Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TAX LAWS AMENDMENT (BUDGET MEASURES) BILL 2008
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary .................................................................................................. 1
General outline and financial impact ....................................................... 3
Chapter 1 Fringe benefits tax -- meal cards and eligible
work-related items......................................................... 7
Chapter 2 Employee share schemes -- election
mechanism and removal of double taxation................ 17
Chapter 3 Depreciation of computer software -- four year
statutory effective life .................................................. 25
Index ..................................................................................................... 29
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
AEST Australian Eastern Standard Time
ATO Australian Taxation Office
CGT capital gains tax
Commissioner Commissioner of Taxation
ESS employee share scheme
FBT fringe benefits tax
FBTAA 1986 Fringe Benefits Tax Assessment Act 1986
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
1
General outline and financial impact
Fringe benefits tax
Meal cards
Part 1 of Schedule 1 to this Bill amends the Fringe Benefits Tax
Assessment Act 1986 (FBTAA 1986) to ensure food or drink provided as
part of a salary sacrifice arrangement (eg, `meal card' arrangement) is
excluded from the fringe benefits tax (FBT) exemption in section 41 of
the FBTAA 1986 that applies to property consumed on an employer's
premises.
Date of effect: These amendments apply to food and drink provided after
7.30 pm Australian Eastern Standard Time (AEST), 13 May 2008. Any
food or drink that relates to an existing balance on a meal card at that time
will not be subject to FBT if the food and drink is provided before
1 April 2009. Any food or drink purchased with additional credits
(`top-ups') that occur after 13 May 2008, will be subject to FBT.
Proposal announced: This measure was announced in the 2008-09
Budget and in the Treasurer's Press Release No. 048 of 13 May 2008.
Financial impact: The revenue impact is $610 million over the forward
estimates.
Compliance cost impact: Minimal.
Eligible work-related items
Part 1 of Schedule 1 to this Bill amends the FBTAA 1986, the Income Tax
Assessment Act 1936 and the Income Tax Assessment Act 1997 to:
· restrict the FBT exemption for eligible work-related items in
section 58X of the FBTAA 1986 to items that are used
primarily for work-related purposes;
· limit the exemption to one item per employee per FBT year
unless the item is a replacement item and extend the
exemption to apply to all work-related portable electronic
devices;
3
· deny `decline in value' deductions under Division 40 for
depreciable assets that are exempt under section 58X of the
FBTAA 1986; and
· ensure that an employee can continue to claim decline in
value deductions for other depreciable assets provided as an
expense payment fringe benefit.
Date of effect: The amendments to the FBT exemption for eligible
work-related items will apply to items acquired after 7.30 pm (AEST),
13 May 2008.
Employees will be denied decline in value deductions for eligible
work-related items that are exempt under section 58X of the FBTAA 1986
for items purchased after 7.30 pm (AEST), 13 May 2008. If the item was
purchased before this date, depreciation will be allowed until
30 June 2008.
Proposal announced: This measure was announced in the 2008-09
Budget and in the Treasurer's Press Release No. 048 of 13 May 2008.
Financial impact: The revenue impact is $530 million over the forward
estimates.
Compliance cost impact: Minimal.
Employee share schemes
Election mechanism
Part 2 of Schedule 1 to this Bill amends Division 13A of the Income Tax
Assessment Act 1936 so that an employee who wishes to be assessed on
discounts on shares or rights received in the year of acquisition must make
the election in the income tax return for the income year in which the
shares or rights are acquired.
Date of effect: These amendments apply to assessments for the 2008-09
income year and later income years.
Proposal announced: This measure was announced in the 2008-09
Budget and in the Treasurer's Press Release No. 044 of 13 May 2008.
Financial impact: The revenue impact is $77 million over the forward
estimates.
Compliance cost impact: Minimal.
Removal of double taxation
Part 2 of Schedule 1 to this Bill amends the capital gains provisions in the
Income Tax Assessment Act 1997 to ensure a trustee or beneficiary of an
employee share trust is not subject to capital gains tax (CGT) where an
employee who exercises employee share scheme rights becomes
absolutely entitled to the shares in the trust.
Date of effect: These amendments apply to CGT events occurring from
7.30 pm (Australian Eastern Standard Time), 13 May 2008.
Proposal announced: This measure was announced in the 2008-09
Budget and in the Treasurer's Press Release No. 044 of 13 May 2008.
Financial impact: Nil.
Compliance cost impact: Nil.
Depreciation of computer software -- four year statutory
effective life
Schedule 2 to this Bill amends the Income Tax Assessment Act 1997 to
increase the period over which taxpayers write off for tax purposes
depreciable in-house software, from 2½ years to four years.
Date of effect: The new statutory effective life applies from 7:30 pm (by
legal time in the Australian Capital Territory) on 13 May 2008, in relation
to newly held software assets.
Proposal announced: This measure was announced in the 2008-09
Budget and in the Treasurer's Press Release No. 049 of 13 May 2008.
Financial impact: This measure has an ongoing gain to revenue, which is
estimated at around $1.3 billion over the period 2007-08 to 2011-12, as set
out in the table below:
2007-08 2008-09 2009-10 2010-11 2011-12
$15m $300m $681m $318m
Compliance cost impact: Low. This measure involves a small change to
the taxation treatment of in-house software
5
1 Chapter 1
Fringe benefits tax -- meal cards and
eligible work-related items
Outline of chapter
Fringe benefits tax
.1 Part 1 of Schedule 1 to this Bill amends the fringe benefits tax (FBT)
law to ensure that:
2 food or drink provided as part of a salary sacrifice
arrangement (eg, meal card arrangements) are excluded from
the FBT exemption in section 41 of the Fringe Benefits Tax
Assessment Act 1986 (FBTAA 1986) which applies to
property consumed on the employer's premises on a working
day; and
3 the FBT exemption in section 58X of the FBTAA 1986 for
eligible work-related items is restricted to items that are used
primarily for work-related purposes. In addition:
.1 the exemption will be limited to one of each of the listed
eligible work-related items per employee per FBT year
unless the item is a replacement item; and
.2 the list of eligible work-related items will also be updated
so that it is available to work-related portable electronic
devices.
Income tax
.3 Part 1 of Schedule 1 to this Bill also amends the income tax law to
ensure that:
4 there is no deduction available under Division 40 of the
Income Tax Assessment Act 1997 (ITAA 1997) for the
decline in value of eligible work-related items that are
exempt under section 58X of the FBTAA 1986; and
7
5 section 51AH, of the Income Tax Assessment Act 1936
(ITAA 1936) does not operate to deny decline in value
deductions under Division 40 of the ITAA 1997.
Context of amendments
Fringe benefits tax
Exempt property benefits -- meal card arrangements
.1 Section 41 of the FBTAA 1986 currently provides an exemption for
property benefits provided to employees and consumed by them on a
working day on the employer's business premises. This includes food and
drink.
.2 The original intent of the legislation was to ensure that a property
fringe benefit would be subject to FBT where it was provided free or at a
discount. An exception was provided for goods supplied on a working
day and consumed on the employer's premises. The limited nature of the
intended benefit was illustrated in the explanatory memorandum to the
original Bill by the example of `a daily ration of beer consumed at work
by brewery workers would not be subject to tax'.
.3 Employers and employees have been accessing this FBT exemption
where meals are provided to employees under salary sacrifice
arrangements. These arrangements include the use of `meal cards'.
Under such arrangements, an employer pays for an employee's meals
which have been provided by an independent caterer located on, or the
independent caterer delivers to, the employer's premises. This allows an
employee with a meal card to effectively purchase food and drink out of
pre-tax income, whereas most employees must purchase their meals from
after-tax income.
.4 The use of meal cards in these circumstances is inconsistent with the
original policy intent of the FBT exemption which was to provide an
exemption for staff canteens and other modest benefits. Therefore, the
measure restores the original intent.
Exemption for eligible work-related items
.5 The FBT exemption for eligible work-related items in
section 58X of the FBTAA 1986 was introduced in 1995 as part of
measures designed to reduce the cost of compliance for employers. The
measure was intended to remove the need for employers to obtain
declarations stating the percentage of employment-related use in applying
the `otherwise deductible' rule (generally, the extent to which the
employer could obtain a deduction in relation to the benefit, as the benefit
would have been deductible to the employee).
.6 With the exception of mobile phones, computer software and
protective clothing, the current exemption provides that items will be
exempt without any requirement that their use be work-related. It was not
anticipated that other benefits would be widely available for private
purposes.
.7 Since the exemption was introduced in 1995, changes in technology
have increased access to portable electronic items such as laptop
computers. Employees are able to acquire these items under a salary
sacrifice arrangement for private purposes. This allows them to acquire
goods for private use out of pre-tax income. This is inconsistent with the
original policy intention that the exemption should only be available
where personal use of a particular item is merely incidental to business
use.
.8 In addition, except for laptops or other portable computers, there is no
restriction on the number of items for which the exemption can apply in
an FBT year.
.9 The list of exempt items has also become outdated because of changes
in technology, for example, many portable electronic devices have more
than one function and other work-related electronic devices have become
available. It is uncertain whether the FBT exemption applies to these
items given their multiple functionality.
Income tax
Decline in value deductions for items which are exempt under
section 58X of the FBTAA 1986
.10 Employees are currently able to claim deductions for the decline in
value of depreciating assets such as laptop computers to the extent they
are used for a taxable purpose. This is notwithstanding that the item may
have effectively cost them less than the purchase price because, for
example, it was provided as an expense payment fringe benefit (where the
employee has effectively been reimbursed the cost by their employer) or
as a property fringe benefit and the benefit is exempt from FBT under
section 58X of the FBTAA 1986. This is an inappropriate outcome as no
FBT is payable and both the employee and employer can claim a tax
deduction in respect of the item -- even though the employee has
effectively not incurred the cost of purchasing it.
9
Section 51AH of the Income Tax Assessment Act 1997
.11 Section 51AH of the ITAA 1936 complements section 24 of the
FBTAA 1986 which contains the `otherwise deductible' rule as it applies
to expense payment fringe benefits. It operates to deny an employee a
deduction for expenditure where that expenditure has been reimbursed by
the employer as an expense payment fringe benefit.
.12 Under the existing Australian Taxation Office interpretation, section
51AH does not operate to deny deductions for decline in value of
depreciating assets that are provided by way of expense payment fringe
benefits.
.13 As there is some doubt that this view is sustainable, the law is to be
amended to ensure that section 51AH does not prevent a deduction for
decline in value of depreciating assets that are subject to FBT.
Summary of new law
.14 These amendments:
6 ensure that the FBT exemption in section 41 of the
FBTAA 1986 for property benefits consumed on the
employer's business premises on a working day, excludes
food or drink which is provided to an employee under a
salary sacrifice arrangement;
7 ensure that the FBT exemption for eligible work-related
items under section 58X will now only be available for
eligible work-related items where those items are used
primarily for work purposes. In addition:
.1 the exemption will be limited to one of each of the listed
eligible work-related items per employee per year unless
it is a replacement item; and
.2 the list of work-related items will also be updated to deal
with changes in technology;
8 deny employees decline in value deductions for assets which
are provided to the employee as either an expense payment
fringe benefit or a property fringe benefit and the benefit is
exempt under section 58X of the FBTAA 1986; and
9 ensure that section 51AH of the ITAA 1936 does not
prevent decline in value deductions for depreciating assets
that are subject to FBT.
Comparison of key features of new law and current law
New law Current law
The exemption provided by Section 41 of the FBTAA 1986
section 41 of the FBTAA 1986 will applies to provide an FBT
no longer apply to food or drink exemption for property provided to
provided to an employee as part of a an employee and consumed on the
salary sacrifice arrangement. employer's business premises on a
working day.
Section 58X of the FBTAA 1986 Section 58X of the FBTAA 1986
will provide an FBT exemption for applies to provide an FBT
the following work-related items exemption for an expense payment,
that are used primarily for use in the property or residual benefit that is an
employee's employment: eligible work-related item including:
1 a portable electronic device; 1 a mobile phone (that is
2 an item of computer software; primarily for use in the
3 an item of protective clothing; employee's employment);
4 a briefcase; and 2 protective clothing (that is
required for the employee's
5 a tool of trade.
employment);
The exemption applies to provide an 3 a briefcase;
exemption of one item per FBT year
4 a calculator;
that has substantially identical
functions unless the item is a 5 a tool of trade;
replacement item. 6 computer software (for use in
the employee's employment);
7 an electronic diary;
8 a laptop computer or similar
portable computer; and
9 a portable printer.
A work-related requirement only
applies to mobile phones, protective
clothing and computer software.
The FBT exemption for a laptop
computer or similar portable
computer is limited to the purchase
or reimbursement of one computer
per FBT year for each employee.
11
New law Current law
Division 40 of the ITAA 1997 will Division 40 of the ITAA 1997
deny a decline in value deduction for allows a deduction for decline in
eligible work-related items that are value of depreciating assets.
depreciating assets and where the
asset is provided as an expense
payment fringe benefit or a property
fringe benefit and the benefit is
exempt under section 58X of the
FBTAA 1986.
Section 51AH of the ITAA 1936 There is some doubt whether or not
will not operate to deny an employee section 51AH of the ITAA 1936
a decline in value deduction under (which limits deductions to
Division 40. employees where their expenditure
is reimbursed as an expense
payment fringe benefit) operates to
deny decline in value deductions
under Division 40 of the ITAA
1997.
Detailed explanation of new law
Fringe benefits tax
Exempt property benefits -- meal card arrangements
.1 This Schedule will amend section 41 of the FBTAA 1986 so that it
will not apply to provide a FBT exemption for food or drink provided to
an employee where:
2 an employee has agreed to receive the food or drink in
return for a reduction in the employee's entitlement to
receive salary or wages and this would not have happened
apart from the agreement; or
3 it is reasonable to conclude that the employee's salary or
wages would be greater if the food or drink were not
provided as part of the employee's remuneration package.
[Schedule 1, item 2, subsection 41(2)]
.1 The type of agreement or arrangement described in
subsection 41(2) is commonly referred to as a `salary sacrifice'
arrangement. It includes `meal card' arrangements whereby an employee
forgoes salary and wages to have food and drink supplied to them on their
employer's premises. The exclusion does not apply to a subsidised
canteen which is available to all employees and which does not form part
of a salary sacrifice arrangement.
.1
As an employee, Paul's income is subject to the top rate of taxation.
There is a restaurant on the ground floor of Paul's employer's
premises. The employer has entered into an arrangement whereby the
restaurant provides employees with a `swipe card' (meal card) to
purchase meals.
Paul's employer offers a salary sacrifice arrangement to its employees
to acquire a `meal card'. Paul enters into a salary sacrifice
arrangement for $3,000 with his employer to obtain a meal card. Paul
orders his lunch each day (and occasionally dinner) and the restaurant
delivers this to his office.
The provision of lunch consumed in his office is exempt from FBT
under section 41 of the FBTAA 1986 so Paul's employer has no FBT
liability on the provision of the benefit.
Paul has reduced his tax by $1,350.
Karen, who works in the building across the street, earns the same
income as Paul. Karen's employer, however, does not offer these
arrangements. Karen pays $1,350 more tax than Paul and has to buy
her own lunch.
Exemption for eligible work-related items
.2 This Schedule will replace subsection 58X(2) of the FBTAA 1986 so
that the following eligible work-related items will be exempt where the
items are primarily for use in the employee's employment:
4 a portable electronic device;
5 an item of computer software;
6 an item of protective clothing;
7 a briefcase; and
8 a tool of trade.
[Schedule 1, item 4, subsection 58X(2)]
13
.1
Christine, Eva and Dean are friends from their school days. They all
work in the city and are all subject to the top rate of taxation.
Christine and Eva's employers offer salary sacrifice arrangements.
Dean's employer does not offer salary sacrifice arrangements for its
staff.
Christine's husband wants a laptop computer. Christine's employer
already provides her with the use of a laptop as her employer
recognises that she does a lot of work at home after hours and on
weekends.
Christine goes to the local department store and purchases a laptop for
her husband for $3,000. Christine then provides the receipt to her
employer and requests, under the salary sacrifice arrangement with her
employer, that it be salary packaged and that she be reimbursed for the
expense. As the benefit is an exempt fringe benefit under section 58X
the employer would not be liable for FBT in relation to the benefit.
Christine would have a reduction in her tax liability of $1,350.
Eva's employer does not provide her with a laptop even though she
also does a lot of work after hours and on weekends. Eva purchases
the same laptop as Christine for $3,000 and also asks her employer to
reimburse her as part of a salary sacrifice arrangement. As the benefit
is an exempt benefit under section 58X, the employer would not be
liable for FBT in relation to the benefit. Eva also now has a reduction
in her tax liability of $1,350.
Dean however, is not able to enter into a salary sacrifice arrangement
to acquire a laptop for his wife who wants a laptop computer. Dean
simply purchases a laptop out of his after tax income.
These amendments restore the equity for arrangements similar to those
entered into by Christine and Dean and where a laptop is purchased
wholly for private purposes, that is, the use of salary sacrifice will not
put a person in a more favourable position compared to someone who
does not salary sacrifice.
.2 The exemption for these items will be restricted to one item per year
for items that have a substantially identical function. [Schedule 1, item 4,
subsection 58X(3)]
.1
An employee acquires two laptop computers in an FBT year as a fringe
benefit. The second laptop computer has substantially identical
functions to the first laptop computer. The FBT exemption in
section 58X is only available in respect of the first laptop computer.
.3 The exemption is available in respect of an item that is a replacement
of another item acquired earlier in the FBT year. [Schedule 1, item 4,
subsection 58X(4)]
.1
An employee (Eva in Example 1.2) is provided with a second laptop
by her employer during the FBT year because the first computer was
stolen. The FBT exemption in section 58X applies to exempt the
second laptop computer from FBT.
Income tax
.4 Prior to this amendment, where a person used a laptop purely for
work-related purposes and the laptop had been acquired by way of the
provision of an exempt benefit under section 58X, the employee would be
able to claim a deduction for the decline in value of the laptop.
.5 This Schedule amends section 40-45 of Division 40 of the ITAA 1997
to ensure that an employee is not able to claim a deduction for decline in
value for eligible work-related items where the item is provided as an
expense payment fringe benefit or a property fringe benefit and the benefit
is exempt from FBT under section 58X of the FBTAA 1986. [Schedule 1,
item 8, subsection 40-45(2)]
.6 This Schedule also amends section 51AH of the ITAA 1936 to ensure
that an employee can claim decline in value deductions for depreciating
assets that are provided as taxable fringe benefits. [Schedule 1, item 6,
subsection 51AH(3)]
Application and transitional provisions
Fringe benefits tax
Exempt property benefits -- meal card arrangements
.7 The amendment made by item 2 to section 41 of the FBTAA 1986
applies to food and drink provided after 7.30 pm Australian Eastern
Standard Time (AEST) 13 May 2008. [Schedule 1, subitem 3(1)]
.8 However, if an employee has entered into an agreement with their
employer before 7.30 pm (AEST), 13 May 2008, any food or drink that
relates to an existing balance at that time will not be subject to FBT if the
food and drink is provided before 1 April 2009. Any food or drink
15
purchased with additional credits (`top-ups') that occur after 13 May 2008
will be subject to FBT. [Schedule 1, subitem 3(2)]
.1
Following on from Example 1.1, if Paul had entered into the
arrangement before 13 May 2008 and before this date an amount of
$500 through payroll deduction had occurred by which a credit amount
was available on the meal card, then Paul could continue to use the
meal card after 13 May 2008 up to 31 March 2009 (end of the FBT
year). This simply means that in this circumstance the meal card can
continue to be used until the balance on the card is exhausted on or by
31 March 2008. Any food or drink provided from additional credits to
the meal card after 13 May 2008 would be subject to FBT.
Exemption for eligible work-related items
.9 The amendment made by item 4 to section 58X of the FBTAA 1986
applies to eligible work-related items acquired after 7.30 pm (AEST), 13
May 2008 other than items acquired under a contract entered into at or
before that time. To avoid doubt, this applies to items substantially
identical in function and replacement items. [Schedule 1, item 5]
Income tax
.10 The amendment made by item 8 to section 40-45 of the ITAA 1997 to
deny decline in value deductions for items in relation to which section
58X (of the FBTAA 1986) exempt benefits have been provided, applies to
assets acquired after 7.30 pm (AEST), 13 May 2008 other than assets
under a contract entered into at or before that time. If the asset was
acquired at or before that date, a decline in value deduction can be
claimed for the 2007-08 income year, but not for later income years.
[Schedule 1, item 9]
9 Chapter 2
Employee share schemes -- election
mechanism and removal of double
taxation
Outline of chapter
.1 Part 2 of Schedule 1 to this Bill amends the Income Tax Assessment
Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA
1997) to:
10 restore the intent of the legislation by changing the method
of making an election that allows a taxpayer to choose
between two tax concessions available for qualifying shares
or rights acquired under an employee share scheme (ESS)
thereby ensuring that income is properly included in the
taxpayer's assessable income; and
11 remove double taxation that arises in relation to certain ESS
that use an employee share trust.
Context of amendments
.1 Division 13A of the ITAA 1936 provides for the taxation treatment of
shares and rights acquired under ESS. Any discount from the market
price of the shares or rights is assessable income. An employee
participating in an ESS can, subject to certain conditions, choose one of
two tax concessions on the discount they receive -- the tax-upfront
concession or the tax-deferred concession.
12 Under the tax-upfront concession, an employee is taxed on
the discount received on shares and rights in the income year
in which they are acquired. If the shares and rights are
acquired under an ESS that meets certain exemption
conditions the taxpayer can disregard the first $1,000 of the
discount.
17
13 Under the tax-deferred concession, an employee can defer
paying tax on the discount received on shares or options until
a cessation time. A cessation time occurs at the earliest of:
.1 when restrictions on sale are lifted;
.2 an employee sells the shares or exercises the options;
.3 employment ceases; or
.4 ten years pass from the time the shares or rights were
acquired.
.5 There is a risk with the election mechanism whereby taxpayers may
seek to manipulate when amount of the discount is included as assessable
income and thereby reduce their liability for tax. To address this risk, the
law is being amended to ensure that taxpayers properly include ESS
income in their tax return.
.6 Subdivision 130-D of the ITAA 1997 deals with the capital gains tax
(CGT) consequences of an ESS which falls under Division 13A of the
ITAA 1936.
14 For the tax-upfront concession, the cost base of the rights or
shares is the market value of the shares or rights on
acquisition. The cost base of any shares acquired as a result
of the exercise of rights includes the market value of the
rights on acquisition and the exercise price paid plus
brokerage fees and other costs. The effect is that any gains or
losses from the time of acquisition of the shares or rights will
be dealt with under the CGT regime.
15 For the tax-deferred concession, the CGT consequences
depend on whether the relevant CGT event happens to the
shares or rights (or shares acquired as a result of the exercise
of the rights) in an arm's length transaction within 30 days of
the `cessation time'.
.1 If the relevant CGT event happens to the shares or rights
(or shares acquired from exercising a right) within
30 days of the cessation time any capital gain is
disregarded. This is because any gain that has arisen up to
the cessation time will have been subject to income tax
under Division 13A.
Employee share schemes -- election mechanism and removal of double taxation
.2 If the relevant CGT event happens to the shares or rights
(or shares acquired from exercising a right) outside
30 days of the cessation time, the cost base is the market
value of the shares or rights at cessation time. The effect
is that any gains from the cessation time will be assessed
as a capital gain.
.3 Subdivision 130-D of the ITAA 1997 provides CGT relief where the
shares or rights are held by a trustee before being passed to an employee.
The relief is available for the tax-upfront concession and the tax-deferred
concession. The provisions ensure that the trustee or beneficiary will not
be taxed on a capital gain that reflects either a discount that is assessed to
the employee under Division 13A of the ITAA 1936 or a capital gain that
arises later when a CGT event occurs in relation to the shares.
Making an election
.4 Where in a year of income a taxpayer acquires qualifying shares or
rights and wishes to be taxed upfront, section 139E of the ITAA 1936
requires the taxpayer to make an election. The election, which must be in
writing, must be made before lodging the tax return for the year in which
the shares or rights are acquired, or within such further time as the
Commissioner of Taxation (Commissioner) allows. The election is not
required to be lodged with the tax return or otherwise provided to the
Commissioner.
.5 There is a risk with the election requirements in relation to rights and
options provided by an employer to an employee under an ESS. If the
value of shares or rights increases significantly, a taxpayer can
substantially reduce their tax liability by claiming to have made an
election to be assessed under the tax-upfront method and, through an
oversight, omitted to include the discount in their income tax return in the
earlier income year. If the taxpayer makes this claim outside the two year
amendment period, it may not be possible to include the discount in their
assessable income via an amended assessment.
.1
Carlos works for a public company and is granted 500,000 options in
May 2003. The options are valued at 20 cents each and can be
exercised after three years. If he were to be taxed at grant he would be
assessed on $100,000 (500,000 × 20c) in his 2003 tax return, but he
chooses not to -- he makes no section 139E election -- or makes the
election but fails to include the income.
The company does very well in the current economic boom and by
2006 the options are worth $2 each. Carlos exercises all the options in
19
2006 and his tax agent tells him he will be taxed on a total of
$1 million in 2006. Carlos regrets that he did not make an election
back in 2003. His tax agent advises him that elections are not provided
to the Australian Taxation Office (ATO) and the Commissioner has no
knowledge of whether a taxpayer has made an election.
Carlos writes to the ATO advising that he made an election before
lodging his tax return but now realises that through an oversight he
omitted the income in that year. He requests an amendment to his
2003 tax return to include the $100,000, which is accepted under self
assessment.
By claiming to have made an election for the 2003 year, Carlos avoids
being assessed on $1 million income in 2006.1 If questioned, Carlos
produces a document purporting to be an election prepared in 2003.
Forensic testing of the document provided generally will not provide
the necessary evidence that the document was fabricated and is of little
use.
.6 To ensure the law operates as intended, requirements surrounding the
making of an election will be tightened so amounts acquired under an ESS
are appropriately returned.
.7 Under the new arrangements an election to be taxed upfront on shares
or rights is made under section 139E by making the election and including
the amount of discount in the income tax return of the year of acquisition.
Double taxation
.8 Double taxation can arise in relation to certain ESS that use an
employee share trust. Under these schemes, an employee acquires shares
from the trustee of an employee share trust on the exercise of rights that
they acquired under an ESS.
.9 These ESS do not fall within the schemes to which the CGT relief
applies. This is because the CGT relief only applies where the shares or
rights held by an employee share trust were acquired under an ESS. The
CGT relief does not extend to shares held in the trust that the employee
acquires by exercising rights they acquired under an ESS2.
1
He will be assessable on a capital gain if and when he disposes of the shares, but this can
benefit from discounting. The taxation of the capital gain is also deferred to a time of his
choosing.
2
Subsection 139C(4) of the ITAA 1936 provides that shares acquired by the employee as a
result of exercising the rights are treated as not having been acquired under an ESS.
Employee share schemes -- election mechanism and removal of double taxation
.10 Under these arrangements double taxation can arise because the
trustee cannot access the CGT relief available because the requirement
that the share must have been acquired by the employee under an ESS
cannot be satisfied. In these circumstances, it is the right to the share and
not the share itself which has been acquired under an ESS.
.11 The capital gain that arises to the trustee or beneficiary reflects
wholly or partly:
16 the discount amount (being the difference between the
market value of the right and the amount the employee paid
for the right) on which the employee has been or will be
taxed under the ESS provisions in Division 13A of the
ITAA 1936; or
17 any capital gain arising later when a CGT event occurs in
relation to the shares (such as a sale).
Comparison of key features of new law and current law
New law Current law
An election to be taxed upfront in An election to be taxed upfront in
relation to shares or rights is made relation to shares or rights is made
under section 139E by the taxpayer under section 139E by making an
making the election. The taxpayer election in writing before lodging the
must also include the amount of the tax return for the year in which the
discount in the income tax year of the shares or rights are acquired. The
year of acquisition. This does not election is not required to be lodged
apply where the discount is below with the tax return or otherwise
$1,000 and the shares or rights are provided to the Commissioner.
acquired under an exempt scheme.
Section 130-90 of the ITAA 1997 Section 130-90 of the ITAA 1997
provides a trustee or beneficiary of an provides a trustee or beneficiary of an
employee share trust relief from CGT employee share trust relief from CGT
when an employee becomes when an employee becomes
absolutely entitled to ESS shares or absolutely entitled to ESS shares or
rights held in the trust and shares held rights held in the trust.
to satisfy an exercise of rights held
under an ESS.
21
Detailed explanation of new law
Making an election
.1 Subsection 139E(2) of the ITAA 1936 is replaced with a new method
of making an election to be assessed under the tax-upfront concession.
.2 Under the changes, a taxpayer must make an election to be assessed
under this concession by making the election and including the amount of
the discount in the income tax year of the year of acquisition. If the value
of the discount is $1,000 or less and the taxpayer is eligible for the $1,000
exemption under subsection 139BA(2) of the ITAA 1936 because the
exemption conditions under section 139CE of the ITAA 1936 are
satisfied, the taxpayer will be taken to have made the election. [Schedule 1,
item 11]
.1
Helena is a store manager on a salary of $85,000. Helena's employer
has an ESS which is available for all staff to participate in. Helena
decides to participate and acquires 800 qualifying shares at $1 per
share on 22 September 2009 where the exemption conditions in
section 139CE of the ITAA 1936 are met. The market value of the
shares at that time was $2.00. The discount Helena receives is valued
at $800 (market value of $2 × 800 shares = $1,600 less $800 the
amount Helena paid for the shares).
Helena does not have to include the discount in her assessable income
for the 2009-10 return as the discount is less than $1,000 and the
exemption conditions in section 139CE of the ITAA 1936 are met.
Helena is taken to have made the election to be taxed upfront on the
discount.
.2
Assume the same details in Example 2.1 but the amount of the
discount is more than $1,000. In relation to the amount in excess of
$1,000 Helena must indicate in her return that she has made an election
and include the discounted amount in excess of the $1,000 in the year
of acquisition. If this is not done, Helena will be taken to have chosen
the tax-deferred alternative.
.3 The Commissioner is currently provided with a discretion to allow
additional time to make an election. This discretion will continue. A
taxpayer seeking an extension of time must make the request in writing in
an approved form. [Schedule 1, item 11]
Employee share schemes -- election mechanism and removal of double taxation
.4 Subsection 139E(4), which sets out how an election must be made for
the purposes of subsection 139E(3), is also modified to reflect the new
election mechanism contained in subsection 139E(3). [Schedule 1, item 12]
Double taxation
.5 Subsection 130-90(3) of the ITAA 1997 describes the shares or rights
for which a trustee or beneficiary of an employee share trust is able to
access the CGT relief provided under section 130-90 of the ITAA 1997.
These amendments extend subsection 130-90(3) so that the relief also
applies to the following shares:
2 shares which are acquired as a result of exercising a right
acquired under an ESS; and
3 shares acquired as a result of exercising a right which was
acquired as a result of a corporate takeover or restructure and
section 139DQ of the ITAA 1936 applies to treat the right as
a continuation of the right that existed before the corporate
takeover or restructure.
[Schedule 1, item 14]
Application provisions
.1 The new election procedures under subsections 139E(2), (2A), (2B),
(4) and (5) will take effect in relation to assessments for the 2008-09
income year and later income years. [Schedule 1, item 13]
.2 The amendment to subsection 130-90(3) of the ITAA 1997 will apply
to CGT events happening at or after 7.30 pm (Australian Eastern Standard
Time) 13 May 2008. [Schedule 1, item 15]
23
4 Chapter 3
Depreciation of computer software -- four
year statutory effective life
Outline of chapter
.1 Schedule 2 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to increase the period over which taxpayers write off for tax
purposes depreciable in-house software from 2½ years to four years.
.2 All references to legislative provisions in this chapter are references to
the ITAA 1997.
Context of amendments
.3 For tax purposes, depreciable assets are generally written off over
their effective lives. The Commissioner of Taxation (Commissioner) has
set `safe harbour' effective life depreciation periods for a wide range of
assets. For example, the Commissioner's safe harbour effective life for
computers is four years. Alternatively, taxpayers can self assess an
effective life where they can demonstrate the basis for doing so.
.4 Certain intangible assets, including in-house software, have a
statutory effective life. In the case of in-house software, this effective life
is currently 2½ years.
.5 In-house software is essentially software that is used in-house, rather
than as trading stock, and that is a capital asset, rather than fully
deductible in the year of purchase. It includes software, or a right to use
software, that the taxpayer has acquired, developed or has had another
entity develop.
.6 Extending the statutory effective life of software to four years aligns
the write-off period with other computer equipment (hardware).
.7 Subsection 40-70(2) precludes certain intangible assets -- including
in-house software -- from being depreciated using the diminishing value
method. This means that in-house software must be depreciated on a
`straight line' basis, under the prime cost method.
25
Summary of new law
.8 Schedule 2 to this Bill increases the statutory effective life for
depreciable in-house software from 2½ years to four years.
.9 A four year depreciation period for expenditure on in-house software
is the same period as the Commissioner's safe harbour effective life for
computers generally.
.10 The new statutory effective life applies from 7:30 pm (by legal time
in the Australian Capital Territory) on 13 May 2008, in relation to newly
held software assets.
Detailed explanation of new law
.11 Under section 995-1, in-house software is computer software, or a
right to use computer software, that a taxpayer acquires, develops or has
another entity develop:
5 that is mainly for use in performing the functions for which
the software was developed; and
6 that is not fully deductible in the year of purchase.
.1 Paragraph 40-30(2)(d) states that in-house software is an intangible
depreciating asset if it is not trading stock.
.2 Section 40-25 allows taxpayers to deduct an amount equal to the
decline in value for an income year of a depreciating asset held for any
time during the year.
.3 In this manner, depreciating assets are generally `written off'
(ie, depreciated) for taxation purposes over their effective lives.
.4 The table at subsection 40-95(7) prescribes effective lives for certain
intangible depreciating assets.
.5 Item 8 of that table prescribes the effective life for in-house software
as 2½ years.
.6 This measure changes the figure for that statutory effective life at item
8 from 2½ to four years. [Schedule 2, item 1, subsection 40-95(7)]
Employee share schemes -- election mechanism and removal of double taxation
.7 This means that in-house software will be depreciated over four years,
rather than 2½ years, with a commensurately smaller deduction allowed
each year.
.8 In-house software will therefore be depreciated at the same rate as
under the Commissioner's safe harbour effective life for computers
generally.
.9 The subsection 40-70(2) requirement that in-house software be
depreciated using the prime cost method is unchanged.
Application and transitional provisions
.10 The new, longer statutory effective life of four years applies from
7:30 pm (by legal time in the Australian Capital Territory) on 13 May
2008, in relation to newly held software assets. That is, the four year
write-off period applies to an in-house software asset that a taxpayer starts
to:
7 hold under a contract after that time;
8 develop after that time; or
9 hold in some other way after that time.
[Schedule 2, item 2]
.1 For an in-house software asset held at that time, any further
expenditure representing second element cost (in terms of section 40-190
of the ITAA 1997) is depreciated as part of that asset, under the current
shorter statutory effective life. In particular, upgrades to such software
that do not create new or different depreciating assets will not be affected
by this measure, even though that further expenditure occurs after
7:30 pm (by legal time in the Australian Capital Territory) on
13 May 2008.
27
Index
Schedule 1: Fringe benefits tax and employee share schemes
Bill reference Paragraph number
Item 2, subsection 41(2) 1.17
Item 4, subsection 58X(2) 1.19
Item 4, subsection 58X(3) 1.20
Item 4, subsection 58X(4) 1.21
Item 5 1.27
Item 6, subsection 51AH(3) 1.24
Item 8, subsection 40-45(2) 1.23
Item 9 1.28
Item 11 2.15, 2.16
Item 12 2.17
Item 13 2.19
Item 14 2.18
Item 15 2.20
Subitem 3(1) 1.25
Subitem 3(2) 1.26
Schedule 2: In-house software
Bill reference Paragraph number
Item 1, subsection 40-95(7) 3.17
Item 2 3.21
29
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