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TAX LAWS AMENDMENT (2010 MEASURES NO. 2) BILL 2010

                               2008-2009-2010





               THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA











                                   SENATE











             TAX LAWS AMENDMENT (2010 MEASURES No. 2) bILL 2010











                    SUPPLEMENTARY EXPLANATORY MEMORANDUM





             Amendments to be moved on behalf of the Government








                     (Circulated by the authority of the
                      Treasurer, the Hon Wayne Swan MP)






Table of contents


General outline and financial impact    5


Chapter 1    Amendment to Schedule 1 - Improving fairness and integrity in
              the tax system:  distributions to entities connected with a
              private company      7








General outline and financial impact

Amendment to Schedule 1 - Improving fairness and integrity in the tax
system:  distributions to entities connected with a private company


         The amendment ensures that the use of certain company title flats
         or home units is not a payment for the purposes of Division 7A of
         the Income Tax Assessment Act 1936.


         Date of effect:  1 July 2009.  This amendment does not adversely
         affect taxpayers.


         Proposal announced: This amendment has not previously been
         announced.


         Financial impact:  Nil.


         Compliance cost impact:  Nil.






Chapter 1
Amendment to Schedule 1 - Improving fairness and integrity in the tax
system:  distributions to entities connected with a private company

Amendment 1


      1. The amendment ensures that the use of certain company title flats
         and home units is not a payment for the purposes of Division 7A of
         the Income Tax Assessment Act 1936.  In a company title
         arrangement, a person purchases a share in a company that gives
         them the right to occupy a dwelling rather than purchasing the
         underlying dwelling.  Company title arrangements have largely been
         replaced by strata title arrangements.  However, some multi
         dwelling complexes, such as apartments and duplexes, are still
         owned in company title arrangements.


      2. The amendment provides equitable treatment between individuals who
         own property through a strata title arrangement and individuals who
         are effectively forced to own a flat or home unit through a company
         title arrangement.


      3. The amendment includes a number of requirements to ensure that the
         exemption is not manipulated.  For example, the amendment only
         applies to flats and home units.  The term 'flats or home units'
         incorporates a range of dwellings that are attached to land, such
         as duplexes and apartments.  However, it does not include assets
         that are not attached to land, such as boats.


      4. To qualify for the exemption, there must be more than one share in
         the company, each share or parcel of shares must provide the right
         to occupy a particular flat or home unit, and each flat or home
         unit in the complex must be attached to a share or parcel of shares
         in the company.  This ensures that the exemption cannot be
         manipulated by, for example, purchasing a single holiday house or
         purchasing a single apartment in an existing apartment block.


      5. The amendment also limits the types of assets and income that the
         company can have to ensure that the company is not accumulating
         profits and distributing those profits to shareholders tax free.


      6. To be eligible for the exemption, the company must not own assets
         other than the land and buildings associated with the complex and
         related furnishings, plant, equipment and fittings.  As such, a
         company can qualify for the exemption even if it owns a gym, pool
         or car park on an adjacent piece of land, if that gym, pool or car
         park is provided for the benefit of the occupants of the flats or
         home units.


      7. The income of the company must be derived predominantly from
         managing and maintaining the land, buildings and facilities owned
         by the company, and interest and dividends relating to such income.
          This limitation ensures that the flat or home unit is not
         purchased using the profits of the company.  However, it provides
         some flexibility for the company to earn income from the investment
         of funds provided by residents for the maintenance of common
         property in a manner similar to bodies corporate.


      8. The exemption does not apply to a case where the interposed entity
         rules in Subdivision E of Division 7A apply.


      1.


                Jack owns a share in a private company, called Property
                Company, that owns a duplex.


                Jack's shareholding gives him the right to occupy part of
                the duplex.  Jack's use of the duplex will not ordinarily be
                a payment under Division 7A.  However, if Jack is also a
                shareholder of a private company with accumulated profits,
                Profit Company, and that company makes a payment or loan to
                Property Company as part of an arrangement to make a payment
                to Jack, then the interposed entity rules will apply and
                Jack's use of the apartment will be a payment for the
                purposes of Division 7A.