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TAX LAWS AMENDMENT (2004 MEASURES NO. 5) BILL 2004

2002-2003-2004

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

TAX LAWS AMENDMENT (2004 MEASURES No. 5) BILL 2004

EXPLANATORY MEMORANDUM

(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)

Table of contents

Glossary

The following abbreviations and acronyms are used throughout this explanatory memorandum.

General outline and financial impact

Deductible gift recipients

Schedule 1 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to update the lists of specifically listed deductible gift recipients (DGRs). It also amends the ITAA 1997 to add a new category of DGRs for special schools.

Date of effect: Deductions for gifts to organisations listed as DGRs under Schedule 1 have effect as follows:

• the CFA and Brigades Donations Fund from 1 July 2004;

• the City of Onkaparinga Memorial Gardens Association Inc. from 29 April 2004 to 24 April 2005;

• the Mount Macedon Memorial Cross Trust from 14 August 2004 to 14 August 2005;

• the Shrine of Remembrance Foundation from 3 July 2004 to 1 July 2006; and

• the Shrine of Remembrance Restoration and Development Trust from 1 July 2005 to 1 July 2007.

Proposal announced: The new DGR category for special schools, which applies from 1 April 2004, was announced in the Treasurer’s Press Release No. 32 of 11 May 2004.

Financial impact: The cost to revenue of creating a new category of DGR is unquantifiable but is likely to be small.

Extending the listings for the Shrine of Remembrance Foundation and the Shrine of Remembrance Restoration and Development Trust is estimated to cost $0.6 million over the period of the extension.

The remaining DGR listings and extension have an unquantifiable but insignificant cost to revenue.

Compliance cost impact: Nil.

Irrigation water providers

Schedule 2 to this bill amends the water facilities and landcare tax concession provisions in the Income Tax Assessment Act 1997 to provide irrigation water providers and rural land irrigation water providers access to these concessions.

Date of effect: From 1 July 2004 for expenditure incurred on, or after, that date.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer’s and the Minister for Agriculture, Fisheries and Forestry’s Press Release No. C040/04 of 11 May 2004.

Financial impact: The impact of this measure is estimated to cost $15 million over the forward estimate period.

Compliance cost impact: Compliance costs could be slightly lower.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure is expected to impact favourably on irrigation water providers and rural land irrigation water providers and assists in renewing water supply infrastructure in rural Australia.

Main points:

• The amendments will allow irrigation water providers and rural land irrigation water providers to claim accelerated depreciation deductions for eligible capital expenditure.

• These amendments will have a small positive impact on compliance costs.

• This measure will have a minor negative impact on the Australian Government’s revenue collections.

Fringe benefits tax – broadening the exemption for the purchase of a new dwelling as a result of relocation

Schedule 3 to this bill amends the provisions for accessing the fringe benefits tax exemption for incidental purchase costs associated with the acquisition of a dwelling as a result of relocation.

Date of effect: 1 April 2004.

Proposal announced: This measure was announced in the former Minister for Revenue and Assistant Treasurer’s Press Release No. C031/04 of 11 May 2004.

Financial impact: An insignificant cost to revenue.

Compliance cost impact: Nil.

CGT event G3

Schedule 4 to this bill extends the scope of CGT event G3 so that an administrator (in addition to a liquidator) of a company can declare shares and other equity interests in the company to be worthless for capital gains tax (CGT) purposes. The declaration permits taxpayers who hold those shares or other equity interests to choose to make a capital loss.

Date of effect: These amendments apply to declarations made by liquidators or administrators after the date of Royal Assent of this bill.

Proposal announced: This measure was announced in the 2004-2005 Budget and in the former Minister for Revenue and Assistant Treasurer’s Press Release No. C029/04 of 11 May 2004.

Financial impact: These amendments have an unquantifiable but insignificant cost to revenue.

Compliance cost impact: These amendments will reduce compliance costs for affected taxpayers.

Summary of regulation impact statement

Regulation impact on business

Impact: The main impact will be on individuals, superannuation funds, trusts and companies that are shareholders and holders of other equity interests in companies under external administration.

Main points:

• Taxpayers who hold worthless shares in companies that appoint an administrator (rather than a liquidator) or who hold other equity interests that have become worthless will not have to create a trust over those shares or other equity interests to be able to claim capital losses.

• Liquidators and administrators will incur additional costs in determining whether there are reasonable grounds to declare shares and other equity interests to be worthless and in making the appropriate declarations. These costs are not expected to be significant.

• The Australian Taxation Office may incur some implementation costs. These costs are not expected to be significant.

• This measure will reduce compliance costs for affected taxpayers at little cost and therefore is supported.

Removal of the superannuation guarantee reporting requirement

Schedule 5 to this bill amends the Superannuation Guarantee (Administration) Act 1992 to remove the requirement for employers to provide reports to employees under the superannuation guarantee (SG) arrangements. The removal of this requirement will have effect from 1 January 2005. After this date, employers will not be required, under the SG arrangements, to report to employees on employer superannuation contributions.

Date of effect: This measure will have effect in respect of contributions made on or after 1 January 2005.

Proposal announced: This measure was announced by the Prime Minister in his statement of 6 July 2004 titled Committed to Small Business.

Financial impact: Unquantifiable but likely to be insignificant.

Compliance cost impact: This measure will reduce the compliance impact on employers arising from their SG obligations.

Summary of regulation impact statement

Regulation impact on business

Impact: The recommended option removes the requirement for employers to report superannuation contributions under the SG arrangements. The provision of information to employees will be maintained by a combination of reporting provisions in other Australian workplace legislation that requires reporting on payslips, and annual reporting from superannuation funds.

Main points:

• This option will completely remove the compliance burden associated with SG reporting, as reporting under the SG arrangements will no longer be required.

• Employees will obtain information relating to their superannuation from other sources, for example, the annual reports from their superannuation funds or from their employers reporting on payslips in accordance with Australian workplace legislation.

• There will be no administrative burden on the Australian Taxation Office arising out of this measure.

• There will be no significant compliance impact on superannuation fund providers other than a potentially slight increase in the frequency and level of enquiry from members.

Consolidation: providing greater flexibility

Schedule 6 to this bill provides greater flexibility and clarifies certain aspects of the consolidation regime.

Date of effect: These amendments have retrospective effect to 1 July 2002, which is the date of commencement of the consolidation regime. The amendments clarify the operation of the consolidation regime and as such are beneficial to taxpayers and do not have the potential to act to the detriment of any persons.

Proposal announced: All measures were foreshadowed in the former Minister for Revenue and Assistant Treasurer’s Press Release No. C116/03 of 4 December 2003.

Financial impact: The financial impact in relation to the amendment dealing with capital gains or capital losses arising from changes in the value of deferred tax liabilities is unquantifiable as it depends on the future level of activity in disposals of assets which is not possible to determine. However, this change is designed to reduce compliance costs associated with keeping track of changes in the value of deferred tax liabilities. All of the other changes are not expected to impact on revenue.

Compliance cost impact: The measures in this bill will provide taxpayers with additional flexibility in the transition to consolidation and is not expected to impact significantly on compliance costs.

Baby Bonus (first child tax offset) and adoption

Schedule 7 to this bill amends the first child tax offset provisions affecting adoption.

Date of effect: 1 July 2001.

Proposal announced: This measure was announced in the 2003-04 Mid-Year Fiscal and Economic Outlook.

Financial impact: An insignificant cost to revenue.

Compliance cost impact: Nil.

Technical correction to the Taxation Laws Amendment Act (No. 8) 2003

Schedule 8 to this bill corrects a technical defect in the citation of an Act in the commencement provision applying to the franking deficit tax offset provisions for life insurance companies in Schedule 7 to the Taxation Laws Amendment Act (No. 8) 2003.

Date of effect: The amendment commences immediately after the Taxation Laws Amendment Act (No. 8) 2003 received Royal Assent (21 October 2003).

Proposal announced: This measure has not previously been announced.

Financial impact: Nil.

Compliance cost impact: The amendment in this bill makes a technical correction to the citation of an Act and is not expected to impact on compliance costs.

Chapter 1
Deductible gift recipients

Outline of chapter

1.1 Schedule 1 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to create a new general category of deductible gift recipient (DGR) for a government school that provides special education for students with a disability that is permanent or is likely to be permanent, and that does not provide education for other students. Schedule 1 also updates the lists of specifically listed DGRs.

Context of amendments

1.2 Income tax law allows taxpayers to claim income tax deductions for certain gifts to DGRs. To be a DGR, an organisation must fall within a category of organisations set out in Division 30 of the ITAA 1997, or be specifically listed under that Division.

1.3 The creation of a new category in Division 30 of the ITAA 1997 for special schools and the addition of organisations to the lists of specifically listed DGRs will assist these organisations to attract public support for their activities.

Summary of new law

1.4 Schedule 1 creates a new category of DGRs for special schools.

1.5 The Treasurer announced in Press Release No. 32 of 11 May 2004 that the Government would legislate to provide a new category of DGR, to allow certain special schools to receive tax deductible donations. The new DGR category ensures that these organisations are eligible to receive tax deductible gifts.

1.6 The amendments will allow income tax deductions for certain gifts to the value of $2 or more, made on or after 1 April 2004, to those special schools that come within the new category.

1.7 The amendments will also allow income tax deductions for certain gifts to the value of $2 or more made to the fund and organisation listed in Table 1.1 from, and including, the date of effect.

Table 1.1

1.8 The amendments also extend the period for which deductions are allowed for gifts to certain funds and organisations which have time-limited DGR status.

1.9 Gifts to the Mount Macedon Memorial Cross Trust will now be deductible where they are made before 15 August 2005. Gifts to the Shrine of Remembrance Foundation and the Shrine of Remembrance Restoration and Development Trust will now be deductible where they are made before 1 July 2006 and 1 July 2007 respectively.

Detailed explanation of new law

Deductible gift recipient category for special schools

1.10 The new law will extend DGR status to all government schools that:

• provide special education for students with a disability that is permanent or is likely to be permanent; and

• do not provide education for students without a disability.

[Schedule 1, item 1]

1.11 Some special schools had previously been endorsed by the Commissioner of Taxation (Commissioner) as DGRs by virtue of being public benevolent institutions (PBIs). The Commissioner has now determined that these organisations are government bodies and so cannot be PBIs. It is a well established principle of the existing common law that a government body is not a PBI. The amendments will ensure that special schools that previously had PBI status can continue to receive tax deductible gifts.

1.12 The new law is not intended to extend DGR status to those mainstream schools that also provide some education to students with disabilities. Non-government special schools operating on a non-profit basis will continue to be able to access DGR status by virtue of being endorsed as a PBI.

1.13 Under the new law, a government special school may apply to the Commissioner to be endorsed as a DGR under the new general category. An organisation is generally only endorsed after it has satisfied the Commissioner that it meets certain integrity standards, known as the gift fund requirements, which are set out in the Australian Taxation Office (ATO) Public Ruling TR 2000/12: Income tax: deductible gift recipients – the gift fund requirements and the ATO’s Fact Sheet: Gift fund requirements.

Specifically listed deductible gift recipients and extending the end dates for deductibility

1.14 The new law lists two organisations as DGRs – the City of Onkaparinga Memorial Gardens Association Inc. and the CFA and Brigades Donations Fund. It also extends the period for which deductions are allowed for gifts to the Mount Macedon Memorial Cross Trust, the Shrine of Remembrance Foundation and the Shrine of Remembrance Restoration and Development Trust, all of which have time-limited DGR status. [Schedule 1, items 3 to 7]

1.15 The City of Onkaparinga Memorial Gardens Association Inc. was established to develop memorial gardens and grounds in Morphett Vale, South Australia, to serve as a war memorial to honour and commemorate the sacrifices made by Australians who served in all wars from the Great War of 1914-1918 to the Gulf War and those serving in peacekeeping forces. [Schedule 1, items 6 and 9]

1.16 The Government announced in the Treasurer’s Press Release No. 114 of 23 December 2003 that it would legislate to ensure that the Country Fire Authority and the Victorian State Emergency Services and equivalent co-ordinating bodies in other State and Territories could benefit from being able to receive tax deductible gifts. The CFA and Brigades Donations Fund was established by the Country Fire Authority of Victoria to raise and collect donations from the public specifically for distribution to the Country Fire Authority volunteer fire brigades in Victoria. [Schedule 1, items 7 and 8]

1.17 The ITAA 1997 is amended so that the period for which deductions are allowed for gifts to the Mount Macedon Memorial Cross Trust is extended to gifts made before 15 August 2005. The Mount Macedon Memorial Cross Trust was established to undertake development and restoration of the Mount Macedon Memorial Cross and the surrounding land. The Cross, which was built in honour of those killed in World War I, is recognised as one of the most significant war memorials in Victoria. The DGR status of the Trust was previously granted until 14 August 2004 and has been extended to allow development work to be completed on the memorial. [Schedule 1, item 4]

1.18 The period for which deductions are allowed for gifts to the Shrine of Remembrance Foundation and the Shrine of Remembrance Restoration and Development Trust will also be extended. Gifts made before 1 July 2006 to the Shrine of Remembrance Foundation and before 1 July 2007 to the Shrine of Remembrance Restoration and Development Trust will be deductible. The Shrine of Remembrance in Melbourne is a memorial of national significance built during the depression and commemorates the sacrifices made by Victorians during World War I, World War II and the conflicts in Korea, Malaya, Borneo, Vietnam and the Gulf. The DGR status of this Foundation expired on 1 July 2004. The Trust’s tax deductible status will expire on 1 July 2005. DGR status for the Shrine has been extended to support further enhancements to the Shrine. [Schedule 1, items 3 and 5]

Application and transitional provisions

1.19 The amendments creating a new category of DGR for government special schools apply with effect from 1 April 2004. [Schedule 1, item 2]

1.20 The amendments to specifically list the organisations listed in Table 1.1 apply from the date of effect shown in that table.

Chapter 2
Irrigation water providers

Outline of chapter

2.1 Schedule 2 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow irrigation water providers in Australia who are primarily and principally in the business of supplying water to primary producers access to the water facilities tax concession. It will also amend the ITAA 1997 to allow rural land irrigation water providers in Australia who are primarily and principally in the business of supplying water to primary producers or to businesses using rural land, access to the landcare tax concession.

2.2 This chapter discusses the amendments to the water facilities provisions (in Subdivision 40-F of the ITAA 1997) and to the landcare provisions (in Subdivision 40-G of the ITAA 1997).

Context of amendments

2.3 Primary producers are allowed to deduct amounts for capital expenditure on depreciating assets that are water facilities. One-third of the expenditure on water facilities is deductible in the year in which it is incurred, and one-third in each of the following two years. Examples of a water facility include dams, tanks, wells, irrigation channels, pumps and windmills. This concession is designed to encourage primary producers to undertake expenditure on water management to increase their capacity to withstand drought and to improve their on-farm water management.

2.4 Primary producers and businesses (except mining businesses) using rural land are also allowed to have an outright deduction for capital expenditure on a landcare operation. Examples of a landcare operation include fences to exclude animals from land affected by land degradation, constructing a levee on land, constructing drainage works to control salinity and expenditure associated with eradicating pests and destroying plant growth detrimental to the land. The concession is designed to encourage primary producers and users of rural land to undertake capital expenditure that assists the long-term sustainability of their use of land.

Summary of new law

2.5 This bill will allow:

• irrigation water providers in Australia to have access to the water facilities taxation concession, if they are primarily and principally in the business of supplying water to primary producers; and

• rural land irrigation water providers in Australia to have access to the landcare taxation concession, if they are primarily and principally in the business of supplying water to primary producers or to businesses using rural land.

2.6 The meaning of a ‘water facility’ and a ‘landcare operation’ will also be amended to improve certainty for irrigation water providers, rural land irrigation water providers and primary producers by including repairs of a capital nature and structural items reasonably incidental to conserving or conveying water (in the case of the water facilities tax concession) and reasonably incidental to certain assets under landcare operation.

2.7 The policy rationale for the amendments is to improve equity by aligning the deductions available to primary producers and businesses using rural land with deductions available to irrigation water providers and rural land irrigation water providers which supply those primary producers and businesses with water. Therefore, extending the water facilities and landcare taxation concessions to irrigation water providers and rural land irrigation water providers respectively ensures that the tax concessions apply indirectly to work done by the water providers, as well as directly, to work done by those provided with water for their businesses.

2.8 The amendments also assist irrigation water providers and rural land irrigation water providers to renew water supply infrastructure with a view to enhancing the efficiency of water delivery to primary producers and to carry out landcare work on land affected by delivery of this water.

Comparison of key features of new law and current law

Detailed explanation of new law

Water facilities

Irrigation water provider

2.9 An irrigation water provider is defined as an entity whose business is primarily and principally the supply of water to primary production businesses on land in Australia. The basic functions of an irrigation water provider include the storage of water in headworks, providing infrastructure (channels and pipes) through which irrigation water can flow, managing and monitoring the flow of this water, pumping water into reservoirs, controlling drainage of water from users of this water and providing access across irrigation and drainage channels and pipes.

2.10 However, an irrigation water provider does not include businesses that use a vehicle or vehicles to transport water, or a business that is not primarily and principally supplying water to primary producers because of the extent to which it supplies water to businesses using rural land or to towns and residences. [Schedule 2, item 2, subsection 40-515(6)]

Eligible capital expenditure

2.11 Capital expenditure incurred by an irrigation water provider must be incurred primarily and principally for the purpose of conserving or conveying water for use in primary production businesses. This is consistent with the current law as it applies to primary producers. Eligible capital expenditure incurred by an irrigation water provider is deductible over three years. One-third of the expenditure is deductible in the income year in which it is incurred and one-third in each of the following two years. This is also consistent with the current law as it applies to primary producers. [Schedule 2, item 4, subsection 40-525(1)]

2.12 The term water facility is defined in subsection 40-520(1) as plant or structural improvement, or an alteration, addition or extension to plant or a structural improvement that is primarily and principally for the purpose of conserving or conveying water. It is used to determine eligible capital expenditure for the water facilities tax concession. Typical examples of eligible capital expenditure include dams, tanks, wells, irrigation channels, pumps and windmills.

2.13 An amendment will be made to ensure that the definition of a ‘water facility’ includes repairs of a capital nature to a water facility, as well as alterations, additions and extensions to a water facility. Repairs are, in general, immediately deductible, but ‘initial’ repairs may be treated as part of the cost of a depreciating asset for taxation purposes. This proposed amendment addresses an anomaly in that there is no policy reason to exclude such expenditure from the water facilities tax concession.

2.14 Another amendment will be made to subsection 40-520(1) to clarify the term ‘water facility’. This is because of uncertainty with the interpretation of the current provision in respect of whether the test of conserving or conveying water applies to capital expenditure on each individual component of a water facility or to the water facility as whole. Consequently, the term ‘water facility’ will be amended to include a structural improvement, or repair of a capital nature, or alteration, addition or extension to a structural improvement that is reasonably incidental to the purpose of conserving or conveying water. This amendment will apply to both water irrigation providers and primary producers. The test ‘primarily and principally for the purpose of conserving or conveying water’ is intended to apply to the expenditure itself rather than the purpose of the asset that may be modified to convey or conserve water.

2.15 The question of whether an item of capital expenditure is reasonably incidental to conserving and conveying water depends on the facts and circumstances. However, typical examples of expenditure meeting the reasonably incidental test could include a bridge over an irrigation channel, a culvert (a length of pipe or multiple pipes (usually concrete) that are laid under a road to allow the flow of water in a channel to pass under the road), or a fence preventing livestock entering an irrigation channel. An example of capital expenditure not falling within the reasonably incidental test is a bulldozer used to dig irrigation channels. [Schedule 2, item 3, subsection 40-520(1)]

Reduction of deduction

2.16 The current law (paragraph 40-515(4)(a)) indicates that the amount of the deduction is reduced where the water facility is not wholly used in carrying on a primary production business on land in Australia. An amendment will be made to the effect that this provision does not apply to water irrigation providers. This means that if the water facility is primarily and principally for the purpose of conserving or conveying water for use in primary production businesses, then the whole amount is deductible. However, if the water facility is primarily and principally for the purpose of conserving or conveying water for use in non-primary production businesses, then the whole amount is non-deductible. An example of this is a water facility used primarily and principally to supply town water.

2.17 The current law (paragraph 40-515(4)(b)) indicates that the amount of the deduction is reduced where the water facility is not wholly used for a taxable purpose. This provision applies to water irrigation providers, in the same way it applies to primary producers. [Schedule 2, item 2, subsection 40-515(5)]

Consequential amendments

2.18 After 1 July 2004 (the commencement date), certain capital expenditures undertaken by irrigation water providers will be a water facility for the purposes of Subdivision 40-F. Further, water irrigation providers may have depreciating assets created before 1 July 2004 and may incur capital expenditure that is a water facility for the purposes of Subdivision 40-F on these assets post-1 July 2004. In the case of assets created pre-1 July 2004, water irrigation providers can claim decline in value deductions under Subdivision 40-B. These decline in value deductions are over the effective live of the asset which is typically longer than the three years specified in the water facilities tax concession. If irrigation water providers incur any expenditure on or after 1 July 2004 on altering, adding, extending or repairing assets created pre-1 July 2004, this expenditure will be subject to Subdivision 40-F. However, this expenditure may also satisfy the words in section 40-50 “...amounts for it...” because the amounts would (under normal circumstances) be a second element cost (for the purposes of section 40-190) of any pre-July 2004 asset. Therefore, there is a possibility that decline in value deductions for any pre-1 July 2004 asset (which is altered, added, extended or repaired) could be disallowed by section 40-50.
2.19 For example, assume an irrigation water provider incurs capital expenditure to widen an irrigation channel (which is eligible for the water facilities tax concession). Further, assume that the original irrigation channel was constructed five years ago and is not a ‘water facility’ because it was constructed prior to 1 July 2004 (which is the commencement date of this measure), making it ineligible for the water facilities tax concession. The irrigation water provider has been claiming decline in value deductions in relation to the original irrigation channel over the past five years based on an effective life of 70 years. In this case, the irrigation water provider can claim decline in value deductions over a three year period in the case of expenditure incurred widening the irrigation channel, but decline in value deductions over the next 65 years relating to the original irrigation channel may be denied.

2.20 A new subsection 40-53(1) will be inserted to ensure that decline in value deductions are not denied by the operation of section 40-50 when a water facility is altered, added to, extended or repaired. Using the example in paragraph 2.19, the amendment will ensure that decline in value deductions to the original depreciating asset (i.e. the irrigation channel) are not denied. A consequential change flowing from the proposed subsection 40-53(1) is to repeal subsection 40-555(2). [Schedule 2, item 1, section 40-53; item 5, subsection 40-555(1); item 6, subsection 40-555(2)]

Landcare

Rural land irrigation provider

2.21 A rural land irrigation water provider is defined as an entity whose business is primarily and principally supplying water to primary production businesses on land in Australia and businesses using rural land in Australia for a taxable purpose. Examples of businesses using rural land in Australia may include an abattoir and a wool scour. [Schedule 2, item 7, subsection 40-630(1B)]

Eligible capital expenditure

2.22 Capital expenditure incurred by a rural land irrigation water provider must be incurred on land used by another entity carrying on a primary production business, or rural land used by another entity carrying on a business for a taxable purpose. This is consistent with current law as it applies to primary producers and users of rural land. Eligible expenditure on landcare operation qualifies for an outright deduction in the year the expenditure is incurred. This is also consistent with current law as it applies to primary producers and users of rural land. [Schedule 2, item 7, subsection 40-630(1A)]

Landcare operation

2.23 The term ‘landcare operation’ is defined in subsection 40-635(1). It is used to determine eligible capital expenditures for the landcare tax concession. Examples of landcare operations may include the construction of a levee or a similar improvement on the land, or the construction of drainage works for the purpose of controlling salinity or assisting in drainage control.

2.24 The definition of a ‘landcare operation’ will be amended to include repairs of a capital nature to a landcare operation, as well as alterations, additions and extensions to a landcare operation. This is consistent with the proposed amendment to the definition of a ‘water facility’. [Schedule 2, item 10, paragraph 40-635(1)(f)]

2.25 Another amendment to the definition of a ‘landcare operation’ will be made to include a structural improvement, repairs of a capital nature, or alteration, addition or extension that is reasonably incidental to certain assets deductible under a landcare operation. The types of landcare operations to which this amendment will apply are constructing a levee or a similar improvement on land, and constructing drainage works on land for the purpose of controlling salinity or assisting in drainage control. The amendment will apply to rural land irrigation water providers, primary producers and users of rural land. This is consistent with the proposed amendment to the definition of a ‘water facility’.

2.26 The question of whether an item of capital expenditure is reasonably incidental to the relevant landcare operation depends on the facts and circumstances. However, typical examples of expenditure meeting the reasonably incidental test could include a bridge constructed over a drain that was constructed to control salinity and a fence constructed to prevent livestock entering a drain that was constructed to control salinity. An example of capital expenditure not falling within the reasonably incidental test is a bulldozer used to dig a drain to control salinity. [Schedule 2, item 11, subsection 40-635(1)]

Tie breaker provision

2.27 In general, distinguishing whether a particular expenditure falls within the water facilities or landcare tax concession depends on the primary and principal purpose of the expenditure. However, there could be instances where it is difficult to determine the primary and principal purpose of a particular expenditure. Consequently, an amendment will be made to the effect that where an entity can deduct expenditure under both the water facilities and landcare tax concessions, the expenditure will be eligible for deduction under the water facilities tax concession only. The purpose of this amendment is to remove any uncertainty.

2.28 For example, a rural land irrigation water provider constructs a channel that both drains excess irrigation water or rainfall from primary producers’ properties and supplies the drainage water back to the primary producers at a discounted fee. Assume that neither of these purposes can be said to be the primary and principal purpose. The channel is therefore being used both to conserve or convey water and to control salinity or assist in drainage control. The amendment will allow the eligible expenditure to be deducted under the water facilities tax concession rather than the landcare tax concession. [Schedule 2, item 8, subsection 40-630(2B)]

Reduction in deductions

2.29 The current law (subsection 40-630(3)) indicates that the amount of the landcare deduction is reduced where the landcare operation is not used for the purpose other than a primary production business or a business for the purpose of gaining assessable income from the use of rural land. An amendment will be made to ensure that this provision does not apply in the case of rural land irrigation water providers. However, a rural land irrigation water provider will be required to reduce the amount of its landcare operation where the expenditure is incurred for a non-taxable purpose. This is consistent with the current law as it applies to primary producers and businesses using rural land. [Schedule 2, item 9, subsection 40-630(4)]

Consequential amendments

2.30 Paragraph 40-635(1)(f) allows a rural land irrigation water provider to incur expenditure for making an alteration, addition or extension to an existing landcare operation. Similar to the water facilities, a new provision will be inserted to ensure that the decline in value of deductions is not denied when the original depreciating asset is repaired, altered, added to or extended. [Schedule 2, item 10, paragraph 40-630(1)(f)]

2.31 Subsection 40-630(2) indicates that amounts cannot be deducted as a landcare operation for capital expenditure on plant except certain items of plant covered by paragraphs 40-45(1)(c) and (d). The definition of a plant (paragraph 45-40(c)) includes, inter alia, fences, dams and other structural improvements which are constructed on “....land that is used for agricultural and pastoral operations.”. An amendment will be made to ensure that the requirement to construct these items of plant on land that is used for agricultural and pastoral operations does not apply to rural water irrigation providers. This amendment ensures that expenditure on landcare operations (e.g. drainage works to control salinity) undertaken by a rural land water provider falls within the landcare tax concession (i.e. Subdivision 40-F). [Schedule 2, item 8, subsection 40-630(2A)]

Application and transitional provisions

2.32 The amendments will apply from 1 July 2004 for expenditure incurred on, or after, that date.

REGULATION IMPACT STATEMENT
Background

2.33 Primary producers are allowed to deduct amounts for capital expenditure on depreciating assets that are water facilities. One-third of the expenditure on water facilities is deductible in the year in which it is incurred, and one-third in each of the following two years. This concession is designed to encourage primary producers to undertake expenditure on water management to increase their capacity to withstand drought and to improve their on-farm water management.

2.34 Primary producers and businesses (except mining) using rural land are also allowed to have an outright deduction for capital expenditure on a landcare operation. The concession is designed to encourage primary producers and users of rural land to undertake capital expenditure that assists the long-term sustainability of rural industries by encouraging the development and maintenance of improved land management practices.

Policy objective

2.35 The policy objectives are to:

• improve equity by aligning the deductions available to primary producers and businesses using rural land with deductions available to irrigation water providers and rural land irrigation water providers which supply those primary producers and businesses with water; and

• assist irrigation water providers and rural land irrigation water providers to renew water supply infrastructure with a view to enhancing the efficiency of water delivery to primary producers and to carry out landcare work on land affected by delivery of this water.

2.36 An irrigation water provider is an entity whose business is primarily and principally the supply of water to primary production businesses on land in Australia. A rural land irrigation water provider is an entity whose business is primarily and principally supplying water to primary production businesses on land in Australia and businesses using rural land in Australia for a taxable purpose.

Implementation options

Option 1

2.37 Option 1 has three key characteristics. First, this option applies to expenditure incurred on or after 1 July 2004. This date is chosen because it represents the commencement of a financial year. As is typically the case with new taxation measures, the measure applies prospectively.

2.38 Second, the tax treatment of expenditure on capital works has dual purposes – for example, supplying water to primary producers for primary production activities and to non-primary producers such as town water. In this case, expenditure on capital works either falls within or outside the water facilities and landcare taxation concessions based on whether the primary and principal purpose of such expenditure falls within the existing provisions. For example, an irrigation channel that primarily and principally supplies water to primary producers, but provides some water for residential use would fall within the water facilities and landcare tax concessions. However, a pipe that primarily and principally supplies town water would fall outside the water facilities and landcare tax concessions.

2.39 The third characteristic of option 1 relates to the type of capital expenditures covered by the water facilities and landcare tax concessions. This option extends the type of capital expenditure to include repairs that are of a capital nature, and to include a structural improvement, or repairs, alteration, addition or extension to a structural improvement that is reasonably incidental to the stated purpose of the water facilities and landcare tax concessions. This option also improves certainty and ensures that all relevant capital expenditure is included within the scope of the water facilities and landcare tax concessions.

Option 2

2.40 In contrast to the second characteristic referred to in paragraph 2.38, option 2 apportions the expenditure between that relating to primary production or rural land use, and other purposes. That part of the expenditure relating to primary production or rural land use would fall within the water facilities and landcare taxation concessions and the remaining part would fall outside the concessions. The first and third characteristics referred to in paragraphs 2.37 and 2.39 remain the same.

Assessment of impacts

Impact group identification

2.41 Any amendments to the water facilities and landcare tax concession will directly affect irrigation water providers and rural land irrigation water providers that are subject to the ITAA 1997. This could be around 20 entities. Primary producers and businesses using rural land will also be directly and indirectly affected from the proposed amendments to the water facilities and landcare tax concessions.

Analysis of costs / benefits

Assessment of benefits

Improving the efficiency of water delivery and services

2.42 Both options 1 and 2 impact positively on water irrigators because they are being provided access to the water facilities and landcare tax concessions which allow accelerated decline in value deductions for eligible capital expenditure. This in turn will facilitate the renewal of water supply infrastructure and enhance the delivery of water to primary producers and users of rural land. The exact level of benefits is unclear, but is expected to be an on-going benefit.

Assessment of costs

Compliance costs

2.43 Irrigation water providers are currently required to claim deductions on capital expenditures over the effective life of the depreciating asset. Consequently, the amendments, in general, are likely to reduce the compliance costs incurred by irrigation water providers and rural land irrigation water providers as they are able to write-off expenditure over three years (in the case of the water facilities tax concession) and a year (in the case of the landcare tax concession), rather than over the effective life of the capital item. That is, lower compliance costs arise because the effective life of many capital items is a much longer period of time than three years under the water facilities and one year under the landcare tax concessions (perhaps 40 years or longer).

2.44 Both options identified include amending the meaning of a water facility and a landcare operation to include structural items that are reasonably incidental to conserving or conveying water. This is expected to lower compliance costs relative to the current law by providing greater certainty in the interpretation of the current water facilities and landcare provisions. However, option 2 could involve higher compliance costs relative to option 1 because it could be difficult and time consuming for taxpayers to determine the amount of apportionment. Option 2 also adds complexity to the law.

2.45 The level and extent of the compliance cost reduction from the proposed amendments are unclear, but this cost is likely to be slightly lower compared to the existing provisions.

Administrative costs

2.46 In the context of option 1, there are likely to be no additional administrative costs for the Australian Taxation Office (ATO) relative to the costs of administering the current law. If anything, there could be lower administrative costs over the long term as the proposed law is more certain relative to the old law. However, there could be some relatively small transitional costs associated with internal training, informing taxpayers of the new law and answering taxpayer questions on interpretation of the new law.

2.47 Relative to option 1, option 2 may involve slightly higher administrative costs because it may be difficult and time consuming for the ATO to determine a methodology or approach to apportion expenditure (in the case of preparing a taxation ruling).

2.48 The level and extent of administrative costs identified in paragraphs 2.46 and 2.47 are unclear, but are likely to be negligible compared to existing administrative costs for the water facilities and landcare provisions.

Government revenue

2.49 The options are expected to have a minor impact on the Government’s revenue. Specifically, option 1 is estimated to cost $15 million over the period 2004-2005 to 2007-2008. Option 2 is expected to have the same or slightly lower cost revenue as option 1.

Consultation

2.50 The response arises from various consultations with irrigation water providers and rural land irrigation providers over a period commencing as early as 1995. Other interested parties have also been consulted throughout the policy formulation process, including the Department of Agriculture, Fisheries and Forestry and the ATO.

Conclusion and recommended option

2.51 Both options 1 and 2 improve equity and assist irrigation water providers and rural land irrigation water providers to renew water infrastructure. For these reasons, the proposed measure is expected to provide net benefits to irrigation water providers and rural land irrigation water providers as well as to primary producers and businesses using rural land that obtain water from these entities. Further, the proposed measure assists with the renewal of water supply infrastructure in rural Australia. However, option 1 is favoured over option 2, as option 2 provides little in terms of revenue savings while increasing complexity as well as adding to compliance and administrative costs.

2.52 The Department of the Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an on-going basis.

Chapter 3
Fringe benefits tax – broadening the exemption for the purchase of a new dwelling as a result of relocation

Outline of chapter

3.1 Schedule 3 to this bill amends the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) to broaden the fringe benefits tax (FBT) exemption to cover relocating employees who purchase a new dwelling and have their employer pay the incidental purchase costs associated with the new dwelling, before the employee has sold their old dwelling.

Context of amendments

3.2 Section 58C of the FBTAA 1986 allows an FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes, as long as the employee sells their dwelling at the previous locality within two years, and purchases a dwelling at the new locality within four years, of the commencement date of the new employment position.

3.3 The exemption applies if, within the relevant time limits, an employee:

• sells their old dwelling before purchasing the new dwelling; or

• purchases a new dwelling before selling their old dwelling and the employer pays the incidental purchase costs after the old dwelling has already been sold.

3.4 The exemption does not apply if, within the relevant time limits, the employee purchases a new dwelling and the employer pays the incidental purchase costs before the employee sells the old dwelling.

Summary of new law

3.5 The amendment ensures that, when an employee purchases a dwelling in a new locality without having already sold their dwelling at the old locality, the employer is able to access the FBT exemption for costs incidental to the purchase of the new dwelling, provided the employee then sells their dwelling at the old locality within two years of commencing their new employment position.

3.6 The diagram below illustrates three situations (the steps show the chronological order of the sale and purchase of dwellings for each situation). Benefits of the kind provided in Situation One and Situation Two were already exempt under the previous provisions. A benefit of the kind provided in Situation Three is also FBT exempt as a result of this amendment.

Diagram 3.1

3.7 If the employee fails to sell their old dwelling within two years of commencing the new employment position, the FBT liability will be taken to arise once the two-year period has elapsed. Thus the benefit, which was exempt at the time it was provided by the employer, will be treated as being FBT liable if the old dwelling is not sold within the two-year time limit.

Comparison of key features of new law and current law

Detailed explanation of new law

3.8 The amendments make two changes to the pre-conditions for accessing the FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes.

3.9 Firstly, the employee must either sell their old dwelling or propose to sell their old dwelling. [Schedule 3, item 1, paragraph 58C(1)(b)]

3.10 Secondly, the employee is no longer required to sell the old dwelling before the employer can access the FBT exemption for costs incidental to the sale or acquisition of a dwelling as a result of relocation for employment purposes.

Fringe benefits tax exemption on sale of old dwelling

3.11 The day on which the employee commences to perform the duties of the new employment position is the new employment day. [Schedule 3, item 3, paragraph 58C(2)(a)]

3.12 For the costs associated with the sale of an old dwelling by a relocating employee to be FBT exempt, the employee must sell their old dwelling within two years of the new employment day.

Fringe benefits tax exemption on purchase of new dwelling

3.13 For the costs associated with the purchase of a new dwelling by a relocating employee to be FBT exempt, the employee must:

• sell their old dwelling within two years of the new employment day; and

• enter into a contract for the purchase of a dwelling in the new locality within four years of the new employment day.

[Schedule 3, item 4, paragraph 58C(3)(ca)]

3.14 The date the relocating employee enters into a contract for the purchase of the new dwelling is the contract day. [Schedule 3, item 4, paragraph 58C(3)(c)]

3.15 The effect of the amendment is that at the time the employer pays the costs incidental to the purchase of the dwelling in the new locality, it is not necessary for the old dwelling to have already been sold in order for the employer to access the FBT exemption.

Example 3.1

Frances was required to relocate from Geelong to Ballarat in order to perform her duties as a police officer. She commenced her duties in Ballarat on 1 January 2005.

Frances purchases a new house in Ballarat on 12 February 2005. Her employer pays the conveyancing costs associated with the purchase of the new house on 16 February 2005.

Frances then sells her old house in Geelong on 15 October 2006.

The conveyancing costs paid by Frances’s employer are FBT exempt. This is because Frances enters into a contract for the sale of her house in Geelong within 2 years of commencing employment in Ballarat. This is despite the fact that at the time the employer pays Frances’s conveyancing costs, Frances has not yet sold her house in Geelong. This benefit would not have been exempt under the previous provisions.

No sale of old dwelling

3.16 In the situation where an employee has not sold their dwelling at the old locality at the time the employer paid the costs incidental to the purchase of the new dwelling, and the employee fails to sell their old dwelling within two years of the new employment day, the benefit provided will become FBT liable in the year of tax in which the period of two years since the new employment day expires. [Schedule 3, item 5, subsection 58C(5)]

Example 3.2

Assume the same situation as in Example 3.1, except that Frances fails to sell her home in Geelong by 1 January 2007.

The conveyancing costs paid by Frances’s employer are exempt at the time they are provided. However, as Frances did not sell her dwelling within two years of the new employment day, the benefit provided on 16 February 2005 will now become FBT liable in the 2006-2007 FBT year.

Application and transitional provisions

3.17 These amendments apply to benefits provided in respect of the FBT year of tax beginning on 1 April 2004 and to later FBT years.

Chapter 4
CGT event G3

Outline of chapter

4.1 Schedule 4 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to extend the scope of CGT event G3 so that an administrator (in addition to a liquidator) of a company can declare shares and other equity interests in the company to be worthless for capital gains tax (CGT) purposes. The declaration permits taxpayers who hold those shares or other equity interests to choose to make a capital loss.

Context of amendments

4.2 Currently, section 104-145 of the ITAA 1997 specifies that CGT event G3 happens if a taxpayer owns a share in a company and its liquidator declares in writing that he or she has reasonable grounds to believe (at the time of the declaration) there is no likelihood that the shareholders in the company, or shareholders of the relevant class of shares, will receive any further distribution in the course of winding up the company. The declaration causes CGT event G3 to happen and permits shareholders to choose to make a capital loss in respect of their shares. A declaration cannot be made in respect of equity interests other than shares.

4.3 Commercial factors may cause a company to appoint an administrator (rather than a liquidator) to conduct external administration proceedings. However, an administrator is unable to make a declaration that causes CGT event G3 to happen.

4.4 Therefore, holders of equity interests other than shares and shareholders of companies that appoint an administrator can make a capital loss in respect of their equity interests only if they create a trust over those equity interests (and incur associated costs) or if they can dispose of the equity interests in some other way.

4.5 In some circumstances an administrator will be in a similar position to a liquidator to make a judgement that he or she has reasonable grounds to believe that there is no likelihood that shareholders will receive any further distribution.

4.6 Therefore, the amendments will allow administrators to make a declaration that causes CGT event G3 to happen and allow the declaration to cover a broader range of equity interests. This will reduce compliance costs for affected taxpayers and allow them to more easily claim a capital loss in respect of their shares and other equity interests.

Summary of new law

4.7 These amendments will extend the scope of CGT event G3 so that administrators (in addition to liquidators) can make a declaration that shares or other equity interests are worthless for CGT purposes.

Comparison of key features of new law and current law

Detailed explanation of new law

4.8 CGT event G3 will happen if a taxpayer owns an equity interest in a company and a liquidator or administrator makes a declaration in writing that he or she has reasonable grounds to believe (as at the time of the declaration) that:

• there is no likelihood that owners of interests of that kind, or of a class of interests that includes interests of that kind, will receive any further distribution for those interests; or

• for a right, option or similar interest – the interest has no value or has only negligible value.

[Schedule 4, item 2, subsection 104-145(1)]

4.9 A liquidator is appointed under Chapter 5 of the Corporations Act 2001 to wind up a company.

4.10 An administrator is appointed under Part 5.3A of the Corporations Act 2001 to conduct external administration proceedings. An administrator of a company would require a comprehensive grasp of all of the company’s affairs in order to make a judgement:

• that no further distributions are likely to be made to shareholders and other equity interest holders; or

• that rights, options or similar interests have no value or have negligible value.

4.11 Therefore, generally only an administrator appointed in relation to a deed of company arrangement will be in a position to reasonably make this assessment.

4.12 The kinds of equity interests that a declaration may cover include:

• shares, notes, convertible notes and other similar financial assets issued by a company; and

• rights or options to acquire shares, notes, convertible notes or other similar financial assets issued by a company.

[Schedule 4, item 2, subsection 104-145(3)]

4.13 In relation to shares, notes, convertible notes and other similar financial assets issued by a company, the liquidator or administrator must declare in writing that he or she has reasonable grounds to believe (as at the time of the declaration) that there is no likelihood that owners of the interests will receive any further distributions for those interests.

4.14 Rights, options or similar interests do not give rise to an entitlement to distributions. Therefore, for those kinds of interests, the liquidator or administrator must declare in writing that he or she has reasonable grounds to believe that the interests have no value or have only negligible value.

4.15 To ensure that a liquidator or administrator does not have to make a separate declaration for each type of interest, the liquidator or administrator’s declaration can refer to more than one type of interest.

4.16 The liquidator or administrator’s declaration causes CGT event G3 to happen at the time the declaration is made and permits affected taxpayers to choose to make a capital loss in respect of their interests in the company. The amount of the capital loss is equal to the reduced cost base of the interests at the time the declaration is made. [Schedule 4, item 2, subsections 104-145(2) and (4)]

4.17 If a taxpayer chooses to make a capital loss in respect of his or her interests in a company, the cost base and reduced cost base of those interests are reduced to nil just after the declaration is made. Consequently, if a subsequent CGT event happens to the interests, the whole of the capital proceeds received will generally be a capital gain. [Schedule 4, item 2, subsection 104-145(5)]

4.18 CGT is not generally imposed on assets acquired before 20 September 1985. Therefore, affected taxpayers cannot choose to make a capital loss if the interests were acquired before 20 September 1985. [Schedule 4, item 2, subsection 104-145(6)]

Application and transitional provisions

4.19 The amendments apply to declarations made by liquidators or administrators after the date of Royal Assent of this bill. [Schedule 4, item 8]

Consequential amendments

4.20 The table in section 104-5 contains a summary of CGT events. The table will be amended to reflect the modifications to CGT event G3. [Schedule 4, item 1, section 104-5]

4.21 The table in section 112-45 sets out which element of the cost base or reduced cost base of a CGT asset is affected by various situations. The table will be amended to reflect the modifications to CGT event G3. [Schedule 4, item 3, section 112-45]

4.22 Generally, non-residents are subject to CGT if a CGT event happens to a CGT asset that has the necessary connection to Australia. The table in section 136-10 outlines the circumstances in which a CGT asset has the necessary connection to Australia. The table will be amended to reflect the modifications to CGT event G3. [Schedule 4, item 4, section 136-10]

4.23 Subdivision 165-CD requires adjustments to be made to the tax attributes of significant equity and debt interests that entities have in a company that has realised losses or unrealised losses if an alteration time occurs in respect of the loss company. The purpose of the adjustments is to prevent multiple recognition of the losses when the interests are realised. An alteration time happens if, among other things, CGT event G3 occurs. Therefore, amendments will be made to the relevant provisions in Subdivision 165-CD to reflect the modifications to CGT event G3. [Schedule 4, items 5 to 7, paragraph 165-115GB(1)(b), subsection 165-115H(2) and section 165-115N]

REGULATION IMPACT STATEMENT
Background

4.24 Currently, a liquidator of a company can declare shares in the company to be worthless for CGT purposes. The declaration causes CGT event G3 to happen and permits shareholders to choose to make a capital loss in respect of their shares.

• Subsection 104-145(1) of the ITAA 1997 specifies that CGT event G3 happens if a taxpayer owns a share in a company and its liquidator declares in writing that he or she has reasonable grounds to believe (at the time of the declaration) there is no likelihood that the shareholders in the company, or shareholders of the relevant class of shares, will receive any further distribution in the course of winding up the company.

4.25 Where a company appoints an external administrator, other than a liquidator, shareholders can only cause a CGT event (CGT event E1) to happen by creating a trust over the shares.

Policy objective

4.26 The objective is to allow taxpayers to more easily claim a capital loss on their worthless shares and other securities.

Implementation options

4.27 Given the framework for CGT event G3 and the nature of the representations from taxpayers, only one broad implementation approach was considered. That is, to amend section 104-145 to allow a wider range of insolvency practitioners to be able to make the relevant declaration in relation to shares and other securities.

4.28 However, insolvency practitioners other than administrators and liquidators are often appointed for a short period of time or for a specific purpose and are not usually in a position to make a declaration. As a result, it was considered that it would not be viable for practitioners other than administrators and liquidators to make the declaration, so only the option of allowing administrators and liquidators to be able to make the relevant declaration has been considered further.

4.29 These amendments will apply to declarations made by liquidators or administrators after the date of Royal Assent of this bill.

Assessment of impacts

Impact group identification

4.30 These amendments are expected to impact on taxpayers that are shareholders and holders of other equity interests in companies under external administration. The class of taxpayers potentially affected include individuals, superannuation funds, trusts and companies.

4.31 According to statistics provided by the Australian Securities and Investments Commission, in the 2000-2001 to 2002-2003 income years:

• an average of approximately 2,575 companies per annum appointed a voluntary administrator; and

• an average of approximately 717 companies per annum entered into a deed of company arrangement.

4.32 The average voluntary administration lasts for 28 days (as required by the Corporations Act 2001) before the company either moves into liquidation, enters a deed of company arrangement or resumes trading. A deed of company arrangement can last for many years.

Analysis of costs

4.33 There will be an unquantifiable cost to revenue which is not expected to be significant.

4.34 As a result of these amendments, liquidators and administrators will incur additional costs in determining whether there are reasonable grounds to declare shares and other equity interests to be worthless and in making the appropriate declarations. The level and extent of these costs is uncertain. However, as some administrators made representations seeking the change, the additional costs involved are not expected to be significant.

4.35 The Australian Taxation Office (ATO) may incur some additional administration costs to implement the amendments. For example, the ATO will need to ensure that call centre staff and provision of advice staff are aware of the changes. In addition, the ATO website, CGT publications, an ATO fact sheet and a tax determination may need to be updated. These costs are not expected to be significant.

Analysis of benefits

4.36 The implementation option will allow a liquidator or administrator to be able to declare equity interests in a company worthless for CGT purposes. The declaration will enable shareholders and other equity interest holders to claim a capital loss without having to incur the cost of establishing a trust. This will reduce compliance costs for affected taxpayers. In this regard, commercial organisations who assist taxpayers to establish a trust over worthless shares typically charge an administration fee of between $70 and $150 per transaction.

Consultation

4.37 Representations were made to the Government seeking a modification to the current law to allow administrators to make a declaration that shares (or other securities) are worthless for CGT purposes. The representations were made by individuals who hold shares in companies that have had an administrator appointed, Members of Parliament on behalf of those individuals, media representatives, accountants and administrators.

4.38 Draft legislation to implement the measure was released on a confidential basis to CPA Australia, the Institute of Chartered Accountants in Australia, the National Tax and Accountants’ Association, Deloitte Touche Tohmatsu and Ferrier Hodgson.

4.39 Stakeholders generally supported the proposed measure. Some stakeholders suggested that a wider range of insolvency practitioners should be able to make a declaration, but this was not considered to be practical for the reasons indicated earlier.

Conclusion and recommended option

4.40 This measure will reduce net compliance costs for affected taxpayers at little cost to the revenue and therefore is supported.

4.41 The Department of the Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis.

Chapter 5
Removal of the superannuation guarantee reporting requirement

Outline of chapter

5.1 Schedule 5 to this bill amends the Superannuation Guarantee (Administration) Act 1992 (SGAA 1992) to reduce the compliance burden faced by employers in meeting their superannuation guarantee (SG) obligations. The amendments remove the requirement for employers to report superannuation contributions made to employees under the SG arrangements.

Context of amendments

5.2 The quarterly SG arrangements introduced in the Taxation Laws Amendment (Superannuation) Act (No. 2) 2002 included a requirement for employers to report to their employees the amount and destination of superannuation contributions when they were made on an employee’s behalf.

5.3 Employers have expressed concerns in relation to the cost of compliance of this measure. A key concern has been the time frame for reporting, with employers required to report within 30 days of a contribution actually being made.

5.4 Many employers report more frequently by including information on payslip advices pertaining to superannuation contributions. This obligation is contained throughout various Australian workplace legislation as well as State and Federal awards. As a result of the widespread requirements to report superannuation contributions on payslips, combined with the requirement for superannuation funds to report at least annually to their members on both employer and member contributions, it is unnecessary for employers to provide additional reporting.

Summary of new law

5.5 Employers will no longer be required to report to employees under the SG arrangements any superannuation contributions made on behalf of their employees. The requirement to report contributions will cease for all contributions made on or after 1 January 2005.

Comparison of key features of new law and current law

Detailed explanation of new law

5.6 This amendment will repeal section 23A of the SGAA 1992, removing the need for an employer to report the relevant contribution information to the relevant employee within 30 days of making a contribution which reduces the employer’s SG obligation. [Schedule 5, item 1]

Application and transitional provisions

5.7 This measure will apply to contributions made on or after 1 January 2005. [Schedule 5, item 2]

REGULATION IMPACT STATEMENT
Background and problem

5.8 A key practical concern with the current reporting requirement has been the timing of the reporting obligation. Currently an employer is required to report within 30 days of making a contribution. Under the SG arrangements employers are required to make superannuation contributions for all eligible employees on at least a quarterly basis.

5.9 Many employers report to their employees more frequently by including information pertaining to superannuation contributions in regular payslips. However, as the contributions are often not actually made to a fund until after the pay advice is provided, employers are potentially required to confirm the information and report again after the contributions are actually made.

5.10 Reporting after contributions are made can be a particular issue for employers with a high turnover of employees, particularly casual and itinerant work forces such as those in the hospitality and horticultural industries. These employers have difficulty locating former employees for the purposes of reporting.

Objective

5.11 The objective is to reduce the compliance burden faced by many small businesses as a result of SG reporting while ensuring that employees remain informed about their superannuation entitlements.

Options

Option 1

5.12 Under this option the current arrangements to report within 30 days of making a contribution would be retained.

Option 2

5.13 Under this option employers would be required to report to employees on an annual basis, amounts contributed in order to reduce the employer’s liability to pay the SG charge.

Option 3

5.14 Under this option an employer would produce one consolidated report, detailing the employees, their contributions and the destination of contributions. This report would then be lodged with the Australian Taxation Office (ATO) on a quarterly basis.

Option 4

5.15 This option would remove the requirement for employers to report superannuation contributions from the SG arrangements. Employees would instead rely on a combination of reporting provisions in other Australian workplace relations legislation that require reporting on payslips. Annual reporting from superannuation funds would also assist to keep employees apprised of their entitlements.

Assessment of impacts

Impact group identification

5.16 The impact groups are:

• employers (including small businesses);

• employees;

• the Australian Government; and

• superannuation providers (this group is only indirectly affected by option 4).

Option 1

Benefits

Employees

5.17 Under option 1 employees will continue to have access to at least quarterly information relating to the amount and destination of any superannuation contribution their employer makes on their behalf.

Costs

Employers

5.18 Affected employers, particularly those in industries with a high turnover of employees, will continue to experience the same difficulties in meeting their compliance obligations as they currently face, as identified earlier.

Option 2

Benefits

Employers

5.19 Employers would experience a reduction in the compliance burden associated with the current arrangements as rather than being required to report at least four times a year, only one report would be required at the end of each year. The level and extent of the reduction is uncertain, but is expected to be significant.

Costs

Employees

5.20 Employees could experience a reduction of information relating to their superannuation as they would only receive information once a year. Employees currently receive annual information from their superannuation fund. The cost to employees is unquantifiable as there is no data available on the number of employees who currently receive more frequent superannuation contribution information on payslips, although the coverage is thought to be very widespread.

Government

Data matching

5.21 The ATO continually works on enhancements to their compliance activities. The ATO is already working on matching of data sourced from superannuation fund member contribution statements and income tax returns to identify high risk compliance areas.

5.22 This option reduces the opportunity for some employees to take ownership and responsibility for their superannuation accounts.

More intensive audit activity

5.23 In the 2004-2005 Budget the ATO was given additional funding to raise the level of voluntary compliance and to undertake additional compliance activities. One of the focus areas identified was superannuation and the need for effective compliance activity will be emphasised in an environment of reduced reporting.

5.24 Superannuation funds would not experience any impact as a result of this option being implemented.

Option 3

Benefits

Employers

5.25 This option may be preferable to employers who experience a high turnover of staff. While the proposed modified reporting arrangements will address the issue of locating former staff, it may also be attractive to provide one consolidated report directly to the ATO to cover all employees for a particular quarter. This is expected to substantially reduce compliance costs but the level and extent of the reduction is uncertain.

Cost

Employers

5.26 While this option may be preferable to some employers (e.g. those with a high staff turnover) it is likely to increase compliance requirements for others.

5.27 This option would see every employer in Australia interface with the ATO on SG issues as opposed to only those who have identified an SG shortfall. This would be contrary to the principles of self assessment which underpin the SGAA 1992.

5.28 Information likely to be required would include;

• the amount of contributions;

• the total payroll; and

• the number of employees and names of providers the contributions were made to.

5.29 The level and extent of these costs is uncertain.

Employees

5.30 Employees may not receive information from employers on a quarterly basis, rather they would be disengaged from the reporting process. The majority of employees would, however, still receive information reported to them on payslips, in accordance with other Australian workplace legislation.

Government

5.31 This option would have significant administrative costs for the ATO due to the need to develop systems and devote other resources to analysing the information. It would also mean that every employer interfaced with the ATO on superannuation issues. The level and extent of these costs is uncertain.

Option 4

Benefits

Employers

5.32 This option would completely remove the compliance burden associated with SG reporting as reporting under the SG arrangements would no longer be required. This option would involve repealing section 23A from the SGAA 1992.

Government

5.33 There would be no administration cost associated with this option for the ATO. However, as discussed in relation to option 2 the need for effective compliance activity will be emphasised in an environment of reduced reporting.

Costs

Employees

5.34 This option would mean that employees would have to rely on information from other sources in relation to SG contributions paid for their benefit.

Superannuation funds

5.35 This option may result in an increase in costs for superannuation funds as they may experience an increase in inquiries occurring sporadically from members. The level and extent of these costs is uncertain but they are expected to be minimal.

Consultation

5.36 The Departments of Industry, Tourism and Resources, Treasury and Prime Minister and Cabinet have been consulted on this issue. Employer groups such as the National Farmers Federation and the Council of Small Business of Australia have also been consulted on options 2 and 4. This consultation commenced in July of 2003 and has been ongoing from that time. Consultation has involved meetings and ongoing correspondence from interested parties. Individual employers and employer groups support removing the SG employer reporting requirement.

Conclusion and recommended option

5.37 Option 1, (retaining the current arrangements), would fail to meet the objective of reducing the compliance impact for employers. However, it would ensure that employees remained informed about their superannuation entitlements.

5.38 Option 2, (annual reporting by employers), would meet the objective to a small degree but would add little or no value to the information of employees. Employees currently receive information from their superannuation fund provider on at least an annual basis.

5.39 Option 3, (consolidated reporting to the ATO), would meet the objective of reducing compliance costs to a greater degree, however, the cost to Government would be significant.

5.40 It is recommended that option 4 be implemented, removing the requirement for employers to report superannuation contributions to employees under the SG arrangements. This option will provide the most significant improvement in compliance for small business.

5.41 If this option is implemented employees would not be left without access to timely information relating to their superannuation contributions. Provisions in Australian workplace legislation requires employers in New South Wales, Victoria, Queensland, South Australia, the Australian Capital Territory and the Northern Territory to report information about employees on payslips. Similarly employers in Western Australia and Tasmania with employees subject to federal awards, Australian workplace agreements or certified agreements. Numerous awards also require reporting of superannuation contributions on payslips.

5.42 As superannuation providers currently report to members on an annual basis there would seem to be little value in employers duplicating this process. A dual annual reporting regime involving superannuation funds and employers may facilitate employees identifying any discrepancies in the reports but this result would probably only be achieved through aligning reporting dates.

5.43 Superannuation funds are required to report to their members on at least an annual basis and fund members can contact their superannuation fund to make queries at any time.

Implementation and Review

5.44 The change will be implemented from 1 January 2005. The Australian Government supports an ATO review of the impact of the amendments to the SG legislation on levels of compliance.

5.45 The review, to be conducted by the ATO three years after the introduction of the quarterly SG regime, will evaluate the effect on compliance levels in general. This time frame was outlined in the regulation impact statement covering the introduction of the quarterly SG regime.

5.46 In the 2004-2005 Budget the Australian Government allocated additional funding to the ATO to undertake increased compliance activity. One of the identified areas for increased compliance activity was the quarterly SG arrangements.

Chapter 6
Consolidation: providing greater flexibility

Outline of chapter

6.1 Schedule 6 to this bill contains the following modifications to the consolidation regime:

• source of profit distributions in working out the allocable cost amount (ACA) and cost setting process;

• ensuring that the undistributed profits of a joining entity are appropriately included in working out the ACA;

• adjusting for changes in deferred tax liabilities in working out the ACA and for capital gains tax (CGT) purposes; and

• ensuring that the head company will receive a credit in circumstances where amounts are withheld where no Australian Business Number (ABN) or tax file number (TFN) has been quoted.

6.2 All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1997 unless otherwise stated.

6.3 Unless otherwise stated, a reference in this chapter to a consolidated group should be read as including a multiple entry consolidated (MEC) group.

Context of amendments

6.4 A number of modifications are being made to the consolidation regime to provide greater flexibility and to further clarify certain aspects of the regime.

6.5 The first three modifications adjust the consolidation cost setting rules which reset the cost of assets when they become assets of the head company of a consolidated group. Where an entity joins a consolidated group, the tax cost for its assets are reset under the cost setting rules by reference to the ACA. The ACA represents the cost of acquiring the entity’s assets.

Summary of new law

Application

6.6 Part 1 of Schedule 6 to this bill provides that the amendments made by Schedule 6 to this bill apply on and after 1 July 2002.

Source of certain distributions for allocable cost amount purposes

6.7 Part 2 of Schedule 6 to this bill contains rules to simplify the method of working out the ACA by accepting a last-in-first-out method of accounting for profits in appropriate circumstances where the entity must determine which prior year’s profits were used to pay a particular dividend.

Adjustment to step 3 of allocable cost amount to take account of certain losses

6.8 Part 3 of Schedule 6 to this bill contains rules to ensure that the full amount of undistributed profits, that have accrued to a consolidated group before the joining time, is included when calculating the ACA for a joining entity.

Transitional treatment of deferred tax liabilities

6.9 Part 4 of Schedule 6 to this bill contains rules that reduce compliance costs in applying the consolidation cost setting rules for transitional entities which have a change in the amount of deferred tax liabilities associated with assets that have their tax cost reset.

Attributing tax credits to head companies

6.10 Part 5 of Schedule 6 to this bill will allow a head company of a consolidated group to access amounts withheld as a consequence of a subsidiary member of the group’s failure to quote its ABN or TFN. The amendment will apply where an amount was withheld while the subsidiary was a member of the group.

Comparison of key features of new law and current law

Detailed explanation of new law

Source of certain distributions for allocable cost amount purposes

6.11 Part 2 of Schedule 6 to this bill contains rules that simplify the method of working out the ACA by accepting a last-in-first-out method of accounting for profits in appropriate circumstances where the entity must determine which prior year’s profits were used to pay a particular dividend.

6.12 Sourcing dividends to the profits of individual years is important in working out the ACA because steps 3 and 4 of the cost allocation process require identification of the retained profits accruing to membership interests that were held continuously by the consolidated group. Sourcing dividends to the profits of individual years is also an important part of the ACA process that limits the deferral of tax on profits that were not subject to tax because of over-depreciation. Steps 3 and 4 together with the over-depreciation adjustment are explained below.

6.13 Continuously held profits must be identified because profits earned by an entity before it becomes a subsidiary member of the consolidated group are treated differently in allocating cost to the assets of the subsidiary that earned the profits.

6.14 Historical records that would precisely identify profits that should be included in cost allocation calculations may not be available to the consolidated group. The cost setting rules recognise that the necessary records may not be available and therefore provide for taxpayers to use the most reliable basis for estimation that is available.

6.15 A last-in-first-out approach will simplify determining what proportion of a dividend was sourced from profits earned by a subsidiary while it was owned by the group. It does this by allocating an entity’s most recent profits to the dividend before allocating the next most recent year’s profits and so on until all available profits earned by the group have been included in the calculation.

6.16 The last-in-first-out approach is to be applied in allocating profit between the years over which the profits were earned. Where it is necessary to identify the source of profits within a year a proportional (or pooling) approach is to be applied.

6.17 Steps 3 and 4 in working out a group’s ACA for a joining entity require identification of the retained profits at the joining time that accrued to membership interests held continuously by a consolidated group.

6.18 Step 3 involves adding the sum of fully franked dividends the head company would have received from the joining entity. The purpose of this step is, consistent with the imputation system, to prevent double taxation by allowing a consolidated group a cost for retained taxed profits that accrued to membership interests when the consolidated group held the membership interests.

6.19 Step 3 will be amended by modifying section 705-90 to allow for a last-in-first-out method. Under this method the amount of profit that accrued to the joined group during a particular period is worked out by assuming that profits were distributed in order from the most recent to the earliest income years. Once profits are allocated between years for which distributions were made it is first assumed that unfranked distributions are sourced from untaxed profits. This rule provides consistency between steps 3 and 4 and the over-depreciation adjustment by ensuring that taxpayers allocate profits in a consistent way regardless of which step is being applied. [Schedule 6, item 3, subsection 705-90(10)]

6.20 Step 4 subtracts distributions to the head company by the joining entity, out of profits that did not accrue to membership interests continuously held by members of the joined group, until joining time.

6.21 The purpose of step 4 is to prevent the resetting of costs for a joining entity’s assets reflecting an amount paid for the membership interests in the entity that was later recovered through distributions.

6.22 The provision that determines how to calculate step 4 (paragraph 705-95(b)) refers to subsection 705-90(7) which allows for a most reliable basis for estimation to be used. The insertion of subsection 705-90(10) will allow a last-in-first-out basis to be used under step 4. A note is inserted after paragraph 705-95(b) to explain that subsection 705-90(7), paragraph 705-90(9)(b) and subsection 705-90(10) are relevant to working out whether or not profits accrued to the joined group before the joining time under step 4. [Schedule 6, item 4, note at the end of paragraph 705-95(b)]

6.23 The over-depreciation adjustment limits the deferral of tax on profits (that were not subject to tax because of the over-depreciation of assets) that were distributed to recipients untaxed because of their entitlement to the inter-corporate dividend rebate. The deferral of income tax is limited by reducing the tax cost setting amount allocated to the over-depreciated asset where certain conditions are satisfied.

6.24 Subsection 705-50(3A) allows for a last-in-first-out method to be used in calculating the over-depreciation adjustment. [Schedule 6, item 2, subsection 705-50(3A)]

Adjustment to step 3 of allocable cost amount to take account of certain losses

6.25 Section 705-90 (step 3 of the ACA calculation) provides that undistributed profits accruing to direct or indirect membership interests that the consolidated group held continuously in a joining entity are to be added when working out the joining entity’s ACA. This amount is known as the joining entity’s ‘step 3 amount’.

6.26 For the purposes of section 705-90, undistributed profits of the joining entity is defined as being the retained profits of the entity as at the joining time (as determined by Australian Accounting Standards) that could be recognised in the joining entity’s statement of financial position if that statement was prepared at the joining time.

6.27 Where profits have accrued to the consolidated group before the joining time and pre-acquisition accounting losses have also been incurred, the joining entity’s retained profits balance will be understated (as it will have been reduced by the pre-acquisition losses). Accordingly, the retained profits balance at the joining time will not accurately reflect the amount of profit that has accrued to the joined group. This could result in the joining entity’s ACA being understated and consequently reduce the tax cost of the joining entity’s assets.

6.28 Amendments contained in Part 3 of Schedule 6 to this bill ensure that the full amount of undistributed profits that have accrued to a consolidated group before the joining time are included when calculating the joining entity’s ACA.

6.29 Subsection 705-90(2A) provides that, where an accounting loss has arisen prior to the consolidated group acquiring membership interests in the joining entity, and that loss would normally be taken into account in working out the joining entity’s undistributed profits amount under section 705-90, that loss is not taken into account. [Schedule 6, item 5, subsection 705-90(2A)]

6.30 However, it is only those losses that have reduced the joining entity’s undistributed profits amount that are able to be disregarded. In other words, if there are unrealised (accounting) losses that have not reduced the undistributed profits amount, the disregarding of those losses will not affect the balance of retained profits.

6.31 Further, the new rule does not mean that every accounting loss ever incurred by the joining entity that did not accrue to the consolidated group will be disregarded under subsection 705-90(2A). Instead, it is the accumulated retained losses that did not accrue to the consolidated group that are disregarded when working out the step 3 amount for the joining entity.

Example 6.1: Retained losses that have not accrued to membership interests and the subsidiary member has retained profits at the joining time

retained loss = $100 of Entity A

30 June 2000

30 June 2001

30 June 2002

1 July 2000

Head Co purchases 100% membership interests in Entity A

retained profit = $200 of Entity A

retained profit = $400 of Entity A

1 July 2002

group consolidates (Entity A becomes a subsidiary member)

In this example, Entity A has accumulated retained losses at 30 June 2000 of $100. None of this loss accrued to the consolidated group because the group did not hold membership interests in Entity A (subsection 705-90(8) states what it means for a loss to accrue to the joined group). On 1 July 2000, Head Co purchased 100% of the membership interests in Entity A. Assume Entity A made a net accounting profit in the year ended 30 June 2001 of $300. As a consequence, the accumulated retained profits balance at 30 June 2001 would be $200 ($300 - $100). Assume also that in the year ended 30 June 2002, Entity A made a net accounting profit of $200, giving a retained profits balance at 30 June 2002 of $400. Head Co and Entity A form a consolidated group on 1 July 2002.

Prior to applying subsection 705-90(2A), the group’s step 3 amount would be $400, being the undistributed retained profits of the joining entity at the joining time. However, this amount is understated because the pre-acquisition retained loss of $100 has been taken into account (it was offset against later year profits that accrued to the consolidated group).

As the $100 loss did not accrue to the joined group (it is a pre-acquisition loss) and it would otherwise be taken into account in working out the undistributed profits of Entity A, subsection 705-90(2A) will apply. As a result the $100 loss is not taken into account when determining the undistributed profits amount of Entity A. In other words, the joined group’s step 3 amount is $500, representing the total profits that have accrued to the joined group during the 2000-2001 and 2001-2002 financial years ($300 and $200 respectively).

Example 6.2: Retained losses that have not accrued to membership interests and the subsidiary member has retained losses at the joining time

retained loss = $200 of Entity B

30 June 2000

30 June 2001

30 June 2002

1 July 2000

Head Co purchases 100% membership interests in Entity B

retained loss = $100 of Entity B

retained loss = $50 of Entity B

1 July 2002

group consolidates (Entity B becomes a subsidiary member)

In this example, Entity B has a retained loss at 30 June 2000 of $200. None of this loss accrued to the consolidated group because the group did not hold membership interests in Entity B (subsection 705-90(8) states what it means for a loss to accrue to the joined group). On 1 July 2000, Head Co purchased 100% of the membership interests in Entity B.

Assume Entity B made a net accounting profit in the year ended 30 June 2001 of $100. As a consequence, Entity B would have a retained loss at 30 June 2001 of $100 ($200 - $100). Assume also that in the year ended 30 June 2002, Entity B made a net accounting profit of $50, giving a retained loss at 30 June 2002 of $50. Head Co and Entity B form a consolidated group on 1 July 2002.

Prior to applying subsection 705-90(2A), the group’s step 3 amount would be nil as Entity B has no retained profits at the joining time. However, as the $200 loss incurred in the year ended 30 June 2000 did not accrue to the joined group and it has been taken into account in working out the undistributed profits of Entity B (i.e. it reduced them), subsection 705-90(2A) will apply.

As a result of not taking the pre-acquisition loss into account, Entity B’s retained profits are increased to $150. This amount correctly reflects the profits that have accrued to the joined group in the 2000-2001 and 2001-2002 years ($100 and $50 respectively).

Transitional treatment of deferred tax liabilities for allocable cost amount and capital gains tax purposes

6.32 Part 4 of Schedule 6 to this bill contains rules to reduce compliance cost in applying the consolidation cost setting rules for transitional entities which have a change in the amount of deferred tax liabilities associated with assets that have their tax cost set.

6.33 Step 2 in working out the ACA adds the value of all accounting liabilities at the time an entity joins a consolidated group. This includes the amount of deferred tax liability under section 705-70(1A) associated with assets of a joining entity as recognised under the accounting standards.

6.34 Where an entity joins a consolidated group, the amount of deferred tax liability is added in working out the ACA of the joining entity. However, it is the amount of the deferred tax liability arising for the head company rather than the amount of the deferred tax liability recorded by the joining entity that is taken into account. This is because when a head company acquires an entity, it will adjust its purchase price to take into account any change in the deferred tax liability as a result of the consolidation cost setting rules.

6.35 In the case of a consolidated group forming during the transitional period (i.e. between 1 July 2002 and 30 June 2004), it is unlikely that the head company will have adjusted the purchase price to take into account the change in the deferred tax liability as a consequence of consolidation. This is because the purchase is likely to have occurred before the introduction of the consolidation regime.

6.36 Section 701-32 of the Income Tax (Transitional Provisions) Act 1997 reduces compliance costs in applying the cost setting rules by excluding entities that join a consolidated group during the transitional period from having to adjust the ACA calculation for changes in the amount of deferred tax liability associated with assets that have their tax cost reset. [Schedule 6, item 6, section 701-32]

6.37 Section 701-34 of the Income Tax (Transitional Provisions) Act 1997 reduces compliance costs by not requiring the consolidated group to determine a capital gain or capital loss (under CGT event L7) arising from changes in the value of a deferred tax liability of entities that join a consolidated group during the transitional period. [Schedule 6, item 6, section 701-34]

6.38 Without the amendments taxpayers would have to compare the value of the liability at the time the entity became a member of a consolidated group with the value when the liability is discharged. Requiring entities to track these changes would result in significant compliance costs.

Attributing tax credits to head companies

6.39 Part 5 of Schedule 6 to this bill will allow a head company of a consolidated group to access certain tax credits arising to a subsidiary member of the group. This will ensure that the pay as you go withholding provisions apply appropriately to consolidated groups.

6.40 Generally, Subdivision 12-E of the Taxation Administration Act 1953 provides that when an entity fails to quote its ABN or TFN when receiving a payment, an amount must be withheld by the payer. Subdivision 18-A entitles the entity to a credit equal to the withheld amount for offset against any income tax liability arising on assessment. If the Commissioner of Taxation is satisfied that the entity faces no income tax liability, the entity can use the credit against other tax-related liabilities or receive a refund.

6.41 Where such an entity is a subsidiary member of a consolidated group, the subsidiary will no longer be entitled to the credit. Instead the head company of the group will be entitled to the credit to offset against the group’s income tax liability, another tax-related liability, or to receive a refund depending on the head company’s circumstances. [Schedule 6, item 7, section 18-26]

6.42 The specific withholding events relevant to this amendment are found in sections 12-140 and 12-190 of Schedule 1 to the Taxation Administration Act 1953. In the context of this amendment, the events can be described as when a subsidiary of a group fails to quote its ABN or TFN to its investment body in relation to certain investments or for a supply for the goods and services tax purposes.

6.43 Where a subsidiary leaves the group before the end of the income year, the credit will remain with the head company. This treatment is similar to the treatment of pay as you go instalment credits and the franking deficit tax offset in consolidation.

6.44 Without the amendment, head companies are prevented from accessing these kinds of credits. The single entity rule in section 701-1 which treats subsidiary members of the group as part of the head company for the purposes of working out the group’s income tax liability does not extend to the application of a tax credit. This is because the tax credit is applied after the income tax liability has been calculated.

Application and transitional provisions

6.45 The amendments made by Parts 2 to 4 of Schedule 6 apply on and after 1 July 2002. The amendment made by Part 5 of Schedule 6 applies to amounts withheld on or after 1 July 2002. The consolidation regime commenced on 1 July 2002. Having the amendments apply from this date will provide maximum certainty and minimise the risk of arbitrary outcomes from a later commencement date. [Schedule 6, item 1, Application]

6.46 All of the amendments are either beneficial to taxpayers or correct unintended outcomes. The amendments to address unintended outcomes are consistent with the original policy intent for the consolidation regime and therefore have the same commencement date as the consolidation regime.

Chapter 7
Baby Bonus (first child tax offset) and adoption

Outline of chapter

7.1 Schedule 7 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to:

• allow adoptive parents, once legally responsible for an eligible child, retrospectively to lodge a claim for the first child tax offset for the period between the date they commenced care of the child and the date they were granted legal responsibility for the child (but not for any period before 1 July 2001); and

• allow adoptive parents to choose for their ‘base year’, either the income year in which they commenced care of the child or the income year before they commenced care of the child (but not being an income year earlier than 2000-2001).

Context of amendments

7.2 Section 61-355 of the ITAA 1997 outlines the eligibility criteria for the first child tax offset, including that the taxpayer must be legally responsible for the child. Adoptive parents are considered to be legally responsible for the child when an adoption order is issued. However, this will generally not be issued for at least six to twelve months after the child entered into the care of the adoptive parents, and the period of care prior to legal responsibility can be longer for special needs children or some international adoptions. Adoptive parents are currently not entitled to claim the first child tax offset for the period between commencing care of the child and being granted legal responsibility.

7.3 Section 61-430 of the ITAA 1997 stipulates that the ‘base year’ is the income year in which the taxpayer gained legal responsibility for the child, or the income year immediately prior to the income year in which the taxpayer gained legal responsibility for the child. The first child tax offset entitlement is calculated based on the size of the reduction in income of a parent from the ‘base year’ to the ‘claim year’. Adoptive parents are currently excluded from claiming the offset in respect of the period between commencing care of the child and being granted legal responsibility – years in which their claim may be the largest.

Summary of new law

7.4 The amendments will ensure that adoptive parents, once they are legally responsible for an eligible child, will now be entitled to the first child tax offset from 1 July 2001 or the date the child entered into their care, or the date they become an Australian resident, whichever is the later date. The date that the taxpayer commenced caring for the child will be the date evidenced as being so by Court documentation or as documented by the relevant State department.

7.5 The amendments will allow adoptive parents to choose as their ‘base year’, either the income year in which they commenced care of the child or the income year before they commenced care of the child, but not an income year before 2000-2001.

7.6 Adoptive parents who will be disadvantaged by the amendments maintain an entitlement under the law as it was at 30 June 2004. However, adoptive parents claiming a greater entitlement under the old law cannot nominate the year of care or year prior to care as their base years and thus would not be entitled to the tax offset for the period between obtaining care of the child and gaining legal responsibility for the child.

Comparison of key features of new law and current law

Detailed explanation of new law

7.7 An adoptive parent may claim the first child tax offset if a child is in their care before they legally adopt the child, under the following conditions:

• at the time the child is first in the care of the adoptive parents:

− the adopted child is less than five years of age;

− the child is in their care (but they are not legally responsible for the child); and

− the parent is an Australian resident;

• the adoptive parent meets the general conditions for eligibility for the first child tax offset in subsection 61-355(3) of the ITAA 1997;

• the parent becomes legally responsible for the child by adopting the child; and

• the time adoptive parents became legally responsible for the child is on or after 1 July 2001 but before 1 July 2004.

[Schedule 7, item 20, section 61-440]

7.8 A child is first in the care of the adoptive parents on the date evidenced in writing by a court or relevant department of the relevant State or Territory. [Schedule 7, item 20, section 61-445]

Transferring entitlements

7.9 An adoptive parent can transfer their entitlement to another person. However, where the adoptive parent has an entitlement to the first child tax offset under new section 61-440 (for the period between care and legal responsibility) and also an entitlement under existing section 61-355 (after gaining legal responsibility), both entitlements or neither entitlement can be transferred to another person for a particular income year. [Schedule 7, item 13, paragraph 61-385(1A)]

Base year election

7.10 The amount of first child tax offset to which a parent is entitled is based on the reduction in income from the base year to each subsequent claim year. The default ‘base year’ for adoptive parents will be the income year prior to the income year when the child was first in their care and they were an Australian resident, or 2000-2001, whichever is later. [Schedule 7, item 20, subsection 61-450(2)]

7.11 Adoptive parents can elect as their ‘base year’ the year in which the child is first in their care provided they were Australian residents and that this is not before 2000-2001. However, they cannot change this ‘base year’ election once it is made [Schedule 7, item 20, subsection 61-450(3)]. Moreover, either the choice must be made before a claim under section 61-440 is made or before an entitlement under section 61-440 is transferred under section 61-385 [Schedule 7, item 20, subsection 61-450(4)]. The ‘base year’ for a transferred entitlement is the income year before the first income year for which the entitlement was transferred [Schedule 7, item 20, subsection 61-450(5)].

Example 7.1

Mary resigned from her $30,000 per year job in October 2001 in preparation for travelling overseas to adopt a child from a country where many young children had been orphaned by war. This country is not a signatory to the Hague Convention on intercountry adoption. On returning to Australia with her child in November 2001, Mary was required to obtain a formal adoption order from an Australian Court which was ultimately not granted until November 2002.

Under the old law, Mary can only claim the first child tax offset from November 2002. Under the new law, Mary will be able to claim the offset from November 2001 until the date when the child turns five years of age. Mary’s offset will be based on her reduction in income from $30,000 to nil.

Example 7.2

Martha and Paul applied to adopt a child and were awarded care of a newborn child with special needs at the end of June 2002. The child was assessed by social workers in the new home environment for 12 months before a formal adoption order was made, to ensure that Martha and Paul were able to meet the special needs of the child. As a result, the formal adoption order was not made by the courts until July 2003. Paul gave up his fulltime employment (which earned him $100,000 a year) when they were first given care of the child in June 2002 and is not intending to go back to work until the child goes to school.

Under the amended provisions for adoptive parents, Martha can transfer her first child tax offset to Paul who can then claim the maximum amount of $2,500 for each full year the child is in his care until the child turns five years of age (plus a pro-rata entitlement for part years of care) based on a ‘base year’ income of $100,000. Under the old law, Paul’s ‘base year’ income of zero at the time they gained legal responsibility for the child will only entitle him to the minimum first child tax offset of $500 per full year of care from the date of gaining legal responsibility in July 2003 until the child is five years old.

Adoptive parents who would be better off under the old law

7.12 Adoptive parents whose greatest fall in income occurs after they have gained legal responsibility for the child could be disadvantaged if they are required to nominate a ‘base year’ before the year of legal responsibility for the child.

7.13 The amended provisions ensure that no adoptive parent will lose their existing entitlement or have a reduced entitlement to the first child tax offset because of the amendments. [Schedule 7, item 20, section 61-455]

7.14 Adoptive parents who would be entitled to a lesser amount of tax offset under the amended law than they would have been entitled to under the old law retain their entitlement to the first child tax offset under the law as it was in force on 30 June 2004.

7.15 However, adoptive parents claiming the tax offset under the old law would not have an entitlement to the tax offset for the period in which they had care of the child prior to obtaining legal responsibility for the child.

7.16 To ensure that they do not receive a lesser amount of first child tax offset under the new law, adoptive parents may compare the amount they would receive under the new law – potentially five years worth of claims, and the amount they could continue to claim under the old
law – which may be a greater annual amount for a shorter period since the old law does not allow retrospective claims from the date of care to the date of legal responsibility. Adoptive parents are not required to make an election to claim under the old law – this is an option that remains open to them while they remain eligible to claim the offset until their child turns five years of age. The Australian Taxation Office will be able to advise adoptive parents on making claims under the old and new laws.

Application and transitional provisions

7.17 The amendments apply from 1 July 2001.

7.18 The amendments are retrospective to ensure that adoptive parents receive the benefit of the amendments from the time the first child tax offset came into effect.

7.19 Taxpayers will not be adversely affected by the retrospective commencement of the amendments because of section 61-455 which allows claimants access to the old law if their entitlement would be for a lesser amount under these amendments.

Chapter 8
Technical correction to the Taxation Laws Amendment Act (No. 8) 2003

Outline of chapter

8.1 Schedule 8 to this bill corrects a technical defect in the commencement provision applying to the franking deficit tax (FDT) offset provisions for life insurance companies in Schedule 7 to the Taxation Laws Amendment Act (No. 8) 2003.

Context of amendments

8.2 Schedule 7 to the Taxation Laws Amendment Act (No. 8) 2003 amended Part 3-6 of the Income Tax Assessment Act 1997 to insert rules in the simplified imputation system for offsetting of FDT against company tax. Rules were inserted for both ordinary companies and life insurance companies.

8.3 The FDT offset rules that applied to life insurance companies, as currently drafted, commence immediately after the commencement of Schedule 7 to the Taxation Laws Amendment Act (No. 7) 2003 (this Schedule was to introduce imputation rules for life insurance companies). However, the life company imputation rules, which were introduced into Parliament as part of the Taxation Laws Amendment Bill (No. 7) 2003, were later enacted as part of the Taxation Laws Amendment Act (No. 1) 2004.

8.4 Therefore, the citation to the Taxation Laws Amendment Act (No. 7) 2003 in a commencement provision for the Taxation Laws Amendment Act (No. 8) 2003 is incorrect. It should instead refer to Taxation Laws Amendment Act (No. 1) 2004.

Detailed explanation of new law

8.5 Item 1 replaces the citation in item 5 in the table of subsection 2(1) in the Taxation Laws Amendment Act (No. 8) 2003 to the Taxation Laws Amendment Act (No. 7) 2003 with the correct reference to the Taxation Laws Amendment Act (No. 1) 2004. This will ensure that the FDT offset provisions for life insurance companies in the Taxation Laws Amendment Act (No. 8) 2003 commence appropriately following the enactment of the imputation rules for life insurance companies in the Taxation Laws Amendment Act (No. 1) 2004. [Schedule 8, item 1, item 5 in the table in subsection 2(1)]

Application and transitional provisions

8.6 This amendment made by Schedule 8 will commence immediately after the Taxation Laws Amendment Act (No. 8) 2003 received Royal Assent (21 October 2003).

Index

Schedule 1: Deductible gift recipients

Schedule 2: Irrigation water providers

Schedule 3: FBT housing benefits

Schedule 4: CGT event G3

Schedule 5: Superannuation reporting requirements

Schedule 6: Consolidation

Schedule 7: Baby bonus adoption amendments

Schedule 8: Technical correction

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