund' [Schedule
11, items 7 to 9]. Any declaration which is in force under section 30-85
immediately before the commencement of item 6 of Schedule 11 is taken
to be a declaration that the public fund is a developing country relief fund
[Schedule 11, item 24].
Consequential amendments
11.54 Consequential amendments specify that the existing relief fund
in section 30-80 of the ITAA 1997 relates to developing countries.
[Schedule 11, items 7 to 9 and subsections 30-80(1), 30-85(2) and (4)]
11.55 A consequential amendment will be made to update the
reference to the Australian Citizenship Act 1948 when the new citizenship
law receives Royal Assent. [Schedule 11, item 3, paragraph 30-37(a)]
11.56 The index to Division 30 of the ITAA 1997 is updated to include
the five new DGR categories. [Schedule 11, items 12 to 18, subsection 30-315(2)]
11.57 The Dictionary definitions in the ITAA 1997 are updated to
include definitions of pre-school course, primary course, secondary course
and tertiary course. [Schedule 11, items 19 to 22, subsection 995-1(1)]
102
Chapter 12
GST treatment of gift-deductible entities
Outline of chapter
12.1 Schedule 12 to this Bill amends the A New Tax System (Goods
and Services Tax) Act 1999 (GST Act) to ensure that:
· the goods and services tax (GST) charity concessions apply
as originally intended; and
· charities operating retirement villages, like other charities,
are required to be endorsed in order to access the GST
charitable retirement village concession.
Context of amendments
12.2 There are a number of provisions in the GST Act which allow
various GST concessions only to an entity that is either a charitable
institution, a trustee of a charitable fund, a gift-deductible entity or a
government school. For example, section 38-250 of the GST Act
provides that supplies by such entities may be treated as GST-free where
they are made for nominal consideration.
12.3 Division 129 of the GST Act is another concession that applies
to gift-deductible entities. Division 129 provides that where there is a
difference between the actual use and the planned use of a thing acquired
by an entity for a creditable purpose, that entity is required to make an
adjustment. Where the entity acquires something for its enterprise and
then donates the item to a gift-deductible entity, no adjustment is required
under section 129-45. However, in certain situations, this may not be an
appropriate outcome.
12.4 For GST purposes, an entity is a gift-deductible entity if gifts or
contributions made to it can be deductible under Division 30 of the
Income Tax Assessment Act 1997 (ITAA 1997).
12.5 It has been suggested that the definition of `gift-deductible
entity' in the GST Act arguably makes it possible for an entity that
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
operates a fund, authority or institution for which gifts or contributions
made to it are tax deductible (but is not itself such a fund, authority or
institution), to apply the GST charity concessions to its entire operations.
This is despite some of its activities being in no way related to the fund,
authority or institution that the entity operates.
12.6 As part of its response to the Report of the Inquiry into the
Definition of Charities and Related Organisations, the Government
decided that charities, public benevolent institutions and health promotion
charities would need to be endorsed by the Commissioner of Taxation
(Commissioner) in order to access the relevant tax concessions. This
requirement was intended to apply to all charities. Although the GST Act
was amended to reflect this, the requirement for charities operating
retirement villages to be endorsed was inadvertently omitted.
Summary of new law
12.7 Schedule 12 to this Bill amends the GST Act to clarify that:
· the GST concessions available to an entity only because it
operates a fund, authority or institution that has
gift-deductible status does not apply to the activities of the
entire entity;
· an entity that supplies a thing as a gift to an entity that
operates a fund, authority or institution that has
gift-deductible status may have an adjustment under
Division 129 of the GST Act if the gift is made other than for
the principal purpose of the endorsed fund, authority or
institution; and
· charitable retirement villages must be endorsed by the
Commissioner in order to access the GST charitable
retirement village concession under section 38-260 of the
GST Act.
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GST treatment of gift-deductible entities
Comparison of key features of new law and current law
New law Current law
An entity that operates a fund, An entity that operates a fund,
authority or institution which can authority or institution which can
receive tax deductible gifts or receive tax deductible gifts or
contributions is entitled to apply the contributions, may argue that it is
GST charity concessions only to the entitled to apply the GST charity
activities of the endorsed fund, concessions for its entire operations.
authority or institution.
An entity that operates a fund, An entity that operates a fund,
authority or institution which can authority or institution which can
receive tax deductible gifts or receive tax deductible gifts or
contributions will not be entitled to contributions may argue that it is
account for GST on a cash basis entitled to account for GST on a cash
unless it meets the general eligibility basis irrespective of the general
criteria. eligibility criteria.
A gift-deductible entity can elect to A gift-deductible entity may argue
create non-profit sub-entities but that it can elect to create non-profit
only if it is a non-profit body. sub-entities irrespective of whether it
is operated on a non-profit basis.
If a donor makes a gift to an entity A donor may argue that they are not
that operates a fund, authority or required to make an adjustment to
institution which can receive tax the input tax credits they have
deductible gifts or contributions, the claimed for certain acquisitions
donor may have an adjustment to provided the acquisition is supplied
their input tax credit entitlement as a gift to a gift-deductible entity.
unless the gift is made for the
principal purpose of an endorsed
fund, authority or institution.
A charitable institution or a trustee of A charitable institution or a trustee of
a charitable fund that operates a a charitable fund that operates a
retirement village must be endorsed retirement village can apply the
by the Commissioner in order to treat concession under section 38-260 of
relevant supplies as GST-free. This the GST Act to treat certain supplies
amendment ensures consistency with as GST-free without the need to be
the other provisions applying to endorsed by the Commissioner.
charitable institutions and trustees of
charitable funds.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Detailed explanation of new law
Amendments relating to gift-deductible entities
12.8 There are a range of provisions in the GST Act that provide
specific GST treatment for gift-deductible entities. These include
provisions concerning:
· cash accounting under Subdivision 29-B;
· eligibility for GST-free supplies under Subdivision 38-G;
· the choice to elect to input tax fundraising events under
Subdivision 40-F;
· the ability to create non-profit sub-entities under
Division 63;
· the ability to treat certain reimbursements as creditable
acquisitions under Division 111; and
· no denial of input tax credits for gifts made to
gift-deductible entities under section 129-45.
12.9 The amendments in this Bill relating to gift-deductible entities
do not apply to gift-deductible entities that are also charitable institutions,
trustees of charitable funds or government schools. In addition, the
amendments do not apply to entities that are endorsed as gift-deductible
recipients in their own right. These entities continue to qualify for
concessional GST treatment.
Accounting on a cash basis
12.10 An entity may account for GST on a cash basis if it meets
certain eligibility criteria. For instance, an entity may account for GST on
a cash basis if its annual turnover does not exceed $1 million. However,
certain entities can account for GST on a cash basis regardless of the
general eligibility criteria. These entities are currently prescribed under
subsection 29-40(2) of the GST Act and include charities, trustees of
charitable funds, gift-deductible entities and government schools.
12.11 Given the limited range of entities that can apply this rule it is
appropriate that it be situated in that part of the GST Act which deals with
special rules. Accordingly, this Bill amends the GST Act to insert a new
Division into the GST Act. The amendment essentially transfers the
special rules contained within Subdivision 29-B into the new Division.
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GST treatment of gift-deductible entities
This Bill also includes signposts to the special rules in the GST Act.
[Schedule 12, items 1, 3 to 5 and 14, subsections 29-40(2) and (2A),
subsections 29-50(5) and (6), sections 29-69, 37-1 and 157-1]
12.12 The current definition of `gift-deductible entity' in the GST Act
includes an entity that operates a fund, authority or institution that is
endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax
deductible gifts or contributions. Such an entity is therefore entitled to
account for GST on a cash basis. However, eligibility for cash accounting
for this type of entity is available irrespective of the fact that its major
activities may bear no relationship to the activities of its endorsed fund,
authority or institution. Accordingly, this Bill amends the GST law to
ensure that such an entity is not entitled to account for GST on a cash
basis simply because it operates an endorsed fund, authority or institution.
[Schedule 12, item 14, subsections 157-5(3) and 157-10(3)]
12.13 However, the amendment does not prevent these entities from
accounting for GST on a cash basis if they meet the existing general
eligibility criteria.
12.14 These amendments ensure that an entity's election to account for
GST on a cash basis prior to the amendments coming into effect is made
as if the choice was made under the new Division. This ensures that
existing elections can continue to have effect if they meet the
requirements of the new Division. [Schedule 12, item 2]
GST-free and input taxed supplies by gift-deductible entities
12.15 Sections 38-250, 38-255, 38-270 and 40-160 of the GST Act
provide that certain supplies made by a gift-deductible entity can be
treated as GST-free or input taxed. Section 111-18 provides that a
gift-deductible entity may be entitled to input tax credits for certain
reimbursements made to its volunteers.
12.16 By virtue of the current GST definition of `gift-deductible
entity', an entity that operates a fund, authority or institution that is
endorsed under paragraph 30-120(b) of the ITAA 1997 to receive tax
deductible gifts or contributions, may argue that it is entitled to access
each of the above concessions for its entire operations. This is despite
some of its activities being in no way related to the activities of the
endorsed fund, authority or institution. This outcome is inconsistent with
the original policy of restricting access to these concessions to charitable
and charitable-like activities.
12.17 Accordingly, this Bill amends the GST law to ensure that a
gift-deductible entity can only apply these concessions for a supply or
reimbursement if the supply or reimbursement relates to the principal
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
purpose of the endorsed fund, authority or institution that the entity
operates and not to some other purpose. This Bill amends the GST
Dictionary to include the term `gift-deductible purpose' to refer to the
concept of the principal purpose of an endorsed fund, authority or
institution. [Schedule 12, items 6, 7, 9, 10, 12 and 15, subsections 38-250(4),
38-255(3), 38-270(3), 40-160(3) and 111-18(3) and section 195-1]
Example 12.1
Sara Pty. Ltd. operates an enterprise buying and selling books. As part
of its enterprise, Sara Pty. Ltd. operates a public art gallery.
Sara Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the
ITAA 1997 as a deductible gift recipient (DGR) for the operation of
the public art gallery. The public art gallery is entitled to receive tax
deductible gifts and contributions. Sara Pty. Ltd. is thus a
gift-deductible entity for GST purposes.
If Sara Pty. Ltd. sells tickets to enable people to visit the art gallery,
then the sale of the tickets may be GST-free under section 38-250 of
the GST Act. The sale of the tickets relates only to the principal
purpose of the public art gallery. However, section 38-250 cannot
apply to the sale of the books as these sales relate to a purpose other
than the principal purpose of the public art gallery; that is, they relate
to the purpose of the book selling enterprise.
Example 12.2
Ely Pty. Ltd. operates both a swimming pool and a public museum.
Ely Pty. Ltd. is endorsed solely under paragraph 30-120(b) of the
ITAA 1997 as a DGR for the operation of the public museum.
Ely Pty. Ltd. is a gift-deductible entity for GST purposes.
Ely Pty. Ltd. sells a single ticket for entry to both the swimming pool
and public museum. Assuming that this amounts to a mixed supply for
entry to the swimming pool and the public museum, the GST law can
apply differently to the two aspects of the transaction.
The supply of a right of entry to the swimming pool is not GST-free
under the relevant provisions because the supply relates to a purpose
other than the principal purpose of the public museum. On the other
hand, the supply of a right of entry to the museum can be GST-free
because that supply relates only to the principal purpose of the
museum.
Ely Pty. Ltd. needs to apportion the consideration for the ticket
between the two components on a reasonable basis when determining
its GST liability.
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GST treatment of gift-deductible entities
Example 12.3
Ian Inc. is an environmental organisation listed on the Register of
Environmental Organisations stemming from Subdivision 30-E of the
ITAA 1997. Ian Inc. is not a charitable institution but through its
public fund, Ian Fund, is endorsed to receive tax deductible gifts.
Ian Inc. decides to hold a fundraising event to raise funds to support its
principal purpose of preserving the local national park. As the supplies
involved in this event relate only to the principal purpose of the
endorsed fund, Ian Inc. is entitled to access the relevant concessions in
the GST Act for this event.
Non-profit sub-entities
12.18 Division 63 of the GST Act allows charitable institutions,
trustees of charitable funds, gift-deductible entities, government schools,
and certain non-profit entities exempt from income tax (such as non-profit
sporting bodies) to create non-profit sub-entities. Such entities are treated
as separate entities for GST purposes. This concession was intended to
only apply to entities that are set up on a non-profit basis.
12.19 A gift-deductible entity may not necessarily operate on a
non-profit basis other than for the purposes of the fund, authority or
institution it operates. Therefore, this Bill amends the GST law to ensure
that only a gift-deductible entity that is a non-profit body is able to choose
to apply the non-profit sub-entity concession. [Schedule 12, item 11,
paragraph 63-5(2)(a)]
Change in use of an acquisition
12.20 Division 129 provides that where there is a difference between
the actual use and the planned use of a thing acquired by an entity for a
creditable purpose, that entity is required to make an adjustment.
However, where the entity donates the item to a gift-deductible entity, no
adjustment is required under section 129-45.
12.21 As noted earlier, a gift-deductible entity includes an entity that
only operates an endorsed fund, authority or institution. Therefore, an
entity can supply a gift to this type of entity, with no adjustment under
Division 129, even though the gift is not made for the purpose of the
endorsed fund, authority or institution.
12.22 The amendment ensures that the concession only applies where
the gift is made by an entity for the principal purpose of an endorsed fund,
authority or institution that a gift-deductible entity operates. [Schedule 12,
item 13, subsection 129-45(3)]
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Endorsement of charities operating retirement villages
12.23 A charitable institution or a trustee of a charitable fund that
operates a retirement village can make certain supplies of accommodation,
related services and food GST-free under section 38-260 of the GST Act.
Unlike other provisions in the GST Act which require charities to be
endorsed by the Commissioner in order to access the GST concessions,
the requirement for charitable retirement village operators to be endorsed
was omitted. Therefore, this Bill amends the GST law to ensure that such
entities are required to be endorsed, ensuring consistency with other
provisions applying to charitable institutions and trustees of charitable
funds. [Schedule 12, item 8, paragraph 38-260(a)]
Application and transitional provisions
12.24 These amendments apply to net amounts for tax periods that
commence on or after the day this Bill receives Royal Assent. [Schedule 12,
item 16]
110
Chapter 13
Technical clarification of time for certain
amended assessments
Outline of chapter
13.1 Schedule 13 to this Bill amends the Tax Laws Amendment
(Improvements to Self Assessment) Act (No. 2) 2005 to clarify that the
repeal of the six-year amendment period for general anti-avoidance
(Part IVA) amendments only applies to assessments for the 2004-05
income year and later income years, as originally intended by the
Government.
Context of amendments
13.2 In the Treasurer's Press Release No. 106 of 16 December 2004,
the Government announced that a four-year amendment period for tax
avoidance schemes would apply to assessments for the 2004-05 income
year and later income years. However, while the amending Act reduced
the period for review and amendment of assessments involving
determinations under Part IVA of the Income Tax Assessment Act 1936
(ITAA 1936), from six to four years, a particular application date was not
specified. Without clarification, the four-year period of review in the new
subsection 170(1) of the ITAA 1936 could be thought to apply from the
date of Royal Assent to the Tax Laws Amendment (Improvements to
Self Assessment) Act (No. 2) 2005.
13.3 The Government is acting to clarify this matter in line with the
announced policy intent.
Summary of new law
13.4 The new four-year amendment period for the Commissioner of
Taxation (Commissioner) to give effect to Part IVA will apply only to
assessments for the 2004-05 income year and subsequent income years, in
line with the original Government announcement.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Detailed explanation of new law
13.5 Item 68 of the Tax Laws Amendment (Improvements to
Self Assessment) Act (No. 2) 2005, which specified that certain
consequential amendments would apply to assessments for the
2004-05 income year and later income years, is extended to apply to
items 64 and 65 of the same Act. Items 64 and 65 of that Act repealed the
six-year amendment period for income tax assessments where the
Commissioner relies on Part IVA to amend an assessment. [Schedule 13,
item 1]
13.6 The technical clarification ensures the ability of the
Commissioner to make amended assessments as if it had been in force on
the day the original amendment to items 64 and 65 of the Tax Laws
Amendment (Improvements to Self Assessment) Act (No. 2) 2005 was
made. [Schedule 13, item 2]
112
Chapter 14
Increase in wine equalisation tax producer
rebate
Outline of chapter
14.1 Schedule 14 to this Bill explains the amendments to the A New
Tax System (Wine Equalisation Tax) Act 1999 that will increase the
maximum amount of wine equalisation tax (WET) producer rebate a wine
producer (or group of producers) is able to claim in each financial year.
These amendments commence from 1 July 2006.
Context of amendments
14.2 In the 2004-05 Budget the Government announced the
introduction of the WET producer rebate scheme. The scheme
commenced on and from 1 October 2004 to provide assistance to each
wine producer (or group of producers) of up to $290,000 in WET rebates
per annum.
14.3 The Government announced in the 2006-07 Budget that it will
provide enhanced assistance to the wine industry from 1 July 2006
through the WET producer rebate scheme.
Summary of new law
14.4 From 2006-07, each wine producer or group of wine producers
will be able to claim up to $500,000 in WET rebates each year.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Comparison of key features of new law and current law
New law Current law
A wine producer or group of A wine producer or group of
producers will be able to claim up to producers is able to claim up to a
a maximum of $500,000 in WET maximum of $290,000 in WET
producer rebates each financial year. producer rebates each financial year.
Detailed explanation of new law
14.5 Division 19 of the A New Tax System (Wine Equalisation Tax)
Act 1999 governs entitlement to a WET producer rebate.
14.6 Section 19-15 of the A New Tax System (Wine Equalisation Tax)
Act 1999 provides for calculation of the amount of WET producer rebate
that a wine producer or group of producers may claim in a financial year.
Under this provision, the maximum amount claimable in a financial year
will be $500,000, reflecting the increased annual threshold. [Schedule 14,
items 1 and 2 ]
14.7 Section 19-25 of the A New Tax System (Wine Equalisation Tax)
Act 1999 imposes a liability on each producer that is a member of a group
of producers, for the repayment of claims in excess of the amount to
which the group was entitled. This section extends and clarifies the
liability rules to an `associated producer' (as defined in the legislation) of
another producer in a group of producers, where the group claims more
than the maximum rebateable amount in a financial year. The specified
maximum rebateable amount will be the new amount of $500,000.
[Schedule 14, item 3]
14.8 The increase to $500,000 in the maximum amount of producer
rebates a producer (or group of producers) can claim in each financial year
will not affect the current eligibility or claiming rules for WET rebate
claimants, and the administration of a WET producer rebate as a wine tax
credit will continue.
114
Chapter 15
GST treatment of residential premises
Outline of chapter
15.1 Schedule 15 to this Bill amends the A New Tax System (Goods
and Services Tax) Act 1999 (GST Act) to ensure that following the
decision of the Full Federal Court of Australia in Marana Holdings Pty
Ltd v Commissioner of Taxation [2004] FCAFC 307 (the Marana
decision) supplies of certain types of real property are input taxed. This
confirms the Government's policy intent.
Context of amendments
15.2 In the Marana decision, the Full Federal Court:
· decided that the sale of a unit, which was previously a room
in a motel, was the sale of `new residential premises' and
therefore subject to the goods and services tax (GST); and
· considered that the terms `reside' and `residence' connoted a
permanent, or at least long-term, commitment to dwelling in
a particular place.
15.3 The Court's judgment has resulted in potential difficulties in
distinguishing between supplies of premises that are residential premises
and therefore input taxed, and supplies that are taxable. In particular, the
Court's judgment is likely to lead taxpayers to seek to treat certain
supplies of real property as taxable rather than input taxed, with effect
from 1 July 2000 when the GST system was introduced. These supplies
include:
· short-term letting of strata titled units such as serviced
apartments by owners to guests;
· leasing of strata titled units to hotel operators or similar
operators; and
· leasing of display homes and provision of certain short-term
employee accommodation.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
15.4 The interpretation of the GST Act arising from the Court's
judgment represents a significant departure from the intended GST
treatment of affected premises. As such it would create uncertainty as
well as an advantage for some taxpayers and a disadvantage for others.
Further, the new view could add to complexity and the compliance burden
for taxpayers. In particular:
· uncertainty would be created in respect of the GST
treatment of other forms of accommodation (eg, holiday
homes);
· investors who have purchased affected premises since the
introduction of the GST and who were previously denied
input tax credits would be advantaged by the interpretation
adopted in the Marana decision. If these investors are
registered for GST, they would be entitled to claim input tax
credits for the earlier acquisition costs. However, they would
need to remit GST on supplies of premises (including on a
subsequent sale of the premises) unless past transactions have
been protected by reliance on an Australian Taxation Office
(ATO) ruling;
· GST registered owners of units who purchased premises
before the introduction of the GST would be disadvantaged
by the interpretation adopted in the Marana decision. They
would not be able to claim input tax credits for acquisition
costs incurred before 1 July 2000 but would need to remit
GST on supplies of premises (including on a subsequent sale
of the premises) unless past transactions have been protected
by reliance on an ATO ruling;
· complexity and compliance costs would increase. The GST
treatment of given premises would need to be determined on
the basis of a range of factors rather than mainly on the
premises' physical characteristics. There would be flow-on
consequences for income tax as the capital allowances and
capital gains tax rules depend on the GST treatment of
transactions; and
· small scale investors who, since the introduction of the GST,
have purchased (or will purchase) units and may be
encouraged to enter the GST system to claim input tax
credits, may be disadvantaged. These investors may be
required to deal with a consequent significant compliance
burden as the tax treatment could change from time to time
depending on the particular arrangements.
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GST treatment of residential premises
15.5 These amendments confirm the policy intent of the GST law.
The continuation of input taxed treatment of supplies of affected premises
represents a sound balance between taxing (and crediting) business inputs
and ensuring that owners of residential premises do not have to concern
themselves with the GST treatment of such premises.
Summary of new law
15.6 These amendments:
· ensure that supplies of certain types of real property are
input taxed to confirm the policy intent that the words
`residential' and `residence' are not limited to extended or
permanent occupation;
· confirm that residential premises which have only
previously been sold as commercial residential premises or as
a part of commercial residential premises are still regarded as
new residential premises; and
· confirm that a supply of accommodation provided to
individuals in commercial residential premises by an entity
that owns or controls the premises remains subject to GST.
Comparison of key features of new law and current law
New law Current law
Premises may qualify as residential It is arguable following the Marana
premises regardless of the term of decision that references to
occupation. Accommodation may `residential premises' and
qualify as residential accommodation `residential accommodation' are only
on a similar basis. to long-term occupation.
No change. The amendment A supply of residential premises is
confirms the current treatment. not precluded from being a supply of
new residential premises merely
because the premises have previously
been sold as commercial residential
premises or as a part of commercial
residential premises.
No change. The amendment Supplies of accommodation provided
confirms the current treatment. to an individual in commercial
residential premises by the operator
of those premises are subject to GST.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
Detailed explanation of new law
Short-term occupation
15.7 These amendments change the definition of `residential
premises' to confirm that the period of occupation or intended occupation
of land or a building is not relevant in determining whether premises are
considered to be residential premises. These amendments change the
definition to ensure that the occupation or intended occupation of the
premises for residential accommodation means that it is residential
premises and therefore generally subject to input taxed treatment upon
sale or rental. A similar change is made to the definition of a `floating
home'. [Schedule 15, item 8, section 195-1 -- definition of `floating home', and
item 9, section 195-1 -- definition of `residential premises']
15.8 Without these changes, the Marana decision would otherwise
suggest that the term residential premises refers only to premises occupied
or intended to be occupied for long-term occupation.
15.9 These amendments qualify residential accommodation to ensure
that it does not solely refer to long-term accommodation but may include
short-term accommodation (ie, it may apply regardless of the term, or
intended term, of occupation). [Schedule 15, items 2 to 6, paragraphs 40-35(2)(a),
40-65(2)(b), 40-70(1)(a) and 40-70(2)(b), subsection 40-65(1)]
15.10 However, supplies of accommodation provided to individuals in
commercial residential premises by an entity that owns or controls the
premises remain subject to GST in accordance with the existing rules.
This means that supplies by an entity that, for example, owns a hotel and
supplies accommodation in the hotel to guests, are not input taxed (unless
the existing option to input tax long-term commercial accommodation is
exercised). An entity that owns or controls commercial residential
premises may provide accommodation to an individual such as an
employee of a company even though the supply of accommodation is
made by the entity to the employer company.
15.11 The reference to an entity that `controls' commercial residential
premises include an entity that leases the premises from the owner or
owners and supplies the accommodation to guests in its own right. It does
not refer to control of the entity itself by way of shareholdings,
directorships or the like. Nor does it refer to an agent that lets out
premises on behalf of the owner of the premises. For example, a supply
made by the owner of an individual strata titled unit in a hotel complex,
who lets the unit to a guest through an agent, remains input taxed.
[Schedule 15, item 1, paragraph 40-35(1)(a)]
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GST treatment of residential premises
Example 15.1: Serviced apartment for short-term stays
Marek leases a strata titled unit in a serviced apartment complex to
Phil who lets apartments in the complex to guests in his own right.
Permitted use of the apartment is restricted to short stays. The lease of
the unit is input taxed because it is a lease of residential premises. The
prohibition on long-term occupation of the apartment does not prevent
the unit being characterised as residential premises. Under these
amendments, residential premises are not limited to those occupied or
intended to be occupied permanently or for an extended period.
Example 15.2: Employee accommodation
Coalmer Enterprises Ltd provides accommodation for its employees in
residential barracks. The employees' occupation of the barracks is not
subject to conditions relating to their terms of employment, such as
limitations on personal possessions or a requirement to vacate at the
end of a period of duty or a set quota of work. Nevertheless, the
barracks are occupied on a short-term basis. These amendments
ensure that the supply of the accommodation to the employees remains
input taxed.
Interaction between commercial residential premises and residential
premises
15.12 These amendments do not change the definition of `commercial
residential premises'. The GST treatment of accommodation in hotels,
motels, inns, hostels and similar premises which exhibit similar
characteristics (which may include: being run with a commercial
intention, having multiple occupancy, holding out to the public, being
used for the main purpose of accommodation, having central
management, being offered by management in its own right, providing
services, and where individuals have the status of guests) is not altered.
15.13 Broadly, these amendments ensure that a sale of residential
premises (other than new residential premises) comprising a strata titled
unit in commercial residential premises, such as a hotel or motel, will be
input taxed.
15.14 For example, a sale of one or several units in a hotel complex
will not constitute a supply of commercial residential premises. This is
because the sale of a single unit or several units in, for example, a hotel or
motel is not a supply of a hotel or motel.
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Tax Laws Amendment (2006 Measures No. 3) Bill 2006
15.15 On the other hand, a sale or lease of, for example, the whole of a
hotel complex will be a supply of commercial residential premises,
whether or not the hotel complex is strata titled. Whether a sale or lease
of anything less than the whole of a hotel complex (eg, not all of the
rooms within the complex or not all of the hotel infrastructure such as
lobby, kitchen or pool areas) would constitute a supply of commercial
residential premises, will depend on the facts of each case.
15.16 However, a supply comprising only the accommodation units in
a hotel complex, without other parts of the hotel, such as the reception, is
not a supply of commercial residential premises. It is a supply of
residential premises.
Example 15.3
Owner Pty Ltd developed a new serviced apartment complex which
consists of 50 apartments, a reception area and conference facilities.
Owner Pty Ltd has retained the complex for the purposes of leasing the
entire complex to Proprietor Pty Ltd who will operate an
accommodation business, which essentially is run as a hotel.
The apartments are offered to the public, by Proprietor Pty Ltd in its
own right, for short-term stays. The apartments are used
predominately for accommodation and include self contained kitchen
and laundry facilities. Proprietor Pty Ltd provides room cleaning and
other services to the guests.
In this example the supply of the complex by Owner Pty Ltd to
Proprietor Pty Ltd under the lease is similar to the supply of a hotel
and is a supply of commercial residential premises.
The supply by Proprietor Pty Ltd when it supplies the apartments to
the guests will also be taxable as a supply of accommodation in
commercial residential premises to an individual by an entity that
controls the commercial residential premises. The fact that the
apartments may or may not be strata titled will not alter the conclusion
in this example.
Application and transitional provisions
15.17 These amendments apply to net amounts for tax periods that
commence on or after 1 July 2000. [Schedule 15, item 10]
15.18 These amendments apply from the first tax period in which
the GST applies because the GST law has been administered on
the basis that residential premises and accommodation include
premises/accommodation for both short and long-term occupation. This
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GST treatment of residential premises
view was set out in the goods and services tax Ruling 2000/20 titled
Goods and Services Tax: commercial residential premises which was
released on 21 June 2000 by the Commissioner of Taxation.
Consequential amendments
15.19 These amendments make a consequential change to the
definition of `new residential premises'. These amendments ensure that
premises are not precluded from being new residential premises merely
because they have previously been sold as commercial residential
premises. [Schedule 15, item 7, paragraph 40-75(1)(a)]
15.20 This ensures that any value added upon conversion of
commercial residential premises to residential premises is subject to GST.
Example 15.4
Camille Enterprises purchases a motel in August 1996 and operates it
for 10 years as a motel. In August 2006, Camille Enterprises ceases
operation of the motel, strata titles the motel and sells one of the strata
titled units as residential premises to Sebastien.
Although the motel was sold as commercial residential premises in
August 1996, the sale of the strata titled unit to Sebastien in
August 2006 is a sale of new residential premises. This reflects the
position that a prior sale as commercial residential premises does not
preclude a later sale of residential premises from being a sale of new
residential premises. The previous supplies of accommodation in the
motel, being supplies of accommodation in commercial residential
premises provided to an individual by an entity that owns the
commercial residential premises, were not input taxed supplies; thus,
subsection 40-75(2) has no operation.
The later sale to Sebastien is subject to GST.
121
Index
Schedule 1: Cyclone Larry income support payments
Bill reference Paragraph number
Item 1, subsection 160AAA(1) 1.14
Item 2, section 13-1 1.17
Item 3, section 13-1 1.18
Schedule 2: Cyclones Larry and Monica business payments
Bill reference Paragraph number
Item 1, subsection 1(1) 2.10
Item 1, paragraph 1(1)(b) 2.9
Schedule 3: Interim income support payments
Bill reference Paragraph number
Item 1, subsection 160AAA(1) 3.9
Item 2, section 13-1 3.15
Item 3, section 13-1 3.16
Item 4, section 13-1 3.17
Schedule 4: Simplified imputation system (share capital
tainting rules)
Bill reference Paragraph number
Item 1, section 197-5 and subsection 197-50(1) 4.11
Item 1, section 197-10 4.14
Item 1, subsection 197-15(1) 4.15
Item 1, subsection 197-15(2) 4.16
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New Business Tax System (Untainting Tax) Bill 2006
Bill reference Paragraph number
Item 1, section 197-25 4.18
Item 1, subsection 197-30(1) 4.21
Item 1, subsection 197-30(2) 4.22
Item 1, subsection 197-30(3) 4.23
Item 1, subsection 197-30(4) 4.24
Item 1, paragraphs 197-35(1)(a) to (c) 4.25
Item 1, paragraph 197-35(1)(d) 4.26
Item 1, subsection 197-35(2) 4.27
Item 1, subsection 197-35(3) 4.28
Item 1, paragraphs 197-40(1)(a) to (c) 4.31
Item 1, paragraph 197-40(1)(d) 4.32
Item 1, paragraph 197-40(1)(e) 4.33
Item 1, paragraph 197-40(1)(f) 4.35
Item 1, subsection 197-40(2) 4.36
Item 1, subsection 197-40(3) 4.37
Item 1, subsection 197-45(1) 4.40
Item 1, subsection 197-45(2) 4.42
Item 1, subsection 197-50(2) 4.44
Item 1, section 197-55 4.45
Item 1, section 197-60 4.55
Item 1, subsection 197-60(1) 4.52
Item 1, subsection 197-60(2) and section 197-70 4.50
Item 1, subsection 197-60(3) 4.56
Item 1, section 197-65 4.47
Item 1, subsection 197-65(3) 4.48, 4.49
Item 1, sections 197-75, 197-80 and 197-85 4.62
Items 2 and 17, section 197-5 of the Income Tax (Transitional 4.64
Provisions) Act 1997
Item 2, section 197-10 of the Income Tax (Transitional Provisions) 4.68
Act 1997
Item 2, sections 197-15 and 197-20 of the Income Tax (Transitional 4.69
Provisions) Act 1997
Item 2, section 197-25 of the Income Tax (Transitional Provisions) 4.71
Act 1997
Items 3 to 7 4.72
Items 8 to 12 4.73
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Index
Bill reference Paragraph number
Items 13 to 16 4.74
Items 18 and 19, subsection 160ARDM(2B) of the ITAA 1936 4.17
Item 19, subsection 160ARDM(2C) of the ITAA 1936 4.20
Items 20 and 21, subsections 160ARDM(4A) and (6) of the 4.30
ITAA 1936
Items 20 and 21, subsections 160ARDM(4B) and (6) of the 4.39
ITAA 1936
Item 22 4.67
Schedule 5: Government grants
Bill reference Paragraph number
Item 1, subsection 118-37(2) 5.25
Item 1, paragraph 118-37(2)(a) 5.24
Item 1, paragraph 118-37(2)(e) 5.19
Schedule 6: Tax offset for Medicare levy surcharge (lump
sum payments in arrears)
Bill reference Paragraph number
Items 1, 2 and 9 6.26
Item 4, subsection 61-585(1) 6.21
Item 4, paragraph 61-580(1)(d) 6.16
Item 4, subsections 61-585(2) and 61-580(2) 6.23
Item 4, section 61-590 6.14
Item 4 6.10
Items 5 to 7, subsection 995-1(1), definitions of `exempt foreign 6.28
employment income', `Medicare levy surcharge', and `MLS lump
sums'
Item 8, section 61-575 of the Income Tax (Transitional Provisions) 6.25
Act 1997
Items 10 and 11 6.27
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New Business Tax System (Untainting Tax) Bill 2006
Schedule 7: Reporting superannuation contributions
Bill reference Paragraph number
Item 3, section 78 7.8
Item 3, section 78A 7.13
Item 3, paragraph 78(1)(b) 7.12
Item 3, paragraph 78(1)(c) 7.11
Items 4 and 5, paragraphs 298-5(b) and (c) 7.16
Item 6 7.17
Schedule 8: Exclusion for fringe benefits to address personal
security concern
Bill reference Paragraph number
Item 1, subparagraph 5E(3)(l)(i) 8.10
Item 1, subparagraph 5E(3)(l)(ii) 8.13
Item 2, paragraph 5E(3)(l) 8.20
Item 2, subsection 5E(6) 8.27
Item 3 8.43
Schedule 9: Pre-1 July 88 funding credits
Bill reference Paragraph number
Item 1 9.15
Item 2 9.16
Items 3 and 4 9.20
Item 5 9.17, 9.18
Schedule 10: Allowing certain funds to obtain an ABN
Bill reference Paragraph number
Items 1 and 3, paragraph 38(1)(h) of the ABN Act and 10.12
paragraph 9-20(1)(h) of the GST Act
Items 2 and 4, paragraph 38(2)(c) of the ABN Act and paragraph 9- 10.17
20(2)(c) of the GST Act
Item 5 10.15
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Index
Schedule 11: Deductible gift categories
Bill reference Paragraph number
Items 1, 3 to 5 and 14, subsections 29-40(2) and (2A), 12.11
subsections 29-50(5) and (6), sections 29-69, 37-1 and 157-1
Item 2, section 30-35 11.44
Item 2, section 30-35 and items 19 to 22, subsection 995-1(1) 11.46
Item 2, section 30-37 11.45
Item 3, paragraph 30-37(a) 11.55
Item 4, item 4.1.5 in the table in subsection 30-45(1); and item 5, 11.25
section 30-46
Item 4, item 4.1.5 in the table in subsection 30-45(1); item 5, 11.18
section 30-46; item 8, item 9.1.2 in the table in subsection 30-80(1);
and item 11, section 30-86
Item 4, item 4.1.6 in the table in subsection 30-45(1) 11.32
Item 4, item 4.1.7 in the table in subsection 30-45(1) 11.37
Item 5, section 30-46 11.26, 11.27
Items 5 and 11, sections 30-46 and 30-85 11.20
Item 6, item 5.1.3 in the table in subsection 30-50(1) 11.8, 11.9
Item 8, item 9.1.2 in the table in subsection 30-80(1) 11.19
Item 8, item 9.1.2 in the table in subsection 30-80(1); and item 11, 11.28
section 30-86
Item 11, section 30-86 11.29, 11.31
Item 1, item 2.1.13 in the table in subsection 30-25(1); and item 2, 11.41
section 30-37
Items 7 to 9 11.53
Items 7 to 9 and subsections 30-80(1), 30-85(2) and 30-85(4) 11.54
Items 12 to 18, subsection 30-315(2) 11.56
Items 19 to 22, subsection 995-1(1) 11.57
Item 23 11.52
Item 24 11.53
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New Business Tax System (Untainting Tax) Bill 2006
Schedule 12: GST treatment of gift-deductible entities
Bill reference Paragraph number
Item 2 12.14
Items 6, 7, 9, 10, 12 and 15, subsections 38-250(4), 38-255(3), 12.17
38-270(3), 40-160(3) and 111-18(3) and section 195-1
Item 8, paragraph 38-260(a) 12.23
Item 11, paragraph 63-5(2)(a) 12.19
Item 13, subsection 129-45(3) 12.22
Item 14, subsections 157-5(3) and 157-10(3) 12.12
Item 16 12.24
Schedule 13: Technical correction
Bill reference Paragraph number
Item 1 13.5
Item 2 13.6
Schedule 14: Wine equalisation tax
Bill reference Paragraph number
Items 1 and 2 14.6
Item 3 14.7
Schedule 15: GST treatment of residential premises
Bill reference Paragraph number
Item 1, paragraph 40-35(1)(a) 15.11
Items 2 to 6, paragraphs 40-35(2)(a), 40-65(2)(b), 40-70(1)(a) and 15.9
40-70(2)(b), subsection 40-65(1)
Item 7, paragraph 40-75(1)(a) 15.19
Item 8, section 195-1 -- definition of `floating home', and item 9, 15.7
section 195-1 -- definition of `residential premises'
Item 10 15.17
128