TAX LAWS AMENDMENT (2011 MEASURES NO. 7) BILL 2011 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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TAX LAWS AMENDMENT (2011 MEASURES NO. 7) BILL 2011

2010-2011

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

Tax laws Amendment (2011 measures no. 7) bill 2011

EXPLANATORY MEMORANDUM

(Circulated by the authority of the
Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Table of contents

Glossary 1

General outline and financial impact 3

Chapter 1 Removing tax issues facing special disability trusts 13

Chapter 2 Pacific Seasonal Workers - reduction in marginal tax rate
33

Chapter 3 Taxation of financial arrangements and pay as you go
instalments 37

Chapter 4 Commissioner's discretion to extend time for notifying taxation
of financial arrangements transitional elections 51

Chapter 5 Farm management deposits 57

Chapter 6 Extend the temporary loss relief for merging superannuation
funds by three months 67

Chapter 7 Penalty notice validation 73

Chapter 8 Public ancillary funds 79

Chapter 9 Film tax offsets 95

Index 121

Glossary

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

General outline and financial impact

Removing tax issues facing special disability trusts

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to
provide:

. a capital gains tax (CGT) exemption for an asset
transferred into a special disability trust (SDT) for no
consideration;

. a CGT main residence exemption for a trustee of an SDT;

. a CGT exemption for a recipient of the principal
beneficiary's main residence, if their ownership interest
ends within two years of the principal beneficiary's
death; and

. equivalent taxation treatment amongst SDTs established
under different Acts.

Date of effect: These amendments apply to income tax assessments for the
2006-07 income year and later income years.

These amendments, which are beneficial to taxpayers, are retrospective so
as to ensure transactions that have occurred since SDTs were first able to
be established are covered by these amendments.

Proposal announced: The original measure to provide a CGT main residence
exemption to SDTs was announced jointly by the Minister for Families,
Housing, Community Services and Indigenous Affairs and the then
Parliamentary Secretary for Disabilities and Children's Services in Media
Release Extra support for people with disability and their carers on 12 May
2009 as part of the 2009-10 Budget.

Extensions to this measure were announced in the Assistant Treasurer and
Minister for Financial Services and Superannuation's and the Parliamentary
Secretary for Disabilities and Carers' joint Media Release No. 070 of 10
May 2011, as part of the 2011-12 Budget.

Financial impact: These amendments have a small unquantifiable cost to
revenue over the forward estimates, expected to be between $0 and
$10 million per annum.

Compliance cost impact: Low overall, comprising of a low implementation
impact and a low decrease in ongoing compliance costs relative to the
affected group.

Pacific Seasonal Workers - reduction in marginal tax rate

Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to reduce the
lowest marginal tax rate for workers participating in the Pacific Seasonal
Worker Pilot Scheme (Scheme) from 29 per cent to 15 per cent. All other
tax brackets for participants in the Scheme will remain unchanged. This
change only applies to non-residents who hold a Special Program Visa
(subclass 416) and who are employed by an 'Approved Employer' under the
Scheme. Tax rates for other non-residents remain unchanged.

This measure is designed to achieve two things, namely, to address equity
issues associated with the high effective tax rate that currently applies
to participants in the Scheme and to deliver better remittance outcomes for
participants in the Scheme.

Date of effect: This measure applies to the 2011-12 year of income.

Proposal announced: This measure was announced in the 2011-12 Budget.

Financial impact: The measure will have the following cost to revenue:

|2011-12 |2012-13 |2013-14 |2014-15 |
|$0.8m |nil |nil |nil |

The Government has not yet made a decision about the future of the Scheme
beyond its end date of 30 June 2012, so later financial impacts are not
recorded.

Compliance cost impact: Low. This measure will only affect a very small
number of employers and employees. Employers will be required to make
minimal system changes as a result of the change.

Taxation of financial arrangements and pay as you go instalments

Schedule 3 to this Bill amends the Taxation Administration Act 1953 so that
instalment income of a taxpayer who is required to apply Division 230 of
the Income Tax Assessment Act 1997 to their financial arrangements also
includes their net gains from their Division 230 financial arrangements (to
the extent the gains equal or exceed the losses) as worked out under the
taxation of financial arrangements (TOFA) provisions.

Date of effect: These amendments commence on Royal Assent. The amendments
generally apply from the first instalment quarter of an income year
following the lodgment of the first income tax return in which a taxpayer
reported an assessable gain or deductible loss from their Division 230
financial arrangements.

Proposal announced: These amendments were announced in the then Assistant
Treasurer's Media Release No. 145 of 29 June 2010. The Media Release
advised that amendments would be made to ensure that the TOFA provisions
would interact appropriately with the pay as you go instalments provisions
to lower compliance costs for taxpayers.

Financial impact: Nil. However, some small but unquantifiable timing
differences may arise over the first two years of implementation.

Compliance cost impact: These amendments will reduce compliance costs for
taxpayers who are required to apply the TOFA provisions to their financial
arrangements.

Commissioner's discretion to extend the time for notifying taxation of
financial arrangements transitional elections

Schedule 4 to this Bill amends the Tax Laws Amendment (Taxation of
Financial Arrangements) Act 2009 (TOFA Act) to give the Commissioner of
Taxation (Commissioner) a limited discretion to extend the time for a
taxpayer to notify the Commissioner of the making of the transitional
election to apply Division 230 of the Income Tax Assessment Act 1997 and
related consequential and transitional amendments (TOFA provisions) to its
existing financial arrangements.

Date of effect: These amendments commence the day after Royal
Assent and apply in relation to lodgment dates mentioned in
paragraph 104(5)(b) of the TOFA Act, whether the lodgment dates
occur before, on, or after the commencement of these amendments.

Proposal announced: These amendments were announced in the Assistant
Treasurer and Minister for Financial Services and Superannuation's Media
Release No. 019 of 29 November 2010.

Financial impact: Nil.

Compliance cost impact: These amendments will reduce compliance costs for
taxpayers who have elected to apply the TOFA provisions to their existing
financial arrangements, but have failed to notify the Commissioner of this
election on or before the first lodgment date that occurs on or after the
start of their first TOFA applicable income year.

Farm management deposits

Schedule 5 to this Bill amends Division 393 of the Income Tax Assessment
Act 1997 (ITAA 1997) to allow a farm management deposit (FMD) owner
affected by an applicable natural disaster to access their FMDs within 12
months of making a deposit while retaining concessional tax treatment.

Schedule 5 to this Bill also amends:

section 398-5 of Schedule 1 to the Taxation Administration Act 1953 to
require FMD providers to report certain information about FMDs to the
Agriculture Secretary on a monthly basis before the 11th day after the end
of a calendar month;

Division 393 of the ITAA 1997 to allow FMD owners to hold FMDs
simultaneously with more than one FMD provider; and

section 69 of the Banking Act 1959 so that an FMD becomes unclaimed moneys
only if the FMD has not been operated on for a period of at least seven
years and the authorised deposit-taking institution (which is the FMD
provider) is unable to contact the FMD owner after making reasonable
efforts.

Date of effect: The amendment to allow FMD owners affected by applicable
natural disasters to access their FMDs within 12 months of making a deposit
applies from 1 July 2010. This measure is retrospective to enable FMD
owners who were affected by applicable natural disasters in the 2010-11
income year to benefit from the amendments.

The amendment relating to reporting requirements apply from 1 July 2012.
The amendment allowing owners to have FMDs with more than one FMD provider
applies in relation to agreements made before, on or after 1 July 2012.

The amendment relating to the unclaimed moneys provision applies in
relation to statements to be delivered within three months after
31 December 2012 and within three months after the end of each later
calendar year.

Proposal announced: The amendments were announced as part of the 2011-12
Budget.

Financial impact: Only the amendment to allow FMD owners who are affected
by applicable natural disasters to access their FMDs within 12 months will
have an ongoing unquantifiable revenue impact.

Compliance cost impact: These amendments are expected to have a medium
overall compliance cost impact.

There will be an impact on FMD owners affected by applicable natural
disasters as the conditions prescribed by the Income Tax (Farm Management
Deposits) Regulations 1998 must all be met before access within 12 months
of the deposit is allowed.

There will be an impact on FMD providers by requiring more frequent
reporting and requiring FMD providers that are authorised deposit-taking
institutions to make reasonable efforts to contact FMD owners before FMDs
become unclaimed moneys.

Extend the temporary loss relief for merging superannuation funds by three
months

Schedule 6 to this Bill amends the Tax Laws Amendment (2009 Measures No. 6)
Act 2010 to extend the end date of the temporary loss relief for complying
superannuation fund mergers by three months - from 30 June 2011 to
30 September 2011. This will provide additional time for mergers to be
completed and still meet the eligibility requirements of the loss relief.
The requirement that affected mergers are completed in a single income year
of the transferring fund is also relaxed to permit funds to benefit from
the extension.

Date of effect: The measure commences on Royal Assent and applies in
respect of transfer events in the period 1 July 2010 to 30 September 2011
for the purpose of determining eligibility for the temporary loss relief.
The measure benefits affected taxpayers by extending the period of the
temporary loss relief.

Proposal announced: This measure was announced in the Assistant Treasurer
and Minister for Financial Services and Superannuation's Media Release No.
066 of 3 May 2011.

Financial impact: This measure has an unquantifiable but small revenue
impact.

Compliance cost impact: As the measure extends the period of operation of
an existing temporary measure, its compliance cost impact is expected to be
small.

Penalty notice validation

Schedule 7 to this Bill ensures the ongoing validity of certain
director penalty notices, notwithstanding the New South Wales Court
of Appeal (NSWCA) decision in Soong v Deputy Commissioner of
Taxation [2011] NSWCA 26 (Soong).

Date of effect: These amendments apply from 10 December 2007.

This application date ensures that all director penalty notices issued by
the Commissioner of Taxation, which relied on the earlier NSWCA decision in
Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 (Meredith),
continue to remain valid.

Technically, these amendments will have an adverse impact on those
directors who would otherwise seek to challenge the validity of
their director penalty notices in light of the NSWCA's later
decision in Soong.

Substantively though, no taxpayers will be adversely affected
because these amendments merely restore the precedential view on
the issue during this period (as enunciated in Meredith).

Proposal announced: This measure has not previously been announced.

Financial impact: Nil.

Compliance cost impact: Negligible.

Public ancillary funds

Schedule 8 to this Bill amends the Income Tax Assessment Act 1997, the
Taxation Administration Act 1953 and the A New Tax System (Australian
Business Number) Act 1999 to improve the integrity of public ancillary
funds. These amendments among other things:

rename the funds as public ancillary funds (their more commonly used name);

give the Treasurer the power to make legislative guidelines about the
establishment and maintenance of public ancillary funds; and

give the Commissioner of Taxation (Commissioner) the power to impose
administrative penalties on trustees that fail to comply with the
guidelines and to remove or suspend trustees of non-complying funds.

Date of effect: These amendments will apply from 1 January 2012.

Proposal announced: These amendments were announced in the then Assistant
Treasurer and Minister for Financial Services and Superannuation's Media
Release No. 093 of 11 May 2010 and in the 2010-11 Budget.

Financial impact: These amendments are expected to result in a revenue
gain of $3 million over the forward estimates period as a result of
improved compliance.

Compliance cost impact: Low.

Film tax offsets

Schedule 9 to this Bill amends Division 376 of the Income Tax Assessment
Act 1997 to make a number of changes to the film tax offsets.

Changes affecting the producer offset include:

amending the qualifying expenditure threshold for feature films, single
episode dramas and documentary programs to $500,000;

disallowing eligibility for those documentaries which receive financial
assistance under the Producer Equity Program;

allowing additional screen production costs to be claimed as qualifying
expenditure;

allowing television series to benefit for their first 65 broadcast hours;

allowing films with qualifying expenditure of less than $15 million to use
actual exchange rates rather than existing averaging rules;

removing the 20 per cent cap on development expenditure or remuneration
provided to the principal director, producers and principal cast associated
with the documentary;

allowing certain distribution and marketing costs to be included in
qualifying expenditure;

allowing short-form animated documentaries access to the offset; and

excluding goods and services tax (GST) from an amount of expenditure for
the purpose of applying the offset.

Changes affecting the location and post, digital and visual effects offsets
include:

increasing the rate of the location offset from 15 per cent to 16.5 per
cent;

increasing the post, digital and visual effects offset from 15 per cent to
30 per cent;

permitting some additional screen production costs to be claimed as
qualifying expenditure; and

excluding GST from an amount of expenditure for the purpose of applying
these offsets.

Date of effect: The amendments as they relate to the producer offset apply
to:

films for which production assistance (other than development assistance)
has been approved by the film authority on or after 1 July 2011; or

in any other case, films for which production expenditure is first incurred
in, or in relation to, pre-production of the film on or after 1 July 2011.

The amendments as they relate to the location offset apply retrospectively
to films commencing principal photography or production of the animated
image on or after 10 May 2011.

The amendments as they relate to the post, digital and visual effects
offset apply retrospectively to post, digital and visual effects production
that commence on or after 1 July 2011.

Consistent with the 2011-12 Budget, the net retrospective application dates
benefit affected taxpayers.

Proposal announced: This measure was announced in the 2011-12 Budget and
in the Minister for the Arts' Media Release No. SC056/2011 of 10 May 2011.

Financial impact: This measure is estimated to increase expenditure on the
film tax offsets by $8 million over the forward estimates.

|2011-12 |2012-13 |2013-14 |2014-15 |
|- |$2m |$3m |$3m |

Compliance cost impact: This measure is expected to reduce compliance
costs for affected taxpayers.

Removing tax issues facing special disability trusts

Outline of chapter

1. Schedule 1 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to provide:

. a capital gains tax (CGT) exemption for an asset
transferred into a special disability trust (SDT) for no
consideration;

. a CGT main residence exemption for a trustee of an SDT;

. a CGT exemption for a recipient of the principal
beneficiary's main residence, if their ownership interest
ends within two years of the principal beneficiary's
death; and

. equivalent taxation treatment amongst SDTs established
under different Acts.

Context of amendments

2. SDTs were introduced in 2006 to assist families and carers to make
private financial provision for the current and future care and
accommodation needs of a family member with severe disability -
referred to as the principal beneficiary.

3. There are two key benefits of establishing an SDT:

. Immediate family members making gifts to an SDT may access
a concession of up to a combined total of $500,000 from
the social security or veterans' entitlements gifting
rules.

. Assets of an SDT up to $578,500 (current as at 1 July 2011
and indexed annually) plus the principal beneficiary's
principal place of residence do not impact upon the
principal beneficiary's ability to access income support
payments.

4. In order to access these concessions, the trust must operate in
accordance with Part 3.18A of the Social Security Act 1991 or
Division 11B of Part IIIB of the Veterans' Entitlements Act 1986.

5. The Senate referred a number of matters relating to SDTs to its
Community Affairs Committee for inquiry and report in 2008. In
particular, the Committee considered why more families of
dependants with disabilities are not making use of the current
provisions to establish SDTs.

6. In its report of 16 October 2008, the Committee highlighted that
the taxation arrangements that apply to SDTs diminish their value
for carers and people with disabilities.

7. The Government announced in the 2009-10 Budget that it would extend
the CGT main residence exemption to include a dwelling that is held
by a trustee of an SDT and used by the principal beneficiary as
their main residence, with effect for CGT events that happen on or
after 1 July 2009.

. The existing CGT main residence exemption ensures an
individual will disregard a capital gain or capital loss
on their main residence, subject to various conditions
being satisfied.

8. Without these changes, the CGT main residence exemption
requirements cannot be satisfied by a trustee of an SDT. This is
because the trustee holds the dwelling and is responsible for
claiming the CGT main residence exemption, but the dwelling is used
by the principal beneficiary as their main residence. In addition,
the principal beneficiary cannot access the exemption as they do
not own the dwelling.

9. During the policy design of this measure, stakeholders raised
concerns that the potential CGT liability on transferring an asset
into an SDT is a major disincentive to setting up an SDT.
Stakeholders were also concerned that a trustee of an SDT may have
realised a CGT liability where they disposed of a dwelling before
1 July 2009, even though the dwelling was effectively being used as
the principal beneficiary's main residence.

10. During the development of this measure, it was identified that a
recipient who receives a principal beneficiary's main residence
after the principal beneficiary's death would not be eligible for
the CGT main residence exemption that applies to a trustee or a
beneficiary of a deceased person's estate, as the dwelling does not
pass to the recipient from the principal beneficiary's estate.

11. It was also identified that the definition of SDTs in the ITAA 1997
is limited to SDTs established under the Social Security Act 1991
and does not include SDTs established under the Veterans'
Entitlements Act 1986.

12. The Government announced in the 2011-12 Budget that in order to
remove further income tax barriers that impede families from making
contributions to an SDT and to make SDTs more beneficial for
families, it would:

. provide a CGT exemption for an asset transferred into an
SDT for no consideration (ignoring any interest in the
trust);

. backdate the application date of the CGT main residence
exemption for SDTs to apply from when SDTs were first able
to be established;

. provide a CGT exemption for a recipient of a principal
beneficiary's main residence, if their ownership interest
ends within two years of the principal beneficiary's
death; and

. ensure SDTs established under the Veterans' Entitlements
Act 1986 have equivalent taxation treatment as those
established under the Social Security Act 1991.

13. These changes apply to income tax assessments for the 2006-07
income year and later income years. The changes are beneficial to
taxpayers.

Summary of new law

14. These amendments will ensure that a capital gain or capital loss is
disregarded when an asset is transferred directly into an SDT for
no consideration, or where an asset passes from a deceased person's
estate to an SDT.

15. In addition, a trustee of an SDT will disregard any capital gain or
capital loss on the principal beneficiary's main residence, to the
extent that the principal beneficiary would have been able to do so
had they owned the main residence directly. These amendments will
also ensure that a recipient of the principal beneficiary's main
residence will disregard any capital gain or capital loss on the
principal beneficiary's main residence, if their ownership interest
ends within two years of the beneficiary's death.

16. Finally, these amendments provide that SDTs established under the
Veterans' Entitlements Act 1986 will have equivalent taxation
treatment as those established under the Social Security Act 1991.

Comparison of features of new law and current law

Detailed explanation of new law

17. For the purposes of this explanatory memorandum, the term trustee
of an SDT refers to a trustee of a trust that was an SDT at some
point in the ownership period of the dwelling. In addition, the
term principal beneficiary refers to a beneficiary who was the
principal beneficiary of an SDT at some point in the ownership
period of the dwelling.

Income tax definition of SDT

18. In the ITAA 1997, 'special disability trust' and 'principal
beneficiary' have the meanings given by sections 1209L and 1209M of
the Social Security Act 1991 respectively.

19. These amendments expand the definition of special disability trust
and principal beneficiary in the ITAA 1997 to also include SDTs
established under the Veterans' Entitlements Act 1986. This
ensures SDTs established under that Act will also be covered by
these amendments. These SDTs will also be able to access the rules
in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936)
that ensure the unexpended income of an SDT is taxed at the
principal beneficiary's personal income tax rate, rather than
automatically at the top personal tax rate plus the Medicare Levy,
with effect for income tax assessments for the 2008-09 income year
and later income years. [Schedule 1, Part 3, items 10 and 11,
definitions of 'principal beneficiary' and 'special disability
trust' in subsection 995-1(1)]

CGT exemption on an asset transferred into an SDT

An asset transferred directly to an SDT

20. When there is a change of ownership of an asset for no
consideration, the market value substitution rule in section 116-30
of the ITAA 1997 applies and the taxpayer will determine a capital
gain or capital loss based on the difference between the cost base
(or reduced cost base) of the asset and its market value at the
time of the CGT event.

21. The law is amended so that any capital gain or capital loss that
the taxpayer would have made is disregarded when the asset is
transferred into the SDT for no consideration. [Schedule 1, Part
2, item 6, section 118-85]

22. When determining whether a taxpayer receives consideration for
transferring an asset into an SDT, any interest in the trust is
disregarded. This ensures that where an asset is transferred into
an SDT and the transferor is entitled to receive the asset at the
ending of the trust, a CGT exemption is still available. [Schedule
1, Part 2, item 6, subsection 118-85(2)]

23. If an asset is transferred into a trust that is not yet an SDT, a
CGT exemption will still be available provided the trust becomes an
SDT as soon as practicable after the asset is transferred into it.
Whether a trust satisfies this requirement will depend on the
circumstances of each case.

For example, a trust will satisfy this requirement if it applies to become
an SDT within a reasonable time and the application is later approved.

[Schedule 1, Part 2, item 6, paragraph 118-85(1)(b)]

Bright Pty Ltd (Bright) is the trustee of an SDT established for Jessica,
who is the principal beneficiary. In 2007, Suban, Jessica's father,
transfers ownership of a townhouse for no consideration to Bright as
trustee of the SDT.

Suban acquired the townhouse in 1990 and it was not his main residence
during his ownership period. Suban may be entitled to receive the asset
back when the SDT comes to an end.

Based on the market value of the townhouse, Suban would make a capital gain
of $100,000 (apart from these amendments) at the time the townhouse is
transferred to the SDT.

As Suban has transferred the townhouse to an SDT, he disregards the capital
gain of $100,000.

An asset passes to an SDT from a deceased person's estate

24. Typically, where an asset with an unrealised capital gain or
capital loss passes from a deceased person's estate to a
beneficiary of the estate, there is no taxing point for the
deceased person or their legal personal representative. Instead,
any unrealised capital gain or capital loss is typically deferred
until a later dealing with the asset by the beneficiary of the
estate.

25. To ensure that a trustee of an SDT disregards any unrealised
capital gain or capital loss when an asset passes to the trustee
from a deceased person's estate, the trustee will use the market
value of the asset on the day the deceased died as the first
element of its cost base (and reduced cost base).

. This effectively exempts any unrealised capital gain or
capital loss that has accrued up until the transferor's
death.

[Schedule 1, Part 2, items 7 and 8, subsection 128-15(4) (item 1 in
the table) and (after item 3A in the table)]

26. If the trust is not an SDT at the time the asset passes to it from
the deceased person's estate, the trust must become an SDT as soon
as it is practicable after the asset passes to it. This provides
consistent treatment with what is available when an SDT is
established outside of a deceased person's estate (see paragraph
1.23).

27. If the trust is not an SDT or does not become an SDT as soon as
practicable, the normal deceased estate cost base rules will apply.

Further to Example 1.1, Jessica's grandfather, Muhammad passes away and
leaves shares in his will to Bright as trustee of the SDT, who is a
beneficiary of Muhammad's estate. The shares are worth $20,000 at the time
of Muhammad's death.

Muhammad and his legal personal representative disregard any capital gains
or capital losses on the shares using the normal deceased estate
provisions.

These amendments ensure Bright obtains a market value cost base (and
reduced cost base) of $20,000 for the shares. One year later, Bright sells
the shares for $21,000. Assuming that Bright has not incurred any other
costs in relation to the shares, Bright makes a capital gain of $1,000 on
the shares.

CGT main residence exemption

28. If a trustee of an SDT holds a dwelling (or an ownership interest
in the dwelling) for the benefit of the principal beneficiary, the
trustee will be eligible for the CGT main residence exemption if
the principal beneficiary used the dwelling as their main residence
and the dwelling was not used to produce assessable income
[Schedule 1, Part 1, item 4, section 118-215 and subsections 118-
218(1) to (3)].

. The existing CGT main residence exemption, which is
located in Subdivision 118-B, disregards all or part of a
capital gain or capital loss on an individual's main
residence, provided certain conditions are satisfied.

29. The trustee of the SDT will be eligible for the CGT main residence
exemption in the same way as the principal beneficiary would have
been had they owned the dwelling directly.

. This is achieved by treating the trustee of the SDT as
holding the asset personally and using the asset in the
same particular way as the principal beneficiary on each
day the trust is an SDT [Schedule 1, Part 1, item 4,
subsections 118-218(1) and (2)].

. Where the trustee is not an individual, they are treated
as if they were an individual [Schedule 1, Part 1, item 4,
subsection 118-218(3)].

30. The map of the CGT main residence provisions, which is located in
section 118-105, is amended to include references to the new
provisions. [Schedule 1, Part 1, item 3, section 118-105]

1. : Basic case

Debbie and Marina are the trustees of an SDT established for Jack, who is
the principal beneficiary.

The trustees purchase a dwelling for the benefit of Jack. Settlement
occurs on 1 January 2008 and Jack moves in as soon as practicable after
minor modifications are made to the dwelling to assist Jack with his
independent occupation of the dwelling.

The trustees later sell the dwelling, making a capital gain of $20,000
(apart from these amendments). Jack continues to live in the dwelling
until settlement occurs on 31 December 2011.

The dwelling was never used to produce assessable income and the trust is
an SDT throughout the entire ownership period.

If Jack owned the dwelling directly, he would have been able to disregard
the entire capital gain. Therefore, the trustees will be able to disregard
the entire capital gain.

31. There are specific rules that extend the existing CGT main
residence exemption (sections 118-135 to 118-160). These rules
allow an individual to treat a dwelling as their main residence
even when it is not their main residence.

32. A trustee of an SDT will access these extensions, to the extent the
principal beneficiary could access them if they owned the dwelling
(or interest in the dwelling) directly. [Schedule 1, Part 1, item
4, subsections 118-218(1) to (3)]

1. : Absence rule

Further to Example 1.3, assume that in mid-2010, Jack moved out of the
dwelling into a nursing home, with the dwelling being rented out at market
value until the dwelling was sold in 2011. The trust remains an SDT for
all of the ownership period.

If Jack owned the dwelling directly, he could access the absence rule under
section 118-145. Therefore, the trustees can decide to continue to treat
the dwelling as a main residence during this period under the absence rule
and disregard the $20,000 capital gain when the dwelling is sold.

33. An individual may make a capital gain or capital loss where a
dwelling is their main residence for only part of the ownership
period or where the dwelling was used for income producing
purposes.

34. A trustee of an SDT will access the partial CGT main residence
exemption and the income producing rules to the extent the
principal beneficiary could have accessed these rules if they owned
the dwelling (or an interest in the dwelling) directly. [Schedule
1, Part 1, item 4, subsections 118-218(1) to (3)]

A trust is not an SDT for part of the ownership period

35. For any day that a trust is not an SDT, that day will be treated as
a non-main residence day for the purposes of the CGT main residence
exemption. This outcome arises as the trustee cannot use these
amendments to treat themselves as using the dwelling as their main
residence on that day.

. For example, the trustee cannot use the absence rule in
section 118-145 for any day when the trust is not an SDT.

[Schedule 1, Part 1, item 4, subsections 118-218(1) and (2)]

36. This treatment will not apply where the trust becomes an SDT as
soon as practicable after a dwelling is transferred into it (see
paragraphs 1.23 and 1.26) or after the trustee purchases a
dwelling. That is, where the dwelling is the principal
beneficiary's main residence in the time leading up to the trust
becoming an SDT, those days will be main residence days.

Respect Pty Ltd (Respect) is the trustee of an SDT established for Mark.
Respect, in its capacity as trustee, purchases a dwelling for the benefit
of Mark, with settlement occurring on 1 January 2007. Mark moves in on
this day.

Respect sells the dwelling with settlement occurring on 31 December 2010.
Mark moves out on this day. Respect would make a capital gain of $15,000
(apart from these amendments).

The trust is not an SDT during the calendar year of 2010 (including at the
time of the CGT event) as during this period, the trustee paid a weekly
allowance of $200 to Mark's mother for her personal expenditure.

When Respect sells the dwelling in 2010, the trustee is required to use the
partial main residence formula in subsection 118-185(2). For the year of
2010, the days are counted as non-main residence days.

Therefore, Respect will be taken to have made a capital gain of $3,747 -
calculated as follows:

[pic]

A trustee inherits a dwelling from a deceased person's estate

37. If a trustee of an SDT inherits a dwelling from a deceased person's
estate, the trustee may be able to disregard or reduce a capital
gain or capital loss on a later dealing with that dwelling (or an
ownership interest in it).

38. The trustee will determine the extent to which they can access the
exemption by applying either section 118-195 (for a complete
exemption) or 118-200 (for a partial exemption) as if they were a
trustee or a beneficiary of the deceased person's estate.
[Schedule 1, Part 1, item 4, subsections 118-218(1) to (3)]

39. These amendments provide a market value cost base for any asset
that passes to an SDT from a deceased person's estate (see
paragraphs 1.24 to 1.27). Therefore when the trustee of the SDT
calculates any applicable CGT liability on a later dealing with
that dwelling using the CGT main residence rules, any use of the
dwelling by the deceased is ignored. This ensures that the trustee
of the SDT will be able to access section 118-195 even where the
dwelling was not the deceased's main residence or the dwelling was
used to produce assessable income. [Schedule 1, Part 1, item 4,
subsection 118-218(4)]

Radovan purchased a dwelling, with settlement occurring on 1 January 2000.
He died on 31 December 2009. Just before Radovan's death, the dwelling was
his main residence although part of the dwelling was used to produce
assessable income.

Radovan had set up a testamentary trust in his will to become an SDT for
the benefit of Sue (the principal beneficiary). Sue had undergone the
beneficiary assessment process prior to Radovan's death and the trust is
recognised as an SDT at the time the asset passes to it. Kind Pty Ltd
(Kind) is the trustee of the SDT.

The dwelling is used by Sue as her main residence until the dwelling is
sold and settlement occurs on 2 March 2014. During the ownership period,
the trust was an SDT.

Kind makes a capital gain of $20,000 (apart from these amendments).

These amendments disregard any income producing use before the deceased's
death. Therefore, as the dwelling was Sue's main residence during all of
Kind's ownership period, Kind disregards the capital gain of $20,000 when
the dwelling is sold.

Death of the principal beneficiary

40. The social security and veterans' entitlements rules provide that
an SDT ends on the death of the principal beneficiary, with assets
being disposed of by a trustee or passed to the relevant
beneficiary as determined by the trust deed. An implied trust may
arise over the assets of the SDT. The assets are then transferred
out of the implied trust to the beneficiary.

The dwelling is disposed of by either a trustee of the SDT or a trustee of
the implied trust with proceeds given to the beneficiary

41. After the death of the principal beneficiary, the terms of the
trust deed may require the dwelling to be disposed of, with the
proceeds being distributed to the beneficiary or beneficiaries.
This disposal may be by a trustee of the SDT or a trustee of the
implied trust (the trustee). Under the amendments, the trustee
will access a complete or partial CGT main residence exemption,
based on the use of the dwelling by the principal beneficiary.

42. Diagram 1.1 highlights this outcome where the dwelling is disposed
of by the trustee.

1. : Overview of the operation of the amendments where the trustee
disposes of a dwelling

[pic]

Conditions for the trustee

43. In order for the trustee to qualify for the treatment available
following a principal beneficiary's death, the following conditions
must be satisfied:

the CGT event must happen at or after the principal beneficiary's death;

the dwelling must have been owned by a trust that was an SDT at some point
in the dwelling's ownership period (at or before the principal
beneficiary's death); and

when the CGT event happens, the dwelling must be owned by a trustee of the
SDT or a trustee of an implied trust arising because of the principal
beneficiary's death.

[Schedule 1, Part 1, item 4, section 118-220]

44. Prior to determining whether a full or partial CGT main residence
exemption is available, to work out the amount of the capital gain
or capital loss, the trustee will use the following as the first
element of the cost base (and reduced cost base) as appropriate:

Where the trustee of the SDT disposes of the dwelling and distributes the
proceeds to a beneficiary - the trustee will retain its original cost base,
unless it satisfies the requirements of a market value cost base (see
paragraph 1.45).

Where the trustee of the implied trust disposes of the dwelling and
distributes the proceeds to a beneficiary -the trustee will use the trustee
of the SDT's cost base of the asset just before the deceased's death
(unless the market value cost base rule in paragraph 1.45 applies)
[Schedule 1, Part 1, item 4, subsection 118-227(2)].

45. The trustee of the SDT and the trustee of the implied trust will
use the market value of the asset just before the principal
beneficiary's death as the first element of the asset's cost base
provided certain conditions are met. These conditions require that
the dwelling was used by the principal beneficiary as their main
residence, it was not used to produce assessable income and the
dwelling was owned by the trust that was an SDT just before the
principal beneficiary's death. This provides consistent outcomes
with the Division 128 treatment that is available to a legal
personal representative.

This effectively exempts any unrealised capital gain or loss that has
accrued up until the principal beneficiary's death.

[Schedule 1, Part 1, item 4, subsection 118-227(1)]

Calculation of the CGT liability by the trustee

46. Where the trustee of the implied trust acquires the dwelling from
the trustee of the SDT, any capital gain or loss is disregarded by
the trustee of the SDT. This ensures that any CGT liability is
deferred until the trustee of the implied trust disposes of the
asset. [Schedule 1, Part 1, item 4, subsection 118-225(1)]

47. The trustee of the SDT or the implied trust that ultimately
disposes of the dwelling will determine their eligibility for the
CGT main residence exemption by decreasing the amount of the
capital gain or capital loss they would have made by an amount that
is reasonable. Factors that may affect the availability of the
exemption include the time the dwelling was the principal
beneficiary's main residence, the time the trust was an SDT and
whether the dwelling was used to produce assessable income during
the relevant period.

The 'relevant period' for the trustee is generally the period starting when
the trustee of the SDT first acquired the dwelling and ending when the
relevant trustee disposes of the dwelling.

[Schedule 1, Part 1, item 4, paragraphs 118-225(2)(a), (3)(a) and (c) and
subsection 118-225(4)]

48. In determining what is a reasonable decrease in the capital gain or
capital loss, the taxpayer should have regard to the principles
applying in Subdivision 118-B, assuming the dwelling passed to the
trustee as a trustee in a deceased person's estate. [Schedule 1,
Part 1, item 4, paragraphs 118-225(2)(a), (3)(a) and (c) and
subsection 118-225(4)]

1. : Full exemption for the trustee on disposal

Caring Pty Ltd (Caring) is the trustee of an SDT established for Peter, who
is the principal beneficiary. Caring purchases a dwelling for the benefit
of Peter. Settlement occurs on 1 January 2007 and Peter moves in on that
day.

On 31 December 2012, Peter dies. Immediately, the trustee of an implied
trust acquires the dwelling from the trustee of the SDT. Six months later,
the trustee of the implied trust disposes of the dwelling and gives the
proceeds to John.

In this situation, the trustee of the SDT disregards any capital gain or
capital loss when the trustee of the implied trust acquires the dwelling.

Using the principles of section 118-195, the trustee of the implied trust
determines that it is reasonable to disregard any capital gain or capital
loss on the dwelling because:

the trustee's ownership interest ends within two years of Peter's death;
and

just before Peter's death:

- the dwelling was Peter's main residence;

- it was not used to produce assessable income; and

- the trust was an SDT.

The trustee passes the dwelling to the beneficiary

49. On the death of an individual, typically there is no CGT taxing
point on an asset of the deceased. Instead, any CGT liability is
typically deferred until a later dealing with the asset by a
beneficiary of the deceased person's estate.

50. For main residence dwellings, a beneficiary of the deceased estate
may be eligible for a complete CGT main residence exemption,
provided certain conditions in section 118-195 are satisfied.
Where these conditions are not satisfied, a partial CGT main
residence exemption may be provided. In these cases, section 118-
200 requires the beneficiary to take into account the extent to
which the dwelling was the deceased's main residence and whether it
was used to produce assessable income.

51. To ensure comparable treatment for SDT cases, when a beneficiary
acquires the main residence dwelling (including where it acquires
the dwelling from an implied trust), no CGT taxing point will occur
for a trustee of the SDT or a trustee of an implied trust (the
trustee). This ensures that where there is an unrealised CGT
liability in the hands of the trustee, this is deferred until a
later dealing with the asset by the beneficiary. [Schedule 1, Part
1, item 4, section 118-220 and subsection 118-225(1)]

52. Diagram 1.2 highlights this outcome where the trustee passes the
dwelling to a beneficiary.

1. : An overview of the operation of the amendments where the trustee
passes a dwelling to a beneficiary

[pic]

CGT consequences for the trustee

53. To ensure that any applicable CGT liability flows through to a
beneficiary, the trustee of the SDT and the trustee of the implied
trust (if relevant) will disregard any capital gain or capital loss
on the dwelling. This is on the condition that the relevant
trustee satisfies the conditions in paragraph 1.43. [Schedule 1,
Part 1, item 4, subsection 118-225(1)]

Calculation of the CGT liability on the subsequent disposal by the
beneficiary

54. In order for a beneficiary to qualify for the treatment available
following the principal beneficiary's death, the beneficiary must
acquire the asset from a trustee of an SDT or trustee of an implied
trust. [Schedule 1, Part 1, item 4, section 118-222]

55. Prior to determining whether a complete or partial CGT main
residence exemption is available, to work out the amount of the
capital gain or capital loss, the beneficiary will use the
following as first element of cost base (and reduced cost base) as
appropriate:

where the beneficiary acquires the dwelling from a trustee of an implied
trust - the trustee's cost base for the asset, just before the beneficiary
acquired the asset (further information about the trustee's cost base is in
paragraphs 1.44 and 1.45); or

where the beneficiary acquires the asset directly from a trustee of an SDT
- the trustee of the SDT's cost base for the asset just before the
beneficiary acquired the asset.

[Schedule 1, Part 1, item 4, subsection 118-227(3)]

56. The relevant trust will use the market value of the asset just
before the principal beneficiary's death for the first element of
the asset's cost base provided certain conditions are met. These
conditions require that the dwelling was used by the principal
beneficiary as their main residence, it was not used to produce
assessable income, and the trust was an SDT just before their
death. This use will flow through to the beneficiary, providing
outcomes consistent with the Division 128 treatment that is
available to a beneficiary of a deceased person's estate.
[Schedule 1, Part 1, item 4, subsection 118-227(1)]

57. The beneficiary determines the extent of their main residence
exemption by decreasing the amount of capital gain or capital loss
they would have made without the exemption by an amount that is
reasonable. In determining what is a reasonable decrease in the
capital gain or capital loss, the taxpayer should use the
principles that apply in paragraphs 1.47 and 1.48, assuming the
dwelling passed to them as a beneficiary in a deceased person's
estate. [Schedule 1, Part 1, item 4, paragraphs 118-225(2)(b),
(3)(b) and (c) and subsection 118-225(4)]

1. : Full exemption for the beneficiary

Health Pty Ltd (Health) is the trustee of an SDT established for John, who
is the principal beneficiary. Health purchases a dwelling for the benefit
of John. Settlement occurs on 1 January 2007 and John moves in on that
day.

On 31 December 2012, John dies. Immediately, the trustee of the implied
trust acquires the dwelling from the trustee of the SDT, as the SDT ends on
the death of the principal beneficiary. Three months later, the
beneficiary of the trust, Casey, acquires the dwelling. Casey later
disposes of the dwelling, with settlement occurring on 1 July 2014.

Both the trustee of the SDT and the trustee of the implied trust will
disregard any capital gain or capital loss as a result of the CGT event
happening to the dwelling.

In addition, using the principles of section 118-195, Casey determines that
it is reasonable to disregard any capital gain or capital loss on the
dwelling because:

Casey's ownership interest ends within two years of John's death; and

just before John's death:

- the dwelling was John's main residence;

- it was not used to produce assessable income; and

- the trust was an SDT.

2. : Partial exemption for the beneficiary

Further to Example 1.8, assume that during Health's entire ownership
period, a part of the dwelling was used for income producing purposes.

Casey, as beneficiary of the SDT, takes into account the cost base of the
dwelling in the hands of the trustee of the implied trust and determines
that, without a partial CGT main residence exemption, a $14,000 capital
gain would be made when he sells the dwelling in 2014.

As there was income producing use of the dwelling just before John's death,
Casey decides it is reasonable to use the principles in sections 118-190
and 118-200 to determine the amount of capital gain or capital loss that
will be disregarded.

When Casey disposes of the dwelling, he considers that it is reasonable
that 25 per cent of the dwelling was used for income producing purposes.
Therefore, of this total capital gain, the following amount is not
disregarded due to the income producing use:

[pic]

Therefore, Casey would make a capital gain of $3,500 as it is reasonable
for Casey to reduce the capital gain of $14,000 by $10,500.

Other issues relating to the CGT main residence exemption

Exception for the beneficiary's interest in the trust

58. To ensure the main residence exemption at the trustee level is not
unwound at the beneficiary level, the beneficiary will disregard a
capital gain or capital loss on their interest in the trust ending.
This is on the condition that the trustee of the SDT or implied
trust is eligible for a CGT main residence exemption.

. This will apply where the beneficiary becomes absolutely
entitled to the dwelling (CGT event E5) or where the
trustee disposes of the dwelling in satisfaction of the
beneficiary's interest in the trust (CGT event E7).

[Schedule 1, Part 1, items 1 and 2, subsections 104-75(6) and 104-
85(6)]

Additional CGT events relevant for SDTs

59. The list of CGT events that is required to happen in order for a
taxpayer to access a CGT main residence exemption is expanded for
SDT cases to include CGT event E5 (where a beneficiary becomes
absolutely entitled to a dwelling held in an SDT) and CGT event E7
(where the trustee disposes of the dwelling in satisfaction of the
beneficiary's interest in the SDT). [Schedule 1, Part 1, item 4,
section 118-230]

Interaction with the trustee's personal dwelling

60. The trustee will disregard the use of their personal dwelling when
determining whether they are eligible for the CGT main residence
exemption in their capacity as trustee of an SDT. Under
subsection 960-100(3) of the ITAA 1997, the trustee of an SDT is
taken to be a different entity for tax purposes to the individual
who accesses the main residence exemption in their personal
capacity.

61. For the same reason, the trustee can ignore the deemed use of the
dwelling held in the SDT when the trustee accesses the CGT main
residence exemption in their personal capacity.

Application and transitional provisions

62. These amendments apply to income tax assessments for the 2006-07
income year and later income years. These amendments, which are
beneficial to taxpayers, are retrospective so as to ensure
transactions that have occurred since SDTs were first able to be
established are covered by these amendments. [Schedule 1, Parts 1
to 3, items 5, 9 and 12]

63. The operation of section 170 of the ITAA 1936 is modified so that
taxpayers are able to seek an amended assessment to take advantage
of these amendments in circumstances where their original
assessment was made before the commencement of these amendments but
their period for seeking an amendment to their tax return has
expired. Taxpayers have two years following the commencement of
these amendments in which their amended assessment must be made.
[Schedule 1, Clause 4]

Pacific Seasonal Workers - reduction in marginal tax rate

Outline of chapter

1. Schedule 2 to this Bill amends the Income Tax Rates Act 1986 to
reduce the lowest marginal tax rate for non-resident workers
participating in the Pacific Seasonal Worker Pilot Scheme (Scheme)
from 29 per cent to 15 per cent. This change will apply for the
2011-12 year of income.

Context of amendments

2. The Scheme was announced in August 2008. It is an important
element of the Pacific Engagement Strategy, a whole-of-government
strategy to advance our engagement in the Pacific, a key objective
announced in the March 2008 Port Moresby Declaration.

3. The key objectives of the Scheme are to:

assist Australian horticulturalists to source seasonal workers;

encourage both skills transfer between Australia and the Pacific Islands,
and remittances home to Pacific Islands; and

support Australia's Pacific Engagement Strategy and Pacific Partnerships.

4. The proposed changes announced by the Government are designed to:

improve remittance outcomes for participants in the Scheme; and

address equity concerns raised by the current high effective tax rates
applicable to participants in the Scheme.

Improve remittance outcomes

5. An important element of the Scheme is developing a remittance
stream, providing income directly to households to improve living
standards. Remittances are especially important to many Pacific
Island countries because their small size, geographic isolation and
rapidly growing populations mean that there are very limited
employment opportunities.

6. As well as raising living standards, remittances allow Pacific
Seasonal Workers (and their families) to make investments in human
capital and small enterprises. Remittance flows are also an
important earner of foreign exchange for many Pacific Island
countries.

Reduce high effective tax rate

7. Under the tax laws, Pacific Seasonal Workers are likely to be non-
residents for income tax purposes. As non-residents, Pacific
Seasonal Workers are subject to the higher marginal tax rates that
apply to non-residents. They will also not have access to the tax-
free threshold or the low income tax offset.

8. This can result in relatively high effective tax rates for
participants in the Scheme and also undermines the remittance and
development goals of the Scheme.

9. From a policy perspective, Australia taxes non-residents at a
higher rate and denies access to the tax-free threshold on the
basis that the taxpayer's home country will address equity concerns
through its own progressive rate scale. While this approach may be
appropriate for high-income earners from developed tax
jurisdictions (the traditional focus of non-resident tax policy),
the appropriateness may be questionable for low-income earners from
these developing countries. In New Zealand the lowest rate (10.5
per cent) applies to similar workers.

10. In addition, there may be logistical difficulties for workers in
remote villages to properly access any foreign tax credits from
their tax administrations.

11. Therefore, in order to address these equity concerns, and to ensure
that the remittance objectives of the Scheme are achieved, the
Government announced in the 2011-12 Budget that it would reduce the
lowest marginal tax rate for Pacific Seasonal Workers to 15 per
cent (down from 29 per cent).

Summary of new law

12. The lowest marginal tax rate for participants in the Scheme will be
reduced from 29 per cent to 15 per cent, effective for the 2011-12
year of income. All other tax brackets for Pacific Seasonal
Workers will remain unchanged. The rates for other non-residents
will be unaffected by this change.
13. The reduced rate will only apply to holders of a Special Program
Visa (subclass 416) who are employed by Approved Employers under
the Scheme.

Comparison of key features of new law and current law

Detailed explanation of new law

14. Item 1, of this Schedule inserts new Clause 1A into Part II of
Schedule 7 to the Income Tax Rates Act 1986. New Clause 1A
modifies the table in Clause 1 by replacing the 29 per cent rate
with the new 15 per cent rate in item 1 in the table.
15. Item 2, of this Schedule repeals Clause 1A from 1 July 2016. This
allows a sufficient amendment period after the Scheme expires (on
30 June 2012) and also ensures the Income Tax Rates Act 1986 does
not contain inoperative provisions.
16. Should the Scheme be extended beyond 30 June 2012, appropriate
amendments will be made at that time.

Application and transitional provisions

17. This measure will apply for the 2011-12 year of income.

18.
Taxation of financial arrangements and pay as you go instalments

Outline of chapter

1. Schedule 3 to this Bill amends Division 45 of Part 2-10 of Schedule
1 to the Taxation Administration Act 1953 (TAA 1953) to ensure
that, for taxpayers who apply Division 230 of the Income Tax
Assessment Act 1997 (ITAA 1997) to their financial arrangements,
the interaction between the taxation of financial arrangements
(TOFA) provisions and the pay as you go instalments (PAYGI)
provisions does not impose significant compliance costs.

Context of amendments

2. The PAYGI provisions contained in Division 45 of Part 2-10 of
Schedule 1 to the TAA 1953 ensure the efficient collection of,
among other things, income tax. In general, the PAYGI provisions
operate so that as taxpayers earn instalment income, they pay
instalments after the end of each instalment quarter worked out on
the basis of their instalment income for that quarter.

3. Generally, under the PAYGI provisions, instalment income for a
period includes ordinary income derived during the period, but only
to the extent that it is assessable income of the income year that
is or includes that period. For certain types of entities it may
also include statutory income. As stated in subsection 6-5(1) of
the ITAA 1997, ordinary income is income according to ordinary
concepts. This generally means gross income before taking expenses
into account.

4. The TOFA provisions were inserted by the Tax Laws Amendment
(Taxation of Financial Arrangements) Act 2009 which commenced on 26
March 2009. The TOFA provisions apply mandatorily for income years
commencing on or after 1 July 2010, unless a taxpayer elects to
apply the TOFA provisions for income years commencing on or after 1
July 2009. The TOFA provisions generally only apply in relation to
gains and losses from financial arrangements held by certain
taxpayers who do not satisfy certain asset or turnover threshold
tests.

5. For a taxpayer who is required or elects to apply the TOFA
provisions in relation to gains and losses from their financial
arrangements (TOFA entities), the gains and losses from their
financial arrangements are taken into account in determining their
taxable income. That is, their assessable income includes a gain
they make from a Division 230 financial arrangement and their
allowable deductions include a loss they make from a Division 230
financial arrangement. Gains and losses from Division 230
financial arrangements may constitute either or both ordinary
income and statutory income.

Summary of new law

6. These amendments extend the definition of 'instalment income' in
section 45-120 to also include net gains (to the extent the gains
equal or exceed the losses) from Division 230 financial
arrangements. For TOFA entities (excluding individuals, or those
entities that only have qualifying securities), this enables their
instalment income from Division 230 financial arrangements to be
worked out more easily from gains and losses worked out under the
TOFA provisions.

7. These amendments also ensure that to the extent an amount of
statutory or ordinary income is included in working out a gain or
loss from Division 230 financial arrangements under the extended
definition; that amount of statutory or ordinary income is excluded
from other categories of instalment income.

8. The extension of the 'instalment income' definition commences from
the first quarter of an income year following a TOFA entity's
(other than individuals, or entities where the entity's only
financial arrangements are qualifying securities) first base
assessment that applied the TOFA provisions to their Division 230
financial arrangements. The income year to which the first base
assessment relates must generally commence on or after 1 July 2010.

9. Under certain circumstances, taxpayers may elect to commence the
extended 'instalment income' definition earlier.

Comparison of key features of new law and current law

Detailed explanation of new law

Instalment income extended to include a net TOFA gain

10. This Schedule extends the definition of 'instalment income' in
section 45-120 of Schedule 1 to the TAA 1953 so that a TOFA
entity's instalment income for an instalment period includes the
difference between:

gains from financial arrangements that are assessable under Division 230 of
the ITAA 1997 and reasonably attributable to the instalment period; and

losses from financial arrangements that are allowable deductions under
Division 230 of the ITAA 1997 and reasonably attributable to the instalment
period, but only to the extent that the losses do not exceed the gains
[Schedule 3, item 1, subsection 45-120(2C)].

11. Financial arrangement has the meaning given by sections 230-45 and
230-50 of the ITAA 1997. Broadly, financial arrangements are
arrangements where the rights and obligations under the arrangement
are cash settlable, subject to certain add-ons and exceptions. A
financial arrangement is a Division 230 financial arrangement if
Division 230 of the ITAA 1997 applies in relation to gains and
losses from the arrangement.

12. The extended definition allows TOFA entities to include net gains
from their Division 230 financial arrangements in their instalment
income calculations for an instalment period, as opposed to
ordinary income derived from their financial arrangements. Net
gains from Division 230 financial arrangements (net TOFA gains)
equal total assessable gains from their Division 230 financial
arrangements for an instalment period (TOFA gains) reduced by
deductible losses from their Division 230 financial arrangements
for that period (TOFA losses), but only to the extent that the TOFA
losses do not exceed the TOFA gains.

13. Without the extension, for TOFA entities to work out their
instalment income from the TOFA gains and losses, the taxpayer
would generally be required to add back expenses to work out the
gross income amount and then subtract any statutory income amounts.
This process would increase compliance costs for taxpayers.

14. With respect to derivatives which are generally fair valued for
financial accounting purposes, the current 'instalment income'
definition may not include fair value gains as they are unlikely to
be ordinary income and also it may be very difficult to work out
the gross income amount because expenses are generally not readily
identifiable.

15. The words reasonably attributable are intended to have their
ordinary meaning. TOFA gains and TOFA losses that accrue over more
than one instalment period should be apportioned to one or more
instalment period(s) on a reasonable basis. [Schedule 3, item 1,
subparagraphs 45-120(2C)(a)(ii) and 45-120(2C)(b)(ii)]

16. For some TOFA entities, TOFA gains and losses from certain
financial arrangements may be taken into account for income tax
purposes under an elective tax-timing method where TOFA gains and
losses are spread in an un-systematic way, for example the fair
value tax-timing method. Under this tax-timing method, the gain or
loss from a financial arrangement for a particular period is the
increase or decrease in its fair value (broadly, the market value)
between the beginning and end of the period. In such situations,
instalment income should include the net fair value changes of a
financial arrangement for an instalment period where the fair value
changes are readily ascertainable; for example, where the financial
arrangement is quoted in an active market or where reliable
valuation methodologies can be used.

17. Where fair value changes of a financial arrangement for an
instalment period are not readily ascertainable, it is reasonable
for the fair value changes to be included in instalment income for
an instalment period in which the fair value of the financial
arrangement is required to be determined for financial accounting
or commercial purposes.

CFD Co is a TOFA taxpayer that has made a valid election to apply the fair
value tax-timing method to its financial arrangements that are classified
or designated as at fair value through profit or loss for financial
accounting purposes.

CFD Co has two portfolios of listed securities (financial arrangements)
during the instalment period from 1 July 2013 to 30 September 2013 - listed
shares in Company A and listed units in Property Trust B - that are being
classified as at fair value through profit or loss for financial accounting
purposes.

At the beginning of 1 July 2013, the listed shares portfolio has a market
value of $65 million and the listed units portfolio has a market value of
$10 million. At the end of 30 September 2013, the listed shares portfolio
has a market value of $70 million and the listed units portfolio has a
market value of $8 million. For the instalment period, CFD Co has a fair
value gain of $5 million from the listed shares portfolio and a fair value
loss of $2 million from the listed units portfolio. CFD Co's instalment
income for the period includes the net TOFA gain of $3 million from its
financial arrangements.

18. To reduce complexities, the extended 'instalment income' definition
does not apply to TOFA entities who are individuals, or only apply
Division 230 of the ITAA 1997 in relation to amounts from their
qualifying securities. [Schedule 3, item 1, subsection 45-120(2D)]

19. 'Qualifying security' is defined in Division 16E of Part III of the
Income Tax Assessment Act 1936 (ITAA 1936). Generally, qualifying
securities are long-term (more than 12 months), discounted and
deferred interest securities with tax deferral characteristics.

20. To ensure no double counting of an ordinary or statutory income
amount in instalment income calculations for any instalment period;
where an amount of ordinary or statutory income is taken into
account in working out a net TOFA gain for an instalment period, it
is not taken into account again in the instalment income
calculations for any instalment period. [Schedule 3, item 1,
subsection 45-120(2E)]

21. Even where the net TOFA gain is a nil amount, due to the TOFA
losses equalling or exceeding the TOFA gains, the ordinary or
statutory income amounts used in working out the TOFA gains should
not be included again as instalment income for any instalment
period. Where such an amount has already been included in an
earlier instalment period, the amount should be subtracted from the
instalment income calculations for the current period.

Charter Co has $100 interest income (TOFA gains) and $200 interest expense
(TOFA losses) from its Division 230 financial arrangements for the
instalment period from 1 July 2013 to 30 September 2013. As Charter Co's
TOFA losses are greater than its TOFA gains for the instalment period, no
amount in relation to its Division 230 financial arrangements is included
in its instalment income for the period.

While the $100 interest income is an amount of ordinary income which would
otherwise have been included in Charter Co's instalment income for the
instalment period under subsection 45-120(1) of Schedule 1 to the TAA 1953,
this amount is not to be taken into account in calculating instalment
income for any instalment period because it has been taken into account in
working out the nil amount of net TOFA gains for the purposes of
calculating instalment income for the instalment period from 1 July 2013 to
30 September 2013.

Application of the extended 'instalment income' definition

Definition

22. The instalment income definition as extended is defined as the
amended instalment income definition. [Schedule 3, item 2]

23. A taxpayer's first TOFA year is defined as the first income year
commencing on or after 1 July 2010 where the taxpayer has an
assessable gain or deductible loss from its Division 230 financial
arrangements (other than a qualifying security). [Schedule 3, item
2]

Main rule

24. Subject to the early opt-in provisions (explained below), a
taxpayer applies the amended instalment income definition when:

the Commissioner of Taxation (Commissioner) issues an instalment rate under
section 45-15 of Schedule 1 to the TAA 1953 after this Bill receives Royal
Assent and in the first quarter of a taxpayer's income year; and

the base year that applies in working out the instalment rate is the
taxpayer's first TOFA year or a later year.

[Schedule 3, subitems 3(1) and (2)]

25. Under the PAYGI provisions, the Commissioner is required to use the
taxpayer's base assessment instalment income to work out the
instalment rate. Base assessment instalment income is defined in
subsection 45-320(2) of Schedule 1 to the TAA 1953 to mean so much
of the taxpayer's assessable income, as worked out for the purposes
of the base assessment, as the Commissioner determines is
instalment income for the base year. Base year is the income year
to which the base assessment relates. Broadly, the base assessment
is the latest assessment for the taxpayer's most recent income year
for which an assessment has been made.

26. The main application rule operates so that taxpayers, who use the
instalment rate method to work out their PAYGI amounts, only start
to apply the amended instalment income definition from the
instalment period in which the Commissioner issued an instalment
rate that is worked out by using the amended instalment income
definition in calculating the base assessment instalment income.
This is to ensure that the Commissioner has sufficient TOFA-related
information to issue a TOFA-related instalment rate.

27. The amended instalment income definition will only have an effect
where a taxpayer has gains or losses calculated under Division 230
of the ITAA 1997. In other words, applying the amended instalment
income definition to any periods prior to a taxpayer's first TOFA
year gives the same instalment income amounts as applying the
existing instalment income definition.

28. To reduce complexities of the law in terms of the various
amendments to the PAYGI provisions that would be required
consequential to starting the amended instalment income definition
part way through an income year, the amended instalment income
definition commences in the first instalment quarter of a
taxpayer's income year.

Heyward Ltd is a full self-assessment taxpayer with an income year ending
on 30 June. The TOFA provisions mandatorily apply to Heyward Ltd for
income years commencing on or after 1 July 2010 (that is, from the 2010-11
income year). Heyward Ltd's first TOFA year is 2010-11 income year.

In compliance with its tax agent's lodgment program it lodges its income
tax return for the 2010-11 income year through its tax agent on 15 January
2012. Assuming a similar lodgment due date applies in subsequent years,
the 2010-11 income year is the base year for the third and fourth
instalment periods of the 2011-12 income year and the first and second
instalment periods of the 2012-13 income year.

As per the diagram below, the Commissioner issues Heyward Ltd with:

an instalment rate based on the base assessment instalment income worked
out using the existing instalment income definition in Heyward Ltd's third
instalment period (that is, Q3 - 1 January 2012 to 31 March 2012) of the
2011-12 income year (in line with current practice for non-TOFA entities);
and

another instalment rate based on the base assessment instalment income
worked out using the amended instalment income definition in Heyward Ltd's
first instalment period (that is, Q1 - 1 July 2012 to 30 September 2012) of
the 2012-13 income year.

In this situation, Heyward Ltd continues to use the existing instalment
income definition to work out its instalment income for the third and the
fourth instalment periods of the 2011-12 income year. Heyward Ltd starts
to use the amended instalment income definition to work out its instalment
income from the first quarter of the 2012-13 income year.

[pic]

Long Ltd is a full self-assessment taxpayer with an income year ending on
30 June. It is required to apply the TOFA provisions to its financial
arrangements from the 2011-12 income year due to the breach of the asset
threshold tests in the TOFA provisions in the 2010-11 income year. Long
Ltd's first TOFA year is the 2011-12 income year.

In compliance with its tax agent's lodgment program it lodges its income
tax return for the 2011-12 income year through its tax agent on 15 January
2013. Assuming a similar lodgment due date applies in subsequent years,
the 2011-12 income year is the base year for the third and fourth
instalment periods of the 2012-13 income year and the first and second
instalment periods of the 2013-14 income year.

As per the diagram below the Commissioner issues Long Ltd with:

an instalment rate based on the base assessment instalment income worked
out using the existing instalment income definition in Long Ltd's third
instalment period (that is, Q3 - 1 January 2013 to 31 March 2013) of the
2012-13 income year (in line with current practice); and

another instalment rate based on the base assessment instalment income
worked out using the amended instalment income definition in Long Ltd's
first instalment period (that is, Q1 - 1 July 2013 to 30 September 2013) of
the 2013-14 income year.

In this situation, Long Ltd continues to use the existing instalment income
definition to work out its instalment income for the third and fourth
instalment periods for the 2012-13 income year. Long Ltd starts to use the
amended instalment income definition from the first instalment period (Q1)
for its 2013-14 income year.

[pic]

Application - Partnerships and trusts

29. Under sections 45-260 (partnerships) and 45-280 (trusts) of
Schedule 1 to the TAA 1953, a partner of a partnership's or a
beneficiary of a trust's instalment income for an instalment period
includes their share of the partnership's or trust's instalment
income for the period worked out in accordance with the formula
specified in the respective sections.

30. For the purposes of sections 45-260 and 45-280, TOFA entities who
are partnerships or trusts apply the amended instalment income
definition in working out the partnership's or the trust's
instalment income for 'the last income year' and 'the current
period' in the applicable formula where:

'the current period' starts after this Bill receives Royal Assent; and

'the last income year' in the formula is the partnership/trust's first TOFA
year or a later year.

[Schedule 3, subitems 3(3) and (5)]

31. To ease compliance costs and avoid the potential for a mismatch
between the:

instalment income for 'the last income year' in the numerator of the two
formulae; and

instalment income of the current period which is the multiplier in the two
formulae,

the application rules for partnerships and trusts defers the
application of the amended instalment income definition in working
out the partnership's or trust's instalment income for the current
period until a partner's or a beneficiary's last income year is on
or after the partnership's or trust's first TOFA year. [Schedule
3, subitems 3(4) and (6)]

XYZ Trust is a TOFA entity with an income year ending on 30 June, and has
reported assessable TOFA gains and deductible TOFA losses in its income tax
return for the 2011-12 income year. This is XYZ Trust's first TOFA year.

Michael is a beneficiary of XYZ Trust. Michael's most recent income year
for which there is an assessment is the 2011-12 income year. The
assessment was issued on 2 December 2012 (which is in Michael's second
instalment period of the 2012-13 income year). As such, from the second
instalment period, Michael's last income year under subsection 45-280(2) is
the 2011-12 income year. This is also the first TOFA year for XYZ Trust.

Accordingly, from the second instalment period of the 2012-13 income year
the trustee of XYZ Trust starts to use the amended instalment income
definition in working out the XYZ Trust's instalment income for 'the last
income year' (2011-12 income year) and 'the current period' for Michael.

The ABC Partnership was created on 1 July 2011 and is constituted by two
equal partners, David Co and Sonida Co investment banks. The ABC
Partnership was created to borrow money from the wholesale market and on-
lend it to DEF Co. The ABC Partnership, David Co and Sonida Co have an
income year ending on 30 June.

On 1 July 2011, the ABC Partnership borrowed $1 billion at 5 per cent per
annum fixed for three years, and on-lent the funds to DEF Co on the same
day at 6 per cent per annum fixed for three years (that is, ABC Partnership
will have assessable TOFA gains of $60 million for the next three years,
and deductible TOFA losses of $50 million in each of those years). Both
loans are Division 230 financial arrangements.

The 2011-12 income year was the first TOFA year for the ABC Partnership,
and for that year:

the ABC Partnership had assessable income of $60 million, allowable
deductions of $50 million and net income of $10 million; and

each partner had $5 million assessable income from the partnership.

Both David Co and Sonida Co lodged their 2011-12 income tax returns on 3
September 2012. In working out the partners' instalment income for the
first instalment period of their 2012-13 income year (that is, Q1 - 1 July
2012 to 30 September 2012) for the ABC Partnership, the amended instalment
income definition applies:

the partnership's instalment income for the period is $2.5 million - this
is worked out as the TOFA gain attributable to the period ($15 million)
less the TOFA loss attributable to the period ($12.5 million), and

the partnership's instalment income for the last income year is $10 million
(being a TOFA gain of $60 million less a TOFA loss of $50 million)

Using the formula in subsection 45-260(1) of Schedule 1 to the TAA 1953,
David Co and Sonida Co each includes $1.25 million in their instalment
income for that period from the ABC Partnership calculated as follows:

$5 million/$10 million � $2.5 million.

Application - Early application of the amended instalment income definition

32. Under the main application rules, the amended instalment income
definition commences for a taxpayer from the first instalment
period of an income year where the base year, for the purposes of
the Commissioner calculating an instalment rate for that first
quarter, is the taxpayer's first TOFA year. This means that TOFA
entities generally cannot apply the amended instalment income
definition in the instalment period when they lodge their first
TOFA tax return. Rather, it does not generally apply until the
first instalment period of the income year that follows the year in
which that first TOFA return is lodged. This generally involves an
18 month delay.

33. For TOFA entities that do not wish to maintain the gross income
system for PAYGI purposes and the net gain or loss system for
income tax purposes, they may elect to start applying the amended
instalment income definition where the base year, for the purposes
of the Commissioner calculating an instalment rate, is an income
year before the taxpayer's first TOFA year. [Schedule 3,
subsection 3(7)]

34. The election only applies where the Commissioner is satisfied that
it would be reasonable to do so having regard to the objects of the
PAYGI provisions. [Schedule 3, paragraph 3(7)(d)]

35. Given the base year is an income year before the taxpayer's first
TOFA year, the base assessment will generally not contain amounts
resulting from the application of the TOFA provisions for the
Commissioner to issue an instalment rate based on the amended
instalment income definition.

36. Taxpayers can only apply the amended instalment income definition
for an instalment period, where the base year for the purposes of
calculating the corresponding instalment rate is an income year
before the taxpayer's first TOFA year, if the Commissioner has
sufficient TOFA related information for the base year to issue a
TOFA related instalment rate for a relevant current period. This
is to ensure the instalment income and instalment rate for an
instalment period are both worked out using the amended instalment
income definition, and therefore ensure the integrity of the PAYGI
provisions. [Schedule 3, subitems 3(7) and (8)]

37. Where the early opt in results in the base year being an income
year before a taxpayer's first TOFA year, the TOFA provisions are
taken to apply to the taxpayer's financial arrangements for the
base year in the same way that they would have applied in the
taxpayer's first TOFA year. [Schedule 3, subitem 3(9)]

Evan Ltd is a TOFA entity from the beginning of its income year commencing
1 January 2012 (that is, its 2012-13 income year). Assume that the amended
instalment income definition commences on 1 January 2012.

It lodges the following income tax returns:

for the 2011-12 income year (which commences on 1 January 2011) on 6 June
2012; and

for the 2012-13 income year (which commences on 1 January 2012) on 6 June
2013.

It lodges its 2012-13 income tax return in the second quarter (Q2) of its
2013-14 income year (that commences on 1 January 2013).

Under the main application rules, Evan Ltd starts to apply the amended
instalment income definition from the first instalment period of the 2014-
15 income year (which commences on 1 January 2014).

Instead, Evan Ltd elects to apply the amended instalment income definition
from the first instalment period of the 2013-14 income year (which
commences 1 January 2013).

For the first instalment quarter of the 2013-14 income year, the base year
is the 2011-12 income year as Evan Ltd's most recent assessment is in
relation to that income year.

Because the base year is an income year before Evan Ltd's first TOFA year,
Evan Ltd's base assessment does not include information for the
Commissioner to work out the base assessment instalment income using the
amended instalment income definition (that is, the net TOFA gains from Evan
Ltd's Division 230 financial arrangements). As such, in making the
election, Evan Ltd needs to provide sufficient information for the
Commissioner to calculate a new instalment rate on the basis that the TOFA
provisions had relevantly applied to Evan Ltd in that income year.

Commissioner's discretion to extend time for notifying taxation of
financial arrangements transitional elections

Outline of chapter

1. Schedule 4 to this Bill amends the Tax Laws Amendment (Taxation of
Financial Arrangements) Act 2009 (TOFA Act) to give the
Commissioner of Taxation (Commissioner) a limited discretion to
extend the time for a taxpayer to notify the Commissioner of the
making of the transitional election to apply Division 230 of the
Income Tax Assessment Act 1997 (ITAA 1997) and related
consequential and transitional amendments (TOFA provisions) to its
existing financial arrangements.

Context of amendments

2. The TOFA Act received Royal Assent on 26 March 2009. The TOFA Act
introduced Division 230 into the ITAA 1997. Division 230 defines
what a financial arrangement is and sets out the methods under
which gains and losses from financial arrangements are brought to
account for tax purposes. The two objectives underpinning the
Division are greater efficiency and the lowering of compliance
costs.

3. The TOFA provisions generally have prospective application. They
apply to financial arrangements a TOFA taxpayer starts to have
during income years commencing on or after 1 July 2010 on a
mandatory basis and during income years commencing on or after
1 July 2009 on an elective basis (first TOFA applicable income
year). Existing financial arrangements that a TOFA taxpayer starts
to have prior to the taxpayer's first TOFA applicable income year
are not subject to the application of the TOFA provisions, unless
the taxpayer elects to have the TOFA provisions apply to those
arrangements.

4. To reduce compliance costs by relieving taxpayers of the burden of
complying with two sets of income tax rules for financial
arrangements, taxpayers may, in certain circumstances, make a one
off election under the transitional provisions to apply the TOFA
provisions to their existing financial arrangements.

5. The transitional election, and the notification of it, must be made
on or before the first lodgment date that occurs on or after the
start of the taxpayer's first TOFA applicable income year. This is
an integrity measure designed to prevent taxpayers from waiting
until the end of their first TOFA applicable income year to 'pick
and choose' favourable tax outcomes once an ex-post analysis has
been made in respect of their existing financial arrangements.

6. Since the commencement of the TOFA provisions, the Australian
Taxation Office (ATO) has identified a number of taxpayers who,
despite electing to bring their existing financial arrangements
into the TOFA regime by the due date for the making of the
election, inadvertently failed to notify the Commissioner of the
election by the due date. The failure to notify the transitional
election by the due date invalidates the election and therefore
prevents the TOFA provisions from applying to existing financial
arrangements which may result in significant compliance
consequences.

7. To address this issue, the Assistant Treasurer and Minister for
Financial Services and Superannuation announced on 29 November 2010
that the Commissioner would be given a limited discretion to
specify a later notification due date in certain circumstances.

Summary of new law

8. This Schedule introduces a new item 104A to Part 3 of Schedule 1 to
the TOFA Act. Under this item, the Commissioner is given a
discretion to extend the time (for a maximum period of three
months) for the notification of the making of a transitional
election to apply the TOFA provisions to existing financial
arrangements in either of the following circumstances:

the taxpayer did not notify the Commissioner by the due date because of
circumstances beyond the control of the taxpayer (or taxpayer's agent) and
the taxpayer (or the taxpayer's agent) has taken reasonable steps to
mitigate the effects of those circumstances; or

the taxpayer did not notify the Commissioner by the due date because of an
honest mistake or an inadvertent omission by the taxpayer (or the
taxpayer's agent).

9. These amendments commence the day after Royal Assent and apply to
lodgment dates mentioned in paragraph 104(5)(b) of the TOFA Act.

Comparison of key features of new law and current law

Detailed explanation of new law

10. This Schedule inserts a new item 104A into Part 3 of Schedule 1 to
the TOFA Act. Where a taxpayer has made the transitional election
to apply the TOFA provisions to its existing financial arrangements
in accordance with subitem 104(2), but has failed to notify the
Commissioner of the election by the first lodgment date that occurs
on or after the start of their first TOFA applicable income year,
the new item gives the Commissioner a discretion to specify a later
notification date (that occurs no later than three months after the
first lodgment date) in limited circumstances. [Schedule 4, item
2]

11. Under the current law, the taxpayer must make and notify the
Commissioner of its transitional election on or before the first
lodgment date that occurs on or after the start of the first TOFA
applicable income year. Not satisfying these requirements renders
the election ineffective and therefore prevents the taxpayer from
applying the TOFA provisions to its existing financial
arrangements.

12. These amendments give the Commissioner a limited discretion to
extend the time for the notification of a transitional election
only; the taxpayer must still have made the transitional election
under subitem 104(2) of the TOFA Act by the first lodgment date
that occurs on or after the start of the taxpayer's first TOFA
applicable income year.

13. The discretion to be exercised by the Commissioner is intended to
allow a certain degree of administrative flexibility while not
compromising the integrity of the requirements.

14. The Commissioner can only extend the notification time by a maximum
period of three months.

15. The Commissioner may specify a later notification due date if he
(or she) is satisfied that he (or she) was not notified of the
transitional election by the required date due to an honest mistake
or an inadvertence by the taxpayer (or the taxpayer's agent).

1. : Honest mistake

David Co was required to apply the TOFA provisions to the income year
commencing 1 July 2010. David Co's first lodgment date after the start of
its first TOFA applicable income year is 17 January 2011 - the lodgment
date for David Co's 2009-10 income tax return. On 14 January 2011, David
Co made the transitional election under subitem 104(2) of the TOFA Act to
apply the TOFA provisions to all its financial arrangements, including
those financial arrangements that it started to have prior to 1 July 2010
and still held as at 1 July 2010. However, David Co did not notify the
Commissioner of the election until 19 January 2011.

Thus, the transitional election was ineffective because the requirement to
notify the Commissioner of the election by 17 January 2011 was not met.

David Co requests that the Commissioner exercise the discretion under item
104A of the TOFA Act to specify 19 January 2011 as the due date for the
notification of the making of the transitional election on the basis that
the failure to notify the election on time was due to its honest mistake.

David Co informs the Commissioner that the notification was late because
there was a communication error where one employee mistakenly thought that
another employee was notifying the Commissioner of the election, however
that other employee did not receive the instruction. The election was
notified to the Commissioner as soon as the first employee realised the
mistake.

Based on these facts, the Commissioner specifies a later notification due
date of 19 January 2011 on the basis that he (or she) is satisfied that the
notification delay was due to David Co's honest mistake.

2. : Inadvertence

Jonathan Co was incorporated 1 July 2005 and the first income year to which
Jonathan Co was required to apply the TOFA provisions commenced on 1 July
2010.

On 14 January 2011, Jonathan Co's tax agent signed the transitional
election form and attempted to notify the Commissioner of the election
using the ATO Tax Agent Portal. However the tax agent inadvertently
omitted to attach the transitional election form to the message. On 20
February 2011 the tax agent realised his error and resent a message using
the ATO Tax Agent Portal with the form attached. The Commissioner
therefore receives notification on 20 February 2011.

While Jonathan Co made the transitional election on 14 January 2011, it did
not notify the Commissioner of the election by its first lodgment date on
or after the start of its first TOFA applicable income year, which was 17
January 2011. The transitional election is therefore ineffective.

Jonathan Co requests that the Commissioner exercise the discretion under
item 104A of the TOFA Act to specify 20 February 2011 as the due date for
the notification of the making of the transitional election because of the
inadvertent omission of its agent.

Based on these facts, the Commissioner specifies a later notification due
date of 20 February 2011 on the basis that he (or she) is satisfied that
the delay in notifying the transitional election was due to Jonathan Co's
tax agent's inadvertence.

16. The Commissioner may also specify a later notification due date if
he (or she) is satisfied that the taxpayer did not notify the
Commissioner of the transitional election by the due date because
of circumstances beyond the control of the taxpayer (or taxpayer's
agent) and the taxpayer (or the taxpayer's agent) took all
reasonable steps to notify the Commissioner by the due date.

1. : Circumstances beyond the taxpayer's control

Russell Co was incorporated 1 July 2005 and the first income year to which
Russell Co was required to apply the TOFA provisions commenced on 1 July
2010.

On 12 January 2011, Russell Co's Public Officer completed and signed
Russell Co's transitional election form. However, later that day the
Public Officer's office building was evacuated and could not be re-occupied
until 19 January 2011. On returning to the office the Public Officer
immediately delivered the election form to the Commissioner.

Russell Co's first lodgment date on or after the start of its first TOFA
applicable income year was 17 January 2011, but because Russell Co only
notified the Commissioner of the making of the transitional election on
19 January 2011, the transitional election is ineffective.

Russell Co requests that the Commissioner exercise the discretion under
item 104A of the TOFA Act to specify 19 January 2011 as the due date for
the notification of the making of the transitional election because
circumstances outside of its control prevented it from notifying the
Commissioner of its election by its first lodgment date.

Based on these facts, the Commissioner specifies a later notification due
date of 19 January 2011 on the basis that he (or she) is satisfied that the
delay in notifying the transitional election was the result of
circumstances outside the taxpayer's control and that the taxpayer had
taken all reasonable steps to notify the Commissioner of the election.

Application and transitional provisions

17. These amendments commence the day after Royal Assent and apply in
relation to lodgment dates mentioned in paragraph 104(5)(b) of the
TOFA Act, whether the lodgment dates occur before, on, or after the
commencement of the item. [Schedule 4, item 4]

Consequential amendments

18. Item 1 of this Schedule inserts a note under subitem 104(5) to
direct the reader to the new item. [Schedule 4, item 1]

19. Item 3 ensures that the Commissioner's specified later notification
due date also applies in relation to Subdivision 775-F (of the ITAA
1997) arrangements under item 105 of the TOFA Act. [Schedule 4,
item 3]

Farm management deposits

Outline of chapter

1. Schedule 5 to this Bill amends Division 393 of the Income Tax
Assessment Act 1997 (ITAA 1997) to allow an owner of a farm
management deposit (FMD) affected by applicable natural disasters
to access their FMDs within 12 months of making a deposit while
retaining concessional tax treatment under the FMD scheme.

2. This Schedule also makes some minor changes to the administration
of the FMD scheme by amending Division 393 of the ITAA 1997,
section 398-5 in Schedule 1 to the Taxation Administration Act 1953
(TAA 1953) and section 69 of the Banking Act 1959.

3. All legislative references in this chapter are to the ITAA 1997
unless otherwise stated.

Context of amendments

Background

4. The FMD scheme, which replaced the income equalisation deposits
scheme, commenced on 2 January 1999. The FMD scheme's legislative
provisions are in Division 393 of the ITAA 1997.

5. These amendments are intended to:

afford the same tax treatment to FMD owners who qualify for concessional
tax treatment under the existing exceptional circumstances exception;

facilitate FMD owners' ability to negotiate competitive interest rates on
their FMD deposits;

enable more timely provision of information to the Agriculture Secretary to
allow for efficient administration of the FMD scheme; and

afford the owner of an FMD additional protection under the unclaimed moneys
provision which is not available to ordinary depositors.

6. The FMD scheme provides an incentive in the form of a tax
concession to individuals carrying on a primary production business
in Australia to encourage those individuals to carry over income
from years of good cash flow and to draw down on that income in
years of reduced cash flow. This enables the individual to defer
the income tax on their taxable primary production income from the
income year in which they make the deposit until the income year in
which the deposit is repaid, when they may face a lower marginal
tax rate.

7. Division 393 of the ITAA 1997 allows a deduction for an FMD made
if:

it is an individual carrying on a primary production business (including a
primary production business that the individual carries on as a partner in
a partnership or as a beneficiary of a trust);

the individual holds the deposit for at least 12 months; and

the individual meets some other tests.

This deduction for an FMD allows an individual to defer the income
tax on their taxable primary production income in the income year
in which they make the deposit.

8. An FMD owner is an individual who at the time of making the deposit
carries on a primary production business in Australia (including a
primary production business carried on as a partner in a
partnership or as a beneficiary of a trust).

Repayment of farm management deposits within the first 12 months

9. The deduction for an FMD is conditional on a deposit not being
repaid within 12 months (section 393-40), (the 12-month
requirement). This prevents FMD owners from inappropriately
deferring tax.

10. Ordinarily, any part of a deposit repaid within 12 months is taken
never to have been an FMD. The FMD owner is required to amend
their earlier tax return if a deduction was claimed for a deposit
that is later taken not to have been an FMD.

11. Repayments are not subject to the 12-month requirement in the
following circumstances:

the repayment is made in exceptional circumstances; or

the repayment is made in the case of death, bankruptcy or ceasing to carry
on a primary production business.

12. The exceptional circumstances exception allows FMD owners to access
their funds without foregoing concessional tax treatment (a tax
deduction), enabling them to recover and rebuild their farm
businesses more quickly and/or provide an income in times of severe
hardship.

13. Among other things, exceptional circumstances requires that at the
time the FMD is repaid, the FMD owner is eligible for an
'exceptional circumstances certificate' within the meaning of the
Farm Household Support Act 1992 that relates to a primary
production business of that FMD owner. Such a certificate must be
issued within three months after the end of the income year in
which the repayment is made.

14. Exceptional circumstances include situations of severe drought, but
specifically excludes those events covered by the Natural Disaster
Relief and Recovery Arrangements such as bushfires and floods.

Frequency of reporting

15. An FMD provider means an entity that:

is an authorised deposit-taking institution;

carries on the business of banking in Australia, provided deposits are
guaranteed by the Commonwealth, a state or a territory; or

carries on a business in Australia that includes taking money on deposit,
provided deposits are guaranteed by the Commonwealth, a state or a
territory.

16. FMD providers must provide certain information to the Agriculture
Secretary within 60 days after the end of each financial quarter
(section 398-5 in Schedule 1 to the TAA 1953).

17. The information to be provided to the Agriculture Secretary
includes the number of FMDs held at the end of each month in the
quarter, the number of depositors in respect of such deposits at
the end of each month in the quarter, and the sum of the balances
of such deposits at the end of each month in the quarter
(subsection 398-5(3) in Schedule 1 to the TAA 1953).

Farm management deposits with more than one FMD provider

18. An FMD owner cannot hold FMDs simultaneously with more than one FMD
provider (item 5 in the table in section 393-35). This requirement
was initially put in place to facilitate aspects of the
administration of the FMD scheme.

Requirements relating to unclaimed moneys

19. Authorised deposit-taking institutions are required to forward
certain unclaimed moneys to the Commonwealth (section 69 of the
Banking Act 1959). Generally, this applies to those moneys to the
credit of an account that has not been operated on either by
deposit or withdrawal for at least seven years.

20. FMD owners not operating on their FMD for seven years would
ordinarily be at risk of having their deposit transferred to the
Commonwealth through the operation of this unclaimed moneys
provision. Currently, this outcome is avoided by the Australian
Prudential Regulation Authority (APRA) issuing an exemption order
in relation to FMDs under the unclaimed moneys provision.

Summary of new law

Repayment within 12 months in the event of an applicable natural disaster

21. FMD owners affected by applicable natural disasters may access
their FMDs within 12 months of deposit, without losing their
deduction.

22. The deduction for the deposit is retained for early repayment of
FMDs if:

Commonwealth Government Natural Disaster Relief and Recovery Arrangements
apply as specified in the Income Tax (Farm Management Deposits) Regulations
1998 (FMD Regulations) to the FMD owner; and

all of the other circumstances specified in the FMD Regulations are
satisfied.

Frequency of reporting

23. FMD providers now have to meet existing reporting requirements
before the 11th day after the end of each calendar month.

FMDs with more than one FMD provider

24. FMD owners may now hold FMDs simultaneously with more than one FMD
provider.

Requirements relating to unclaimed moneys

25. FMD providers that are authorised deposit-taking institutions are
required to forward unclaimed moneys to the Commonwealth only where
the FMD provider is unable to contact the FMD owner after making
reasonable efforts to do so.

Comparison of key features of new law and current law

Detailed explanation of new law

Repayment within 12 months in the event of an applicable natural disaster

26. Despite the 12-month requirement, FMD owners affected by applicable
natural disasters may access their FMDs within 12 months of
deposit, without losing their deductions. (That is, such FMD
owners will not be required to amend their previous year's tax
return to remove the deduction claimed upon deposit.)

27. The deduction is retained despite early repayment of the whole or a
part of an FMD if:

Natural Disaster Relief and Recovery Arrangements made by or on behalf of
the Commonwealth apply as specified in the FMD Regulations to a primary
production business of the FMD owner; and

all of the other circumstances specified in the FMD Regulations are
satisfied.

[Schedule 5, Part 1, item 5, subsection 393-40(3A)]

28. The Natural Disaster Relief and Recovery Arrangements is a program
that provides financial assistance to disaster-affected community
members, primary producers, small businesses, and local and state
Governments to assist with the recovery from applicable natural
disasters. Such natural disasters include bushfires and floods
(but not drought, frost or heatwaves).

29. The details of this exception are to be set out in the
FMD Regulations to more easily accommodate any future changes to
the way in which the Natural Disaster Relief and Recovery
Arrangements are defined or operate. Currently, the FMD
Regulations require that the FMD owner receive recovery assistance
in the form of a Category C primary producer recovery grant.

30. This exception affords the same taxation treatment to FMD owners
who qualify for concessional tax treatment under the existing
exceptional circumstances exception, that is, those affected by
severe drought. It allows FMD owners to access their own funds
without foregoing concessional tax treatment, enabling them to
recover and rebuild their primary production businesses more
quickly and/or providing an income in times of severe hardship.

1. : FMD owner benefits from repayment within 12 months in the event
of an applicable natural disaster

Arthur is an individual partner in a partnership. The partnership carries
on a primary production business in Queensland, Australia.

On 30 June 2010, Arthur deposited $200,000 of his primary production income
from the partnership into an FMD. In Arthur's 2009-10 tax return, he
claimed the $200,000 deposit as a deduction.

In January 2011, the partnership was affected by the floods in Queensland.
The primary producer Category C measure under the Natural Disaster Relief
and Recovery Arrangements made by the Commonwealth applies to the area in
which the primary production business is located. Arthur is eligible to
receive a recovery grant for primary producers under the Category C of the
National Disaster Relief and Recovery Arrangements and makes an
application.

Following the receipt of the recovery grant, Arthur withdrew $200,000 from
his FMD on 1 April 2011 to assist in rebuilding the primary production
business. Arthur will have to declare the $200,000 income in his 2010-11
tax return. However he will not be required to amend his 2009-10 tax
return to remove the deduction claimed in that year.

31. Any later deposit that is made by, or on behalf of, the FMD owner
in the income year in which the repayment is made is not (and is
taken never to have been) an FMD. This mirrors the existing
provision in relation to early repayment as a result of exceptional
circumstances. It prevents an FMD owner from benefiting from
concessional tax treatment on an FMD that is repaid early and,
within the income year, obtaining an additional deduction on a new
FMD. [Schedule 5, Part 1, item 6, subsection 393-40(4)]

32. Minor amendments have been made to a number of provisions as a
result of the inclusion of this new provision. [Schedule 5, Part
1, item 1, section 393-1, item 2, paragraph 393-15(2)(d), item 3,
note 1 to subsection 393-40(1), item 4, note 1 to subsection 393-
40(2), and item 7, paragraph (d) of note 1 to subsection 393-55(2)]

Frequency of reporting

33. FMD providers must provide the required information about FMDs to
the Agriculture Secretary on a monthly basis before the 11th day
after the end of a calendar month. [Schedule 5, Part 2, item 11,
subsection 398-5(1) in Schedule 1 to the TAA 1953]

34. This amendment requires FMD providers to meet existing reporting
requirements more frequently. More timely provision of information
to the Agriculture Secretary will enable more efficient
administration of the FMD scheme.

35. Information is to be given if the FMD provider holds any FMDs at
the end of the calendar month and the required information pertains
to the information available at the end of the month (for example,
the number of FMDs held at the end of the month and the sum of the
balances of FMDs at the end of the month.). [Schedule 5, Part 2,
item 12, subsection 398-5(1) in Schedule 1 to the TAA 1953, items
13 to 15, paragraphs 398-5(3)(a) to (d) in Schedule 1 to the TAA
1953]

36. Information may be given on the tenth day of the following month.

XYZ Bank is an authorised deposit-taking institution and FMD provider that
holds FMDs on 31 August. On 10 September, XYZ Bank provides the required
information about the FMDs held on 31 August to the Agriculture Secretary.
XYZ Bank meets the requirement to provide the information before the 11th
day after the end of a calendar month.

37. Minor amendments have been made to a number of provisions to
reflect this change to the frequency of reporting. [Schedule 5,
Part 2, item 9, note to section 393-1, and item 10, heading to
subsection 398-5(1) in Schedule 1 to the TAA 1953]

Farm management deposits with more than one FMD provider

38. The prohibition on having FMDs with more than one FMD provider has
been removed. FMD owners may now have FMDs simultaneously with
more than one FMD provider. [Schedule 5, Part 3, item 17, item 5
in the table in section 393-35]

39. The prohibition was initially put in place to facilitate aspects of
the administration of the FMD scheme. It may have restricted
existing FMD owners' ability to negotiate competitive interest
rates on new deposits (although FMD owners remain free to transfer
all their FMDs to a competing institution if they are dissatisfied
with the interest rate they are obtaining).

40. As a consequence of this change, item 10 in the table in
section 393-35 has been amended to maintain a single overarching
$400,000 cap for all FMDs across all FMD providers.
Subsections 393-55(4) and (5) are also repealed as they refer to
the requirement in item 5 in the table in section 393-35 and, as
such, are no longer required. (Section 393-55 deals with FMDs
arising from FMDs with authorised deposit-taking institutions which
are subject to the financial claims scheme.) [Schedule 5, Part 3,
item 18, item 10 in the table in section 393-35, item 19,
subsections 393-55(4) and (5)]

Requirements relating to unclaimed moneys

41. FMD providers that are authorised deposit-taking institutions are
required to forward unclaimed moneys to the Commonwealth only if
the FMD provider is unable to contact the FMD owner after making
reasonable efforts to do so.

42. Section 69 of the Banking Act 1959 requires authorised deposit-
taking institutions to forward certain unclaimed moneys to the
Commonwealth. Generally, this applies to money to the credit of an
account that has not been operated on either by deposit or
withdrawal for at least seven years. Retirement savings accounts
are exempt from these provisions, in recognition of their long-term
nature, and unclaimed moneys in relation to first home saver
accounts are dealt with in the First Home Saver Accounts Act 2008.

43. This Schedule adds an additional exclusion to the Banking Act 1959
for FMDs in certain circumstances. FMDs are unclaimed moneys
where:

they are to the credit of an account with an authorised deposit-taking
institution;

no contributions have been made to, and no repayments have been made from
the FMD for a period of at least seven years; and

after the end of each seven year period, the authorised deposit-taking
institution has been unable to contact the FMD owner after making
reasonable efforts.

[Schedule 5, Part 4, item 21, subsection 69(1A) of the Banking Act 1959]

44. 'Reasonable efforts' would include trying to contact the FMD owner
at their last known address.

45. FMDs are often held for several years without being operated on,
which is consistent with the policy intent of the scheme as a risk-
management tool. Under the current law, FMD owners not operating
on their FMD for seven years would ordinarily be at risk of losing
their deposit through the operation of the unclaimed moneys
provision. However, in past years, this outcome has been avoided
by APRA issuing an exemption order in relation to FMDs under the
unclaimed moneys provision.

46. A minor amendment has been made to reflect this change to the
unclaimed moneys provision. [Schedule 5, Part 4, item 22,
subsection 69(2) of the Banking Act 1959]

Application and transitional provisions

47. The amendments made by Part 1 of this Schedule (Early repayments in
the event of applicable natural disasters) apply in relation to
repayments of FMDs made on or after 1 July 2010. The retrospective
application of this Part will benefit FMD owners by allowing them
to retain deductions claimed in the 2009-10 income year, despite
early repayment of FMDs as a result of hardship suffered during
applicable natural disasters in 2010-11 such as floods and
bushfires around Australia. [Schedule 5, Part 1, item 8]

48. The amendments made by Part 2 of this Schedule (Providers must
report monthly) apply in relation to the calendar months in the
2012-13 financial year and each later financial year. That is,
they apply from 1 July 2012. [Schedule 5, Part 2, item 16]

49. The amendments made by Part 3 of this Schedule (Owners may have
farm management deposits with more than one FMD provider) apply in
relation to agreements made before, on or after 1 July 2012.
[Schedule 5, Part 3, item 20]

50. The amendments made by Part 4 of this Schedule (Contacting owners
before forfeiting FMD deposits as unclaimed money) apply in
relation to statements to be delivered within three months after
31 December 2012 and within three months after the end of each
later calendar year. [Schedule 5, Part 4, item 23]

Consequential amendments

51. Consequential amendments are also made to the FMD Regulations.

Extend the temporary loss relief for merging superannuation funds by three
months

Outline of chapter

1. Schedule 6 to this Bill amends the Tax Laws Amendment (2009
Measures No. 6) Act 2010 to extend the end date of the temporary
loss relief for complying superannuation fund mergers by three
months - from 30 June 2011 to 30 September 2011, to provide
additional time for mergers to take place before the loss relief
expires.

Context of amendments

2. Capital gains tax (CGT) is the primary code for calculating gains
and losses of 'complying superannuation entities', which are
defined in section 995-1 of the Income Tax Assessment Act 1997
(ITAA 1997).

3. The transfer of assets from one superannuation fund to another
under a merger between the two funds will typically trigger CGT
event A1 (section 104-10 of the ITAA 1997) or may trigger CGT event
E2 (section 104-60 of the ITAA 1997), and the realisation of
capital gains or capital losses for the transferring fund.
Following this asset transfer, and the transfer of members'
accounts to the receiving fund, the transferring fund will
generally be wound up.

4. Net capital losses are extinguished on the ending of an entity. As
capital losses can be used to offset present and future capital
gains, they carry value broadly equal to the tax liability that
would otherwise be payable on the reduced capital gains if not for
the offsetting losses. This value is extinguished on the winding
up of the transferring superannuation fund following the asset and
member transfer.

5. The current temporary loss relief was introduced in response to the
severe economic and financial market conditions faced by
superannuation funds in late 2008. The loss relief has allowed
funds to transfer losses when they merge that would have otherwise
been extinguished when the merging fund was wound up. The period
of operation of the temporary loss relief was granted for CGT
events between 24 December 2008 and 30 June 2011.

6. The current loss relief is conditional on the requirement that all
the transfer events for an eligible merger and the completion time
for the losses choice, must happen in a single income year of the
transferring entity. This rule was included to avoid the
complexities arising from mergers occurring over more than one
income year, and to avoid the need for claw-back rules where the
loss relief was claimed in one year but where the merger does not
ultimately satisfy the eligibility requirements for the loss
relief, or does not proceed at all, in a later year.

7. The three-month extension responds to concerns expressed to the
Government that due to the complexity of fund mergers, existing
transactions may well be completed after 30 June 2011, meaning
superannuation funds would not qualify for the tax relief,
disadvantaging their members.

Summary of new law

8. This measure provides an extension to the period during which
superannuation funds may transfer assets and members in mergers and
continue to be eligible for the temporary loss relief. The period
is extended to cover transfer events under a merger that are
commenced on or after 1 July 2010 and completed on or before
30 September 2011.

Comparison of key features of new law and current law

Detailed explanation of new law

9. The application provisions for the temporary loss relief for
merging superannuation funds in the Tax Laws Amendment (2009
Measures No. 6) Act 2010 are amended to extend the period for
superannuation funds to complete mergers and continue to be
eligible to choose the loss relief. The extension is for three
months, to 30 September 2011. Specifically, the loss relief may be
obtained if the eligibility conditions of the temporary loss relief
are satisfied during the period starting on 1 July 2010 and ending
at the end of 30 September 2011 and all the transfer events occur
during the period starting on 1 July 2010 and ending on 30
September 2011. [Schedule 6, item 5, subitem 11(2) of Schedule 2
to the Tax Laws Amendment (2009 Measures No. 6) Act 2010]

10. The extension to 30 September 2011 is noted in the main temporary
loss relief provisions in Division 310 of the ITAA 1997. [Schedule
6, item 1, section 310-1 (note 1) of the ITAA 1997]

11. The application provision for Schedule 2 to the Tax Laws Amendment
(2009 Measures No. 6) Act 2010 is also amended to reflect the
insertion of the additional subitem. [Schedule 6, items 2 to 4,
item 11 of Schedule 2 to the Tax Laws Amendment (2009 Measures No.
6) Act 2010]

12. The current loss relief also includes a requirement that the
transfer events for the merger must all happen in the income year
for the transferring entity that includes the completion time for
the losses choice.

13. The three-month extension of the loss relief is provided for
transfer events in respect of mergers that are completed in the
period 1 July 2010 and 30 September 2011. The extension does not
cover mergers that commenced in earlier income years, which must be
completed on or before 30 June 2010 in order to be eligible for the
loss relief.

Treatment of losses transferred during the extended period

14. The three-month extension of the loss relief means that certain
transactions of eligible superannuation funds may occur after
30 June 2011. This extension applies only for the purpose of
determining eligibility for the loss relief.

15. Accordingly, the existing CGT rules will apply for the purposes of
determining how transferred losses and assets will be dealt with
for the continuing fund. In particular, where asset transfers
occur during the extended period, they will be taken into account
by the continuing entity in the income year of the transfer.

Bronze Super (the transferring entity) merges with Gold Super (the
continuing entity) on 30 June 2011. Bronze Super ceases to have any
members on 30 June 2011. This is the completion time of the merger as
defined by the loss relief provisions.

Most of Bronze Super's assets are transferred to Gold Super on 30 June
2011. However, a small number of the transferring entity's assets were
subject to legal impediments such that they cannot be transferred until
31 August 2011.

In the hands of Gold Super, the losses transferred before 1 July 2011 will
be available for Gold Super to utilise in determining its net capital gain
for the 2010-11 income year. Applying the existing CGT rules, capital
losses transferred on 31 August 2011 will be available for Gold Super in
calculating its net capital gain for the 2011-12 income year.

Application and transitional provisions

16. A transitional provision is included to treat a completion time for
a merger finishing during the period starting on 1 July 2010 and
ending on 30 September 2011 as happening in the 2010-11 income year
for the transferring entity. The provision also treats a transfer
event happening during the extended period as happening during the
2010-11 income year. These transitional provisions apply for the
purpose of determining eligibility for the loss relief only. As
noted in paragraph 6.15, for all other purposes transfer events
during the period 1 July 2011 and 30 September 2011 will occur in
the 2011-12 income year. [Schedule 6, item 6, Schedule 2 to the
Tax Laws Amendment (2009 Measures No. 6) Act 2010]

17. This transitional provision ensures that the three-month extension
of the loss relief is available for entities that commenced merger
transfer events on or after 1 July 2010 by treating the additional
three-month period as part of the 2010-11 income year for these
mergers.

18. The measure applies for transfer events in the period 1 July 2010
to 30 September 2011 for the purpose of determining eligibility for
the temporary loss relief. The measure has an element of
retrospectivity in that some of the mergers it applies to involve
some CGT events happening in the period 1 July 2011 to 30 June 2011
and some CGT events happening after 30 June 2011. However, the
measure benefits taxpayers affected by these and other mergers by
extending the period of the temporary loss relief to mergers that
would otherwise be completed too late to qualify for the loss
relief.

Green Super has been undertaking preparatory work to merge with Blue Super
in the first half of 2011 but is unable to undertake the transfer of any
members or assets to Blue Super until 15 August 2011.

Green Super begins transferring assets and members to Blue Super on 15
August 2011, with the final tranche of assets and members being transferred
on 20 September 2011. The completion time for the merger of Green Super
and Blue Super is 20 September 2011.

For the purposes of determining eligibility for the loss relief, this
completion time is taken to have occurred during the 2010-11 income year.
Also, the transfer of assets occurring between 15 August 2011 and 20
September 2011 are taken to have occurred in the 2010-11 income year for
the purpose of determining Green Super's eligibility for the loss relief.

Provided that the other requirements for loss relief are satisfied,
Green Super will be eligible for the loss relief as if the member and asset
transfers had occurred during the 2010-11 income year. However, it should
be noted that for general tax purposes the transfer of assets and losses
are taken to have happened in the 2011-12 income year.

Penalty notice validation

Outline of chapter

1. Schedule 7 to this Bill will ensure the ongoing validity of certain
director penalty notices, notwithstanding the New South Wales Court
of Appeal (NSWCA) decision in Soong v Deputy Commissioner of
Taxation [2011] NSWCA 26 (Soong).

Context of amendments

2. A director penalty notice is a notice issued by the Commissioner of
Taxation (Commissioner) to the director of a company which has
failed to send an amount of money it has withheld, being amounts of
pay as you go withholding, to the Commissioner.

3. Former Part VI of the Income Tax Assessment Act 1936 (ITAA 1936)
contained provisions which authorised the Commissioner to issue
director penalty notices to the directors of companies. These
provisions were effective until 30 June 2010, as former Part VI of
the ITAA 1936 was repealed and new director penalty notice
provisions were inserted into Part 4-15 of Schedule 1 to the
Taxation Administration Act 1953 (TAA 1953) with effect
from 1 July 2010.

4. Under former section 222AOE of the ITAA 1936, the Commissioner was
required in a director penalty notice to inform the relevant
director that they were personally liable to pay a penalty equal to
their company's unpaid amount. However, the director penalty
notice was also required to state that this penalty would be
remitted if, at the end of 14 days after the notice was given:

the liability had been discharged;

a payment agreement relating to the liability had been entered into;

the company was under administration; or

the company was being wound up.

5. If the director did not comply with one of these penalty remission
conditions by the end of 14 days after the director penalty notice
was given, the Commissioner would then be entitled to commence
recovery proceedings against them.

6. On 10 December 2007, a two judge majority of three judges of the
NSWCA in Deputy Commissioner of Taxation v Meredith [2007]
NSWCA 354 (Meredith) considered (the now former) section 222AOE,
and determined that a director penalty notice is considered to be
'given' to a director on the date it was sent by post. As such,
the director's 14-day notice period would commence from the date on
which the director penalty notice was posted by the Commissioner.

7. In reliance on Meredith, the Commissioner proceeded to issue
director penalty notices which explicitly stated that the director
had 14 days from the date of postage (which was displayed on the
director penalty notice) in which to act so as to have the penalty
remitted. The Commissioner continued this practice
until 30 June 2010, when former Part VI of the ITAA 1936 was
repealed with effect from 1 July 2010.

8. However, on 25 February 2011 a full bench of five judges of the
NSWCA in Soong unanimously overturned the earlier decision in
Meredith, and determined that a director penalty notice that was
issued under former section 222AOE of the ITAA 1936 is considered
to be 'given' to a director on the date the director penalty notice
was delivered, instead of the date on which the director penalty
notice was sent by post. As such, the director's 14-day notice
period commenced from the date on which the director penalty notice
was delivered.

9. The Commissioner sought special leave to appeal the Soong decision
in the High Court, however this was denied on 12 August 2011.

10. The effect of this decision by the High Court is that approximately
17,000 director penalty notices which were issued by the
Commissioner between 10 December 2007 and 30 June 2010 (inclusive)
did not advise the recipients of the correct period of time in
which they could act to have their penalty remitted. As such,
these director penalty notices may be invalid.

11. These amendments will ensure that the understanding and operation
of the law at the time these director penalty notices were issued
(in reliance on Meredith) is maintained. As such, the validity of
these director penalty notices will not be able to be questioned
merely because of the NSWCA's later construction (in Soong) of the
former director penalty notice provisions.

12. The validity of those director penalty notices issued by the
Commissioner on or after 1 July 2010 is not in doubt as a result of
the decision in Soong. This is because the new director penalty
notice provisions (specifically section 269-25 in Schedule 1 to the
TAA 1953) explicitly provide that a director penalty notice is to
be taken as 'given' either when the Commissioner leaves it with, or
posts it to, the director penalty notice recipient. Section 269-25
also excludes the operation of section 29 of the Acts
Interpretation Act 1901, so as to confirm that a director penalty
notice cannot be taken as 'given' only from the time at which it is
delivered.

Summary of new law

13. These amendments ensure that all director penalty notices issued by
the Commissioner between 10 December 2007 and 30 June 2010,
inclusive, will not be invalid because of the NSWCA decision in
Soong.

Comparison of key features of new law and current law

Detailed explanation of new law

Effect of the Soong decision

14. In overturning Meredith, the NSWCA's subsequent (and unanimous)
finding in Soong clarified that a director penalty notice issued
pursuant to former section 222AOE of the ITAA 1936 should have been
taken as 'given' at the time the director penalty notice was
delivered to the director. This meant that a director should have
had 14 days, from the date the director penalty notice was
delivered, to act to achieve penalty remission.

15. After the Commissioner was denied special leave to appeal the Soong
decision on 12 August 2011, the validity of all those director
penalty notices issued between 10 December 2007 (the date of the
Meredith judgment) and 30 June 2010 (the last day section 222AOE
had effect) could be brought into question. This is because these
director penalty notices did not advise the directors of the
correct period of time in which they could act to have their
penalty remitted.

Ensuring penalty notices are not made invalid

16. These amendments will ensure that the operation of the law, as
understood at the time of issuing these director penalty notices,
is maintained. As such, the validity of these director penalty
notices will not be able to be questioned merely because of the
NSWCA's later construction (in Soong) of the former director
penalty notice provisions.

17. To achieve this, any director penalty notice issued
between 10 December 2007 and 30 June 2010 (inclusive) will be
treated as having been 'given' at the time the Commissioner sent it
by pre-paid post. [Schedule 7, item 1]

On 1 June 2009 the Commissioner posted director penalty notices to both
Garry and Ruth, the two directors of Tootison Pty Ltd. Garry's director
penalty notice was delivered to his place of residence on 3 June 2009, and
he received it on 4 June 2009. However, Ruth's director penalty notice was
delivered to her place of residence and received by her on 5 June 2009. On
8 June 2009, Garry appointed an administrator to Tootison Pty Ltd. The
Commissioner acknowledged that Garry acted in sufficient time to achieve
remission of the penalty for which Garry and Ruth would otherwise have
remained personally liable.

The director penalty notices are to be treated as having been given to both
Garry and Ruth at the time of postage. Since Garry caused the company to
comply with a condition for penalty remission within 14 days of the
director penalty notice being posted, the remission of the penalty for both
directors cannot be called into question.

On 1 February 2010 the Commissioner posted a director penalty notice to
Erin, the sole director of Willowed Pty Ltd. The director penalty notice
was delivered to Erin's place of business on 4 February 2010, and she
received it on the same day. Erin made no effort to comply with the
director penalty notice. After the passage of several weeks, the
Commissioner contended that Erin did not act in time, and subsequently
initiated recovery proceedings against her for the penalty.

This director penalty notice is to be treated as having been given to Erin
at the time of postage. Since Erin did not satisfy a condition for penalty
remission within 14 days of the director penalty notice being posted,
neither the Commissioner's efforts to recover this money, nor the actual
collection of this penalty, can be called into question.

18. As a consequence, these amendments also ensure that penalty
remission is only available to those directors who complied with a
penalty remission condition within 14 days of the director penalty
notice having been sent by pre-paid post (and not within 14 days of
the director penalty notice having been delivered).

On 1 March 2010 the Commissioner posted a director penalty notice to Meg,
the sole director of Aphaele Pty Ltd. The director penalty notice was
delivered to Meg's place of residence on 3 March 2010, and she received it
on the same day. On 16 March 2010 Meg appointed an administrator to
Aphaele Pty Ltd. The Commissioner later contended that Meg did not act in
time, and subsequently initiated recovery proceedings against her for the
penalty.

This director penalty notice is to be treated as having been given to Meg
at the time of postage. Since Meg did not satisfy a condition for penalty
remission within 14 days of the director penalty notice being posted,
neither the Commissioner's efforts to recover this money, nor the actual
collection of this penalty, can be called into question.

It is irrelevant that Meg would have satisfied a condition for penalty
remission in time had the 14-day period commenced from when the director
penalty notice was delivered to her place of residence.

Application and transitional provisions

19. These amendments apply from 10 December 2007, the date on which the
NSWCA gave judgment in Meredith.

20. This application date is necessary to ensure all those director
penalty notices which were issued in reliance on Meredith, and
pursuant to (the now former) section 222AOE of the ITAA 1936,
cannot be regarded as being invalid because of the later NSWCA
decision in Soong.

21. These amendments affect all director penalty notice recipients who
were issued a director penalty notice between 10 December 2007
and 30 June 2010, inclusive.

22. Technically, these amendments will have an adverse impact on those
directors who would otherwise seek to challenge the validity of
their director penalty notices in light of the later Soong
construction.

23. Substantively though, no taxpayers will be adversely affected
because these amendments merely restore the precedential view on
the issue during this period (as enunciated in Meredith) - that is,
that a director had 14 days from the date the director penalty
notice was sent by post in which to act to achieve penalty
remission.

24. However, these amendments do not affect the rights or liabilities
of parties to a proceeding which may be determined by a court on or
before the commencement of these amendments, insofar as these
rights or liabilities were affected by a director penalty notice
issued between 10 December 2007 and 30 June 2010, inclusive.

Public ancillary funds

Outline of chapter

1. Schedule 8 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997), the Taxation Administration Act 1953 (TAA 1953) and
the A New Tax System (Australian Business Number) Act 1999 to
improve the integrity of public ancillary funds. These amendments
among other things:

rename this type of ancillary fund as a public ancillary fund (their more
commonly used name);

give the Treasurer the power to make legislative guidelines about the
establishment and maintenance of public ancillary funds; and

Context of amendments

2. A public ancillary fund is one of two types of ancillary trust fund
that can qualify for deductible gift recipient (DGR) status and
income tax exempt status under the ITAA 1997. A public ancillary
fund collects tax deductible donations from the public which they
on-distribute to DGRs covered by item 1 in the table in subsection
30-15(1) of the ITAA 1997 that they consider to be for worthwhile
causes.

3. The other type of ancillary fund is a private ancillary fund, which
allows businesses, families and individuals to establish and donate
to a charitable trust of their own, without the need to seek
contributions from the public, for the purposes of disbursing funds
to a range of other DGRs.

4. A public ancillary fund is distinct from a private ancillary fund
in that it must invite the public to contribute to the fund. These
funds are commonly used for community and fund raising appeals.
These funds have been in existence for some time.

5. Public ancillary funds are required to meet the DGR conditions in
the income tax law (item 2 in the table in subsection 30-15(2) of
the ITAA 1997) and also comply with the public fund requirements as
described in Australian Taxation Office (ATO) Taxation Ruling
TR 95/27.

6. TR 95/27 sets out the rules for public funds and ensures a
reasonable standard of governance as these rules are intended to
ensure that moneys and property donated to the fund are applied for
the purpose for which the fund was established.

7. A fund is a public ancillary fund where: it is the intention of
the promoters or founders that the public will be invited to
contribute to the fund; the public, or a significant part of it,
does in fact contribute to the fund; and the public participates in
the administration of the fund (see Bray v FC of T 78 ATC 4179
(1978) 8 ATR 569). These requirements are intended to ensure that
moneys and property donated to the fund, and which attract a
taxation concession, are used for the purpose for which the fund
has been granted DGR status.

8. A public ancillary fund currently requires endorsement by the
Commissioner to be a DGR and to receive tax deductible donations.
To be eligible for endorsement, the fund must have (under item 2 in
the table in subsection 30-15(2) of the ITAA 1997) the following
characteristics:

the fund is a public fund;

it is established and maintained under a will or instrument of trust;

it is allowed, by the terms of the will or instrument of trust, to invest
gift money only in ways that an Australian law allows trustees to invest
trust money; and

it is established and maintained solely for:

- the purpose of providing money, property or benefits to
DGRs; or

- the establishment of DGRs.

9. A public ancillary fund must be exclusively for these purposes. It
must not carry on any other activities and must not distribute to
other ancillary funds. It is like a conduit or temporary
repository for channelling gifts to other DGRs.

10. From 1 October 2009, changes were made to improve the integrity of
private ancillary funds. To provide similar treatment for public
ancillary funds, the Government announced in the 2010-11 Budget,
similar changes to improve the integrity of public ancillary funds.
The changes are:

providing the Treasurer with the power to make legislative guidelines about
the establishment and maintenance of public ancillary funds; and

providing the Commissioner with greater regulatory powers in respect of
trustees for breaches of the guidelines including the ability to impose
administrative penalties.

11. The amendments in the exposure draft implement the Government's
Budget announcement to give the Treasurer the power to make
legislative guidelines and to give the ATO greater regulatory
powers.

12. The guidelines will be implemented by way of a legislative
instrument and will be the subject of further consultation.

13. The proposed changes for public ancillary funds are similar to
those for private ancillary funds but take into account the
differences between the two types of funds.

Consultation

14. The Government released a discussion paper in November 2010 seeking
public input into the implementation of the new integrity
arrangements. Forty-six submissions were received in response to
the paper.

15. Many respondents to the discussion paper were encouraged by the
Government's interest in the philanthropic sector, and in giving
the ATO greater regulatory powers. However, the majority of
respondents also cautioned against applying a minimum distribution
rate for public ancillary funds to a point where these funds are
unable to exist in perpetuity. These matters will be considered by
the Government along with other matters before the new guidelines
are finalised.

16. An exposure draft of Schedule 9 to this Bill was released on
14 July 2011. Eight submissions were received. There was general
support for the changes proposed in the exposure draft. However,
some refinements have been made to allow additional time to
transition to the new requirements.

Summary of new law

17. These amendments rename public ancillary funds in the income tax
law and thus ensure that public ancillary funds still require the
endorsement of the Commissioner.

18. The amendments give the Treasurer the power to make guidelines
about the establishment and maintenance of public ancillary funds.
Those guidelines are enforced through the imposition of
administrative penalties.

19. The Commissioner will also have the power to suspend or remove
trustees of public ancillary funds that breach the guidelines or
other relevant Australian laws. The Commissioner's decisions can
be reviewed by the Administrative Appeals Tribunal and the Federal
Court of Australia.

20. It is necessary to require that all of the trustees of public
ancillary funds are corporate trustees. This ensures there is an
increased range of regulatory powers available to protect the
charitable funds of public ancillary funds. This requirement will
not apply where the trustee is the Public Trustee of a state or
territory as these trustees are subject to an appropriate level of
supervision under state and territory legislation and by Auditor-
Generals in their respective jurisdictions. In addition, not all
states and territories have created their Public Trustees as
constitutional corporations. It will also not apply where a
trustee is prescribed by regulation.

21. These amendments also ensure that the Australian Business Register
(ABR) can identify public ancillary funds.

Comparison of key features of new law and current law

Detailed explanation of new law

Endorsement as a DGR

22. The Commissioner will maintain the role for considering whether a
public ancillary fund is entitled to be endorsed as a DGR.

23. To ensure this outcome, amendments are made to item 2 in the table
in subsection 30-15(2) to replace references to 'public fund' and
'private ancillary fund' to 'ancillary fund' to cover both private
and public ancillary funds. [Schedule 8, items 2, 3, and 7, item 2
in the table in subsection 30-15(2) of the ITAA 1997; definition of
'ancillary fund' in subsection 995-1(1) of the ITAA 1997]

24. A definition of 'public ancillary fund' is included in the
ITAA 1997 and in the TAA 1953. A trust fund that meets the
definition will be entitled to be endorsed as a DGR (subject to the
fund meeting all other requirements that apply to public ancillary
funds seeking endorsement as a DGR). [Schedule 8, items 8 and 16,
definition of 'public ancillary fund' in subsection 995-1(1) of the
ITAA 1997 and section 426-102 in Schedule 1 to the TAA 1953]

25. The Commissioner will be responsible for considering whether a
trust fund meets the definition of a 'public ancillary fund' and
whether that fund is then entitled to be endorsed as a DGR.
[Schedule 8, items 4 and 5, subsection 30-125(1) of the ITAA 1997]

26. This Schedule makes amendments to Subdivision 426-D in Schedule 1
to the TAA 1953 which deals with private ancillary funds to ensure
that it applies to both private and public ancillary funds
('ancillary funds'). [Schedule 8, items 11 to 15]

27. A trust is a public ancillary fund if:

all the trustees of the trust are constitutional corporations; and

all the trustees have agreed to comply with the guidelines made by the
Treasurer.

[Schedule 8, item 16, section 426-102 in Schedule 1 to the TAA 1953]

28. Public ancillary funds were not previously required to have
corporate trustees. However, for constitutional reasons, it has
been necessary to impose this new requirement on public ancillary
funds in order to provide the Commissioner with additional
regulatory powers.

29. An exception from this requirement will be provided for:

Public Trustees of the states and territories. The requirement to be a
corporate trustee should not prevent the Public Trustee of each of the
states and territories from being trustees of public ancillary funds as
they are subject to an appropriate level of prudential supervision under
state and territory legislation and oversight by Auditors-General. In
addition, not all states and territories have created their Public Trustees
as constitutional corporations; and

trustees prescribed by regulation. This mechanism will permit the granting
of additional time for certain new public ancillary funds to comply with
the requirement to have a trustee that is a constitutional corporation.
The need for a limited exemption mechanism was identified during
consultation and is intended to be exercised in limited number of cases
where a need for additional transitional relief can be demonstrated.

[Schedule 8, item 16, subparagraph 426-102(1)(a)(ii) in Schedule 1 to the
TAA 1953]

30. A constitutional corporation is a corporation covered by paragraph
51(xx) of the Constitution. A corporation established and operated
solely as a trustee of a public ancillary fund would be considered
a constitutional corporation. Professional trustee corporations
would also be considered constitutional corporations.

31. Imposing a requirement for public ancillary funds to have a
corporate trustee also ensures that directors meet a minimum
standard of behaviour. The Corporations Act 2001 details the
circumstances under which an individual will automatically be
disqualified from managing corporations. These include where the
person has:

a conviction on indictment of an offence in relation to decisions that
affect the business of a corporation or its financial standing;

an offence involving a contravention of the Corporations Act 2001
punishable by imprisonment for 12 months or more;

an offence involving dishonesty punishable by more than three months
imprisonment;

a conviction for an offence against the law of a foreign country punishable
by more than 12 months imprisonment; or

become an undischarged bankrupt.

32. In order for a trust fund to become a public ancillary fund, the
trustee(s) will need to agree to be bound by the public ancillary
fund guidelines. The trustee(s) will indicate their agreement to
be bound in a form approved by the Commissioner. [Schedule 8, item
16, section 426-102 in Schedule 1 to the TAA 1953]

33. If the Commissioner refuses to endorse a prospective public
ancillary fund as a DGR, the fund can request a review of the
decision by the Commissioner, the Administrative Appeals Tribunal
or appeal the decision to a Court under section 426-35 in Schedule
1 to the TAA 1953.

Public ancillary fund guidelines

34. The Treasurer will be able to make binding guidelines about the
establishment and maintenance of a public ancillary fund.
[Schedule 8, items 9 and 16, definition of 'public ancillary fund
guidelines' in subsection 995-1(1) of the ITAA 1997 and section 426-
103 in Schedule 1 to the TAA 1953]

35. Compliance with guidelines is a requirement for a public ancillary
fund's continued endorsement as a DGR. [Schedule 8, items 4 and 5,
subsection 30-125(1) of the ITAA 1997]

36. Similar to the Private Ancillary Fund Guidelines 2009, the
guidelines will be a legislative instrument and are therefore
subject to disallowance by either House of Parliament.

37. The guidelines may specify requirements about purpose, structure
and governing rules of a public ancillary fund. The guidelines may
also specify matters about the ongoing governance and permitted and
prohibited activities of the fund.

38. It is envisaged that the guidelines will specify a similar range of
matters as the Private Ancillary Fund Guidelines 2009. These
matters include the role and purpose of public ancillary funds; the
class of entities that the fund may donate to; that the fund be not-
for-profit in character; the individuals that may be directors of
the fund's trustees; the minimum distribution requirements of the
fund; the permitted investment strategies of the fund; and any
ongoing audit requirements.

39. The guidelines will ensure that public ancillary funds have
appropriate governance arrangements, are properly accountable and
act in a manner consistent with an entity holding philanthropic
funds for a broad public benefit.

Income tax returns

40. Commencing from the 2011-12 income year, public ancillary funds
will be required to lodge an annual income tax return. The income
tax return for public ancillary funds will be similar to the
current annual information statement that is required to be lodged
by private ancillary funds.

41. Public ancillary funds that fail to lodge their income tax return
by the relevant due date will be subject to the general penalty
regime that applies to all taxpayers who do not provide their
income tax return to the Commissioner by the due date.

42. Similar to private ancillary funds, it is anticipated that
information provided on the income tax returns will be used by the
ATO to provide publicly available annual statistics on these funds.
It is expected that the statistics will provide information on the
number of public ancillary funds, donations and assets and a
breakdown of public ancillary fund donations by DGR category.

43. Similar to private ancillary funds, it is anticipated that
information provided in these returns will also be used by Treasury
to provide additional information in its annual taxation
expenditure statement publication.

Administrative penalties

44. Similar to private ancillary funds, administrative penalties will
apply to trustees and the directors of trustees that hold a public
ancillary fund out as being endorsed; entitled to be endorsed; or
entitled to remain endorsed, as a DGR and where they fail to comply
with the guidelines.

45. The administrative penalties will apply to public ancillary funds
in the same way as they apply to private ancillary funds. This
outcome is achieved by amending the references in section 426-120
in Schedule 1 to the TAA 1953 so that it applies to both private
and public ancillary funds. [Schedule 8, items 18 to 22]

46. These amendments will have the following affect:

the amount of the penalties will be determined by the guidelines;

trustees of a public ancillary fund are jointly and severally liable to any
administrative penalty;

the penalty can only be imposed on directors where any of the penalty
cannot reasonably be recovered from a trustee;

a director that did not take part in the management of the trustee at the
time the public ancillary fund breached its obligations may in certain
circumstances avoid an administrative penalty:

- the circumstances that the director must demonstrate are
that the director was not aware of the breach and it
would not have been reasonable to expect them to have
been aware of the breach; or the director took all
reasonable steps to ensure that the breach did not
occur; or there were no such steps that the director
could have taken;

an administrative penalty must not be reimbursed from the fund; and

the Corporations Act 2001 cannot apply to provide relief to a director from
the administrative penalties.

47. The Public Trustee of each state or territory can be the trustee of
a public ancillary fund. An exception is provided so that, in
addition to directors of trustees that are licensed trustee
companies, directors and statutory office holders of Public
Trustees will not be personally liable to administrative penalties.
Public Trustees have an appropriate level of prudential
supervision and regulation to cover their liabilities so similar to
licenced trustee companies, there is no need to extend the
administrative penalty regime to their directors. Public Trustees
are those trustees that are governed by the relevant state and
territory Public Trustee legislation. [Schedule 8, item 20,
subparagraph 426-120(2)(b)(ii)]

48. The machinery provisions on administrative penalties in Division
298 in Schedule 1 to the TAA 1953 will also apply to the new
administrative penalty regime for public ancillary funds. Under
these rules, the Commissioner has the discretion to remit all or a
part of the penalty under the normal machinery provisions for
penalties.

Suspension or removal of trustees

49. As for private ancillary funds, the Commissioner will also be given
the power to remove or suspend a trustee of a public ancillary fund
that breaches the guidelines or any other Australian law. The
references in section 425-125 in Schedule 1 to the TAA 1953 are
amended so that the rules for suspending or removing a trustee,
apply to both private and public ancillary funds. [Schedule 8,
items 23 to 34]

50. However, the Commissioner will not be provided with the power to
suspend or remove Public Trustees of each state and territory as
this is a matter for the states and territories. [Schedule 8, item
16, subsection 426-102(3) in Schedule 1 to the TAA 1953]

51. If the Commissioner suspends a trustee, the amendments provide
that:

the suspension will be for a period that the Commissioner determines by
reference to the circumstances and it is subject to modification; and

the Commissioner must provide the suspended trustee a written notice
advising them of the decision, explaining the reasons why the decision was
taken and in the cases of suspension, setting out the period of suspension:

- the trustee may seek a review of the decision by the
Administrative Appeals Tribunal or a court following the
process outlined in Part IVC of the TAA 1953 (taxation
objections, reviews and appeals).

52. If a trustee is suspended or removed, the amendments provide that:

the Commissioner must appoint an acting trustee to undertake the duties of
trustee until the suspension period has ended or a replacement trustee is
appointed (as the case may be):

- an acting trustee may be an individual, body corporate
or a government agency or the Commissioner. The acting
trustee must have agreed to comply with the public
ancillary fund guidelines. The Commissioner cannot
appoint an acting trustee who is not a constitutional
corporation for a period exceeding six months;

- the Commissioner may determine the terms and conditions
upon which an acting trustee is appointed. The terms
and conditions determined by the Commissioner are valid
despite any limitation in an Australian law or the
governing rules of the public ancillary fund;

- the Commissioner may give directions to an acting
trustee to do or not to do certain things. The acting
trustee commits an offence if they contravene a
direction;

- the Commissioner may terminate the appointment of an
acting trustee at any time. If the Commissioner were to
do so, he or she would be required to appoint a new
acting trustee; and

- an acting trustee may resign as acting trustee.
However, the acting trustee must do so in writing given
to the Commissioner. The resignation is not effective
until seven days after the Commissioner receives the
written resignation;

the Commissioner must make an order transferring the property of the public
ancillary fund from the former or suspended trustee to the acting trustee:

- the order has the legal effect of immediately
transferring that property subject to certain
limitations. The property covered by the order is both
legal and equitable property;

the Commissioner must also make a subsequent order transferring the
property when the appointment of an acting trustee ends. The subsequent
property transfer order may be to a new acting trustee, to the previously
suspended trustee or to a newly appointed trustee as appropriate:

- the Commissioner's order to transfer property does not
immediately transfer property if the property is of a
kind whose transfer is registrable under an Australian
law. Instead, the property is transferred only after
the registration process has been completed; and

a former trustee is required to comply with a number of obligations (for
which they are strictly liable and which are an offence if not complied
with). These obligations are:

- providing the acting or new trustee with all books
relating to the fund's affairs that are in their
custody, possession or control;

- providing notice to the acting or new trustee
identifying all the property of the fund (as much as
they possibly can);

- providing notice to the acting or new trustee explaining
how that property was accounted for; and

- assisting with the transfer of the property of the
public ancillary fund.

53. In addition, these amendments ensure that former trustees of public
ancillary funds are strictly liable for their actions relating to
books, identification of property and transfer of property (that
is, liable regardless of fault). This liability has been
established to compel former trustees which have already been
removed on the grounds of misconduct to deal fairly with the
trust's property during the handover period.

54. As for private ancillary funds, it is expected that the
Commissioner would only take action to remove or suspend a trustee
in situations that involve serious non-compliance by a public
ancillary fund. Whether the Commissioner decides to merely suspend
a trustee or to remove them permanently will depend upon the nature
of a breach, the circumstances of the trustee and the history of
compliance.

Portability between funds

55. Portability of funds between ancillary fund types will be permitted
in limited circumstances to provide additional flexibility in the
management of funds. The circumstances and eligibility criteria
will be set out in the guidelines.

56. For example, this rule will allow public ancillary funds to
transfer sub-funds to private ancillary funds and for transfers of
sub-funds between public ancillary funds. This rule allows donors
the flexibility to choose an ancillary fund model which best suits
their circumstances and which offers the lowest level of compliance
and administrative costs. [Schedule 8, item 35, section 426-170 in
Schedule 1 to the TAA 1953]

Change to the Australian Business Register

57. For each public ancillary fund, the ABR must include a statement on
the ABR indicating that the fund is a public ancillary fund.
[Schedule 8, items 1 and 16, paragraph 26(3)(ga) of the A New Tax
System (Australian Business Number) Act 1999 and section 426-104 in
Schedule 1 to the TAA 1953]

58. The ABR currently distinguishes between DGRs in items 1, 2 and 4 in
the table in subsection 30-15(2) of the ITAA 1997. However, the
ABR does not distinguish between public and private ancillary
funds.

59. This additional requirement will clearly identify where a fund is a
public ancillary fund. This will provide clarity to the ABR and
assist donors in determining which ancillary funds are public
ancillary funds as opposed to private ancillary funds.

Application and transitional provisions

60. These amendments generally apply from 1 January 2012. [Clause 2]

Transitional rules for existing public ancillary funds

61. Existing public ancillary funds will be taken to be endorsed by the
Commissioner as DGRs under the reformed category on 1 January 2012.
All existing public ancillary funds will also be taken to have
agreed to comply with the guidelines as from 1 January 2012. This
mechanism will ensure a smooth transition of existing public
ancillary funds into the new regime. [Schedule 8, items 38 and 40]

Public ancillary funds with non-corporate trustees

62. Public ancillary funds (that were public ancillary funds before
1 January 2012) will not be required to replace their non-corporate
trustees with corporate trustees. Mandating the replacement of
trustees will create unnecessary compliance costs for existing
trustees. [Schedule 8, item 39]

63. Those public ancillary funds that continue to have non-corporate
trustees will not be subject to the Commissioner's new powers to
suspend or remove trustees. It is for constitutional reasons that
the new powers cannot be extended to these existing public
ancillary funds.

64. In cases of serious non-compliance by public ancillary funds with
non-corporate trustees, the Commissioner has the ability to refer
the matter to the relevant state or territory Attorney-General for
action.

65. If at any point after 1 January 2012, a public ancillary fund with
non-corporate trustees replaces all its non-corporate trustees with
corporate trustees, the public ancillary fund will become subject
to the Commissioner's new powers.

66. Under the existing integrity arrangements, public ancillary funds
and other ancillary funds are prevented from distributing to one
another. However, in order to assist public ancillary funds move
fully into the new regime, public ancillary funds with non-
corporate trustees will be permitted to transfer all of their
property to another public ancillary fund with trustees that have
only corporate trustees. This transitional arrangement will give
public ancillary funds the option of restructuring their trustee
arrangements by establishing a new public ancillary fund to hold
the assets of the old fund. [Schedule 8, item 41]

67. Transitional public ancillary funds that wish to restructure
(either by establishing a new public ancillary fund, or replacing
their existing trustees) should make themselves familiar with the
state and territory laws on replacing trustees or transferring
assets between trusts.

Progressive changes to the ABR

68. The Australian Business Registrar will be given until 1 July 2012
to update the ABR with the additional public ancillary fund
category. The changes are commencing at a later time to give the
Registrar sufficient time to make the necessary systems changes in
support of the new requirements. [Schedule 8, item 36]

Consequential amendments

69. An amendment is required to paragraph 31-10(1)(b) of the ITAA 1997
to update references from 'public fund' to 'public ancillary fund'.
[Schedule 8, item 6, paragraph 31-10(1)(b) of the ITAA 1997]

Miscellaneous amendments

70. This Schedule repeals the definitions of private ancillary fund in
subsection 6(1) of the ITAA 1936 and subsection 2(1) of the TAA
1953 as these definitions are now redundant. [Schedule 8, items 42
and 43]

71. This Schedule also replaces a reference to 'private ancillary fund'
in subsection 355-65(8) in Schedule 1 to the TAA 1953 with
'ancillary fund'. This provision relates to the disclosure of
information to the Attorney-General of a state or territory in
relation to the non-compliance of a private or public ancillary
fund. [Schedule 8, item 10]

Film tax offsets

Outline of chapter

1. Schedule 9 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to make a number of changes to the film tax offsets,
with the aim of delivering support more efficiently and effectively
to companies benefiting from these offsets.

Context of amendments

2. In the 2011-12 Budget, the Government announced a package of
measures to reform and strengthen the Australian screen production
industry. The package is designed to support the industry at a
time when it is striving to meet the challenges of a changing
global environment.

3. These amendments are a result of the Review of the Australian
Independent Screen Production Sector (Review), conducted by the
Office for the Arts in 2010. An extensive range of domestic and
international stakeholders were consulted as part of the Review.

4. Companies may be entitled to one of three refundable tax offsets in
relation to 'qualifying Australian production expenditure' they
incurred in making films.

5. The relevant provisions are contained in Division 376 of the ITAA
1997.

6. The three tax offsets are:

the producer offset, which is available for Australian expenditure incurred
in making an Australian film;

the location offset, which is available for Australian expenditure incurred
in making a film; and

the post, digital and visual effects offset, which is available for
Australian expenditure incurred on post, digital and visual effects
production for a film.

7. The producer offset was established in 2007 by Division 376 to
provide support for the domestic film and television industry. The
producer offset delivers support for Australian film and television
productions through the tax system.

8. This Schedule makes a number of amendments to the producer offset
in order to more efficiently and effectively deliver government
support to Australian screen producers.

9. The Government supports offshore production through two tax
offsets.

The location offset is designed to encourage large-scale film and
television production to Australia and provide greater economic, employment
and skill development opportunities.

The post, digital and visual effects offset is intended to provide further
incentive for offshore productions to contract Australia's post, digital
and visual houses.

10. The amendments in this Schedule also provide some enhancements to
the location and post, digital and visual effects offsets. This
includes allowing some additional expenditure to be claimed as
qualifying expenditure and an increase to the rate of the offsets.

11. Expenditure on a film is production expenditure where it satisfies
the general test of being incurred in making the film or being
attributable to the use of equipment or other facilities for, or
activities undertaken in, making the film (section 376-125).

12. Production expenditure is a general concept with a list of
specifically excluded expenditure items. However, some of these
excluded items may be given production expenditure status if they
are sufficiently connected to Australia to qualify as 'qualifying
Australian production expenditure'.

13. The amount of each of the three film tax offsets is expressed as a
percentage of a company's 'qualifying Australian production
expenditure'. 'Qualifying Australian production expenditure' is a
subset of a production company's overall 'production expenditure'.
The amount of 'qualifying Australian production expenditure' is
determined as part of the certification process for the film.

14. Qualifying Australian production expenditure is defined as
production expenditure on a film that is linked to the provision of
goods and services provided in Australia or the use of land or
goods located in Australia in making the film. Qualifying
Australian production expenditure has certain statutory inclusions
and exclusions in its meaning. Various inclusions and exclusions
apply generally (that is, for all of the tax offsets) and
individually (that is, differently for each tax offset)
(sections 376-145 to 376-180).

15. Division 376 sets out the minimum expenditure thresholds which
apply for the offsets and for different types of films. A
company's 'qualifying Australian production expenditure' on a film
must be at least as much as the relevant threshold for the film to
be eligible for a tax offset.

16. In determining an amount of expenditure for the purpose of applying
the film tax offsets, the expenditure is taken to include the goods
and services tax (GST).

Producer offset

17. The rate of the producer offset is 40 per cent of 'qualifying
Australian production expenditure' for feature films or 20 per cent
of 'qualifying Australian production expenditure' if the film is
not a feature film.

18. For the film authority to issue a company with a producer
offset certificate, it must be satisfied that the minimum
expenditure threshold for a feature film and single episode
program, other than a documentary, is $1 million (column 3 of items
1 and 2 in the table in subsection 376-65(6)). A 'per hour'
expenditure threshold of $800,000 also applies to single episode
programs other than documentaries.

19. There is no minimum total 'qualifying Australian production
expenditure' requirement for documentaries (column 3 of items 3, 6
and 8 in the table in subsection 376-65(6)).

20. Financing expenditure does not count as production expenditure
(item 1 in the table in section 376-135).

21. A film which is a series or a season of series benefits from
the producer offset for their first 65 episodes of content
(paragraphs 376-55(2)(b) and (c)).

22. In calculating an amount for all film tax offsets, a company's
'qualifying Australian production expenditure' is to be translated
to Australian currency at the average of the exchange rates
applicable during the period that 'qualifying Australian
production expenditure' is incurred on the film (item 9B in the
table in subsection 960-50(6)).

23. For the purposes of the producer offset, a 20 per cent cap limits
the amount that can be claimed as qualifying Australian production
expenditure on development expenditure and expenditure on
remuneration provided to the principal director, producers and
principal cast associated with the film (paragraph 376-170(4)(b)).
Expenditure incurred in relation to distributing the film is
excluded from the general test of production expenditure (paragraph
376-125(4)(c)).

24. Publicity and promotion expenditure, that is, marketing costs, are
generally excluded from production expenditure (item 5 in the table
in section 376-135).

25. Short form animated dramas are eligible for the producer offset.
If the film is a short form animated drama, it must be a drama
program comprising one or more episodes which are produced wholly
or principally for exhibition together, for a national market or
national markets under a single title (subsection 376-65(4)).

Location offset

26. The rate of the location offset is 15 per cent of qualifying
Australian production expenditure (section 376-15).

27. Financing expenditure does not count as production expenditure
(item 1 in the table in section 376-135).

Post, digital and visual effects offset

28. The rate of the post, digital and visual effect offset is 15 per
cent of qualifying Australian production expenditure (section 376-
40).

29. Financing expenditure does not count as production expenditure
(item 1 in the table in section 376-135).

Summary of new law

Producer offset

30. A company can be eligible for the producer offset for a feature
film and single episode program, other than a documentary, if it
incurs at least $500,000 total qualifying Australian production
expenditure. There is no longer a 'per hour' threshold for single
episode programs other than documentaries.

31. A company can be eligible for the producer offset for a documentary
if it incurs at least $500,000 total qualifying Australian
production expenditure and at least $250,000 per hour.

32. A company in receipt of financial assistance from the film
authority's Producer Equity Program for the making of a documentary
film is ineligible for the producer offset for that film. If a
company re-edits a film that has been granted such assistance, the
re-edited version will be considered the same film and not be
eligible for the producer offset.

33. For all film tax offsets, certain financing expenditure incurred in
Australia can be claimed as qualifying Australian production
expenditure in relation to the financing of the film. This
includes any of the following:

insurance related to making the film;

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film; and/or

fees for incorporation and liquidation of the company that makes or is
responsible for making the film.

34. For the producer offset only, additional financing expenditure
incurred in Australia can be claimed as qualifying Australian
production expenditure in relation to the financing of the film.
This includes:

fees in obtaining an independent opinion of a film's qualifying Australian
production expenditure.

35. For the producer offset only, expenditure incurred in Australia in
relation to offsetting carbon emissions created during making the
film can be claimed as qualifying Australian production
expenditure.

36. A film which is a series or a season of a series will benefit from
the producer offset for their first 65 commercial hours of content.

37. For the producer offset only, films with qualifying Australian
production expenditure of less than $15 million are able to
translate expenditure incurred in a foreign currency at the
exchange rate applicable at the time when expenditure is incurred
on the film.

38. For the producer offset only, the 20 per cent cap which limits the
amount that can be claimed as qualifying Australian production
expenditure on development expenditure and expenditure on
remuneration provided to the principal director, producers and
principal cast associated with a documentary is removed.

39. For the producer offset only, certain expenditure incurred in
relation to distributing the film can be counted as qualifying
Australian production expenditure. This will include any of the
following expenditure in delivering or distributing the film:

acquiring Australian classification certificates;

sound mix mastering licenses;

re-versioning the film in Australia;

freight services provided by a company in Australia for delivery of
contracted deliverables in relation to the film; and/or

storing the film in a film vault in Australia.

40. For the producer offset only, certain publicity and promotion
expenditure on publicist services provided in Australia,
promotional stills, trailers and press kits (with Australian-owned
copyright) that is incurred after the film's completion but prior
to the end of the income year in which production is complete can
be counted as qualifying Australian production expenditure.

41. Short-form animated documentaries will be eligible for the producer
offset.

42. In determining an amount of expenditure for the purpose of applying
the producer offset, the expenditure is taken to exclude the GST.

Location offset

43. A company benefits from an increase to the location offset from 15
per cent to 16.5 per cent.

44. For all film tax offsets, certain financing expenditure incurred in
Australia prior to the end of the income year in which the film is
complete can be claimed as qualifying Australian production
expenditure in relation to the financing of the film. This will
include any of the following:

insurance related to making the film;

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film; and/or

fees for incorporation and liquidation of the company that makes or is
responsible for making the film.

45. In determining an amount of expenditure for the purpose of applying
the location offset, the expenditure is taken to exclude the GST.

Post, digital and visual effects offset

46. A company benefits from an increase to the post, digital and visual
effects offset from 15 per cent to 30 per cent.

47. For all film tax offsets, certain financing expenditure incurred in
Australia prior to the end of the income year in which the post,
digital and visual effects work is complete can be claimed as
qualifying Australian production expenditure in relation to the
financing of the film. This will include any of the following:

insurance related to making the film;

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film; and/or

fees for incorporation and liquidation of the company that makes or is
responsible for making the film.

48. In determining an amount of expenditure for the purpose of applying
the post, digital and visual offset, the expenditure is taken to
include the GST. Comparison of key features of new law and current
law

Detailed explanation of new law

Changes to producer offset

Minimum expenditure threshold

49. For Screen Australia to issue a company with a producer offset
certificate, it must be satisfied that the film meets certain
minimum expenditure requirements. The minimum expenditure
thresholds differ depending on the format of the project. The
minimum expenditure threshold for the producer offset for a feature
film and single episode program, other than a documentary, is
reduced from $1 million of qualifying Australian production
expenditure to $500,000. The 'per hour' threshold for single
episode programs (other than documentaries) no longer applies.
[Schedule 9, items 12 to 14, subsection 376-65(6)]

50. A new minimum expenditure threshold of $500,000 for a documentary
is introduced. The minimum qualifying Australian production
expenditure to be spent per hour of the film will remain at
$250,000. [Schedule 9, items 15, 17 and 18, subsection 376-65(6)]

Acme Film is a company based in Australia.

From December 2011 to June 2012, Acme Film incurs $800,000 of qualifying
Australian production expenditure in making a feature film.

Because Acme Film's qualifying Australian production expenditure on this
film is at least $500,000, Acme Film meets the expenditure threshold for
the producer offset for its work in making the film.

If the minimum threshold had instead remained at $1 million of qualifying
Australian production expenditure, Acme Film would not have met the
expenditure threshold for the producer offset.

Marina Documentary is a company based in Australia.

In January 2012, Marina Documentary incurs $300,000 of qualifying
Australian production expenditure in making a single episode documentary
about Australian cruise ships.

Because Marina Documentary's qualifying Australian production expenditure
on this documentary is less than $500,000, Marina Documentary is not
eligible for the producer offset for its work.

If the threshold for a documentary had not been introduced, Marina
Documentary would have met that eligibility criterion for the producer
offset. This is because any amount of qualifying Australian production
expenditure in making a documentary would have been eligible for the
producer offset.

Ineligibility for the producer offset

51. Those documentaries that do not meet the new expenditure threshold
of $500,000 may be eligible for financial assistance under Screen
Australia's Producer Equity Program. A company in receipt of this
financial assistance is ineligible to apply for the producer offset
for the same film. [Schedule 9, item 7, paragraph 376-55(4)(g)]

Further to Example 9.2.

As noted in Example 9.2, Marina Documentary is not eligible for
the producer offset because its qualifying Australian production
expenditure on this documentary is less than $500,000.

Marina Documentary instead receives financial assistance under
Screen Australia's Producer Equity Program. This direct support
from Screen Australia reduces the administrative burden on small
production companies.

Because Marina Documentary is in receipt of this financial
assistance, Marina Documentary will not be eligible to apply for
the producer offset for this documentary. This is still the
case even if Marina Documentary eventually incurs qualifying
Australian production expenditure on this documentary of an
amount equal to or greater than $500,000.

Permitting certain financing expenditure

52. There is a general test for what constitutes production
expenditure. Production expenditure of a film is so much of a
company's expenditure as it incurs in, or in relation to, making
the film; or as is reasonably attributable to the use of equipment
or other facilities for making the film or to activities undertaken
in making the film. There are a number of specific exclusions that
are not eligible to be included as production expenditure.

53. Production expenditure for a film also includes some specific
expenditure that may not meet the general test of production
expenditure.

54. Qualifying Australian production expenditure for a film is the
production expenditure for the film to the extent to which it is
incurred for, or is reasonably attributable to:

goods and services that are provided in Australia;

the use of land located in Australia; or

the use of goods that are located in Australia at the time they are used in
making the film.

This broad test connects particular items of production expenditure
to Australia.

55. All qualifying Australian production expenditure is included in
production expenditure, even if it would not otherwise come within
the scope of production expenditure.

56. Expenditure incurred in relation to the financing of a film is not
production expenditure. This specifically includes interest, or
other returns, on amounts invested in the film and costs connected
with raising and servicing finance for the film.

57. For the producer offset, certain financing expenditure incurred in
Australia prior to the end of the income year in which the film is
complete can be claimed as qualifying Australian production
expenditure. [Schedule 9, item 20, section 376-135]

58. This will include any of the following:

insurance related to making the film [Schedule 9, item 22, subsection 376-
150(1)];

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film [Schedule 9,
item 22, subsection 376-150(1)];

fees for incorporation and liquidation of the company that makes or is
responsible for making the film [Schedule 9, item 22, subsection 376-
150(1)]; and/or

fees in obtaining an independent opinion of a film's qualifying Australian
production expenditure [Schedule 9, item 23, subsection 376-170(2)].

Ting Films is a special purpose vehicle company established in Australia to
carry out the making of a feature film.

In September 2011, costs are incurred in setting up the special purpose
vehicle company specifically to produce the film that is applying for the
film tax offset. The costs in establishing a special purpose vehicle
company is a one-off claim for the making of the particular film and cannot
be claimed as qualifying Australian production expenditure in context of
another film.

In November 2011, Ting Films incurs insurance expenditure that is related
to the making of a feature film. The types of insurance purchased by Ting
Films include film producer's indemnity; extra expense insurance; negative
film risk; and weather insurance. For these purposes insurance expenditure
is deemed to include completion guarantor fees.

In December 2011, Ting Films also incurs fees for an audit of the whole
production expenditure (not just qualifying Australian production
expenditure) and legal fees in relation to a Production Investment
Agreement and a distribution agreement. All audit and legal fees are
incurred directly by Ting Films and are not in respect of fees that are
paid to absorb a third party's legal or audit fees expenses.

In June 2012, Ting Films incurs expenditure in relation to liquidating the
special purpose vehicle company established in September 2011.

The financing expenditure incurred by Ting Films in relation to these
insurances, fees for audit and legal services, and fees for setting up and
liquidating the special purpose vehicle company are able to be claimed as
qualifying Australian production expenditure if it is incurred prior to the
end of the income year in which the film is complete. This means that a
film tax offset applies to these particular types of financing expenditure.

If these types of financing expenditure were not specifically included as
qualifying Australian production expenditure, the expenditure incurred by
Ting Films on insurances, fees for audit and legal services, and fees for
setting up and liquidating the special purpose vehicle company would be
excluded from being claimed as qualifying Australian production
expenditure.

Vinnie Productions is a company based in Australia.

Vinnie Productions incurs expenditure in relation to a qualifying
Australian production expenditure opinion fee. A qualifying Australian
production expenditure opinion fee is a fee for obtaining an independent
opinion of a film's qualifying Australian production expenditure to meet
financing requirements. A qualifying Australian production expenditure
opinion fee is a type of financing expenditure.

In paying the qualifying Australian production expenditure opinion fee, the
producer of the film receives a letter of advice to demonstrate to cash
flow providers and investors what the expected qualifying Australian
production expenditure of a film is.

The qualifying Australian production expenditure opinion fee is incurred
directly by Vinnie Productions, that is, it is not a fee incurred by a
third party but absorbed by Vinnie Productions.

The qualifying Australian production expenditure opinion fee incurred by
Vinnie Productions is able to be claimed as qualifying Australian
production expenditure. This means that the producer offset applies to
this particular type of financing expenditure.

If fees in obtaining an independent opinion of a film's qualifying
Australian production expenditure were not specifically included as
qualifying Australian production expenditure, the expenditure incurred by
Vinnie Productions on a qualifying Australian production expenditure
opinion fee would have been excluded from qualifying Australian production
expenditure.

Offset carbon emissions

59. Expenditure incurred in Australia in relation to offsetting carbon
emissions created during the making of the film can be claimed as
qualifying Australian production expenditure. This expenditure can
be incurred in paying an airline to offset carbon emissions or
directly paying a recognised service supplier to offset carbon
emissions created making the film. A recognised service supplier
must be accredited at a national or state government level or
comply with an industry standard. [Schedule 9, item 23, subsection
376-170(2)]

Sixty-five commercial hours of content

60. Currently a company is only entitled to the producer offset for a
series or season of a series which must be at least two episodes
and no more than 65 episodes. The 65 episode limit is a cumulative
cap on the support the producer offset will provide to a series.
It recognises that once a series has been in production for such a
number of episodes, it should be capable of being made without
Australian Government support and effectively become self-
sufficient.

61. The 65 episode limit is changed to allow a company to benefit from
the producer offset for their first 65 commercial hours of content.
When the 65 commercial hour limit has been reached, that series
will be deemed completed and only qualifying Australian production
expenditure on the episodes up to and including the 65th commercial
hour are eligible for the producer offset. Further hours on
episodes or seasons of the series are ineligible for the producer
offset. [Schedule 9, items 5, 6, 25 and 27]

62. The concept of a commercial hour recognises that programs are made
of varying length and they may be transmitted to the public in
different ways. For instance, a program of 52 minutes duration may
be shown without interruption by one broadcaster, but be shown over
a 60 minute programming slot by another broadcaster if the
broadcast slot includes advertisements. In each case, such a
program would be regarded as 'one commercial hour' in length.

Childs Play is a company based in Australia.

Childs Play produces a television program for young children. Each episode
has duration of 20 minutes but fills a 30 minute programming slot by the
broadcaster because the broadcast slot includes advertisements.

Each episode of the television program is regarded as half a commercial
hour in length.

This example sets out a number of scenarios to illustrate the transition
between the 65 episode limit and the new 65 commercial hours limit.

Scenario 1

An applicant has made a series consisting of 70 � 26 minute (commercial
half hour) episodes, all completed prior to 1 July 2011. The series has
been completed and the applicant will not make any further seasons of this
series. The producer offset can only be claimed for the first 65 episodes
of the series.

Scenario 2

An applicant is making a season of a series where the season consists of
episodes 52 to 70, each episode being 26 minutes (commercial half hour).
Production commenced prior to 1 July 2011 and will be completed after this
date. Because this season commenced production prior to 1 July 2011, the
'65 episode limit' will be applied and the season can only claim qualifying
Australian production expenditure opinion expenditure up to the 65th
episode. However, the applicant can make a further season of this series
and be eligible for the producer offset. In this case, episodes 66 to 70
cannot form part of the applicant's qualifying Australian production
expenditure opinion claim for any season, and these episodes also will not
be included in the commercial hour count. In other words, if the applicant
starts a new season after 1 July 2011, the applicant will be deemed (at the
outset) to have completed 32.5 commercial hours (65 � 2) of the series, and
will be eligible to receive the producer offset for another 32.5 commercial
hours of the series produced after 1 July 2011.

Scenario 3

An applicant has made a series consisting of 70 � 26 minute (commercial
half hour) episodes, all completed prior to 1 July 2011. The applicant
will make another season of this series after 1 July 2011. Episodes 66 to
70 were completed prior to 1 July 2011 and so cannot receive the producer
offset and will not be included in the commercial hour count for the new
season. Therefore the applicant will have been deemed to have completed
32.5 commercial hours (65 � 2) of the series to date and will be eligible
to receive the producer offset for another 32.5 commercial hours of content
produced for the series after 1 July 2011.

Scenario 4

An applicant will produce a new series with the first season being made
after 1 July 2011. The producer offset will be capped at 65 commercial
hours.

Exchange rate

63. In working out a company's production expenditure and qualifying
Australian production expenditure, any expenditure incurred in a
foreign currency must be converted into Australian dollars.

64. For the purposes of meeting a relevant minimum expenditure
requirement for an offset, table item 9 of subsection 960-50(6)
requires the amount that is relevant for the purposes of issuing a
certificate for the producer offset to be translated to Australian
currency at the time when principal photography commences or
production of the animated image commences. For calculating the
amount of the offset, the exchange rate used is the average rate of
exchange for the period during which qualifying Australian
production expenditure is incurred.

65. Films with a qualifying Australian production expenditure of less
than $15 million are to use actual exchange rates at the time when
expenditure is incurred on the film. [Schedule 9, items 29 and 30,
subsection 960-50(6)]

Williams Productions incurs qualifying Australian production expenditure in
a foreign currency. This expenditure is incurred on two occasions. The
first is on 1 February 2012 in the amount of US$1 million. The second
occasion is on 1 March 2012 in the amount of US$2 million.

In making the film, Williams Productions incurs a total qualifying
Australian production expenditure of $14 million.

Any expenditure incurred in a foreign currency must be converted into
Australian dollars in calculating Williams Productions production
expenditure and qualifying Australian production expenditure.

Because Williams Productions has a total qualifying Australian production
expenditure of less than $15 million, Williams Productions are to use the
actual exchange rates at the time when expenditure is incurred on the film,
that is, on 1 February 2012 and 1 March 2012.

If the film incurred a total qualifying Australian production expenditure
of greater than $15 million, Williams Productions would be required to
apply an average exchange rate for the whole period when qualifying
Australian production expenditure was incurred.

Twenty per cent cap

66. The amount of expenditure that can be claimed as qualifying
Australian production expenditure by a company in regard to
development, remuneration for the principal director, the producers
and producer's unit and principal cast, is limited. These
expenditures are intended to represent the stated 'above the line'
costs for a film.

67. The qualifying Australian production expenditure that can be
claimed on these costs is only up to a maximum of 20 per cent of a
film's total film expenditure (total budget). This does not mean
that further expenditure on 'above the line' costs cannot be made,
nor does it mean that expenditure that exceeds the cap will mean
that the production cannot qualify for the producer offset.
Rather, it means that any expenditure on 'above the line' costs
that is greater than 20 per cent of the film's total film
expenditure will not be considered as qualifying Australian
production expenditure and will therefore not be counted towards
the expenditure threshold or the rebate amount for the production.

68. This 20 per cent cap is removed for documentaries. A company that
makes a documentary can now claim as qualifying Australian
production expenditure on development, remuneration for the
principal director, the producers and producers' unit and principal
cast without limit. [Schedule 9, items 24 and 26, subsection 376-
170(4)]

VIP Docs is a company based in Australia. VIP Docs makes a documentary
about the history of Vietnamese cuisine.

VIP Docs incurs $200,000 qualifying Australian production expenditure in
remuneration costs for the principal director, the producers and principal
cast. This equates to 35 per cent of their total film expenditure. These
are examples of 'above the line' costs of a company. All of the
expenditure incurred in relation to remuneration costs counts towards VIP
Docs qualifying Australian production expenditure.

If the film was not a documentary, the amount that could be claimed as
qualifying Australian production expenditure by a company in regard to
development, remuneration for the principal director, the producers and
producer's unit and principal cast would be limited to a maximum of
20 per cent of a film's total film expenditure.

Distribution expenditure

69. There is a general test for what constitutes production
expenditure. Production expenditure of a film is so much of a
company's expenditure as it incurs in, or in relation to, making
the film; or as is reasonably attributable to the use of equipment
or other facilities for making the film or to activities undertaken
in making the film.

70. The making of a film means the doing of the things necessary for
the production of the first copy of the film.

71. For the purposes of the producer offset, the distribution of the
film and its promotion are not necessarily part of actually making
the film. Some costs of promotional material are now included in
both qualifying Australian production expenditure and production
expenditure; as some promotional activities can be occurring while
a film is being made.

72. Certain expenditure incurred, prior to the end of the income year
in which the film is completed, in relation to the distribution of
the film will now count as qualifying Australian production
expenditure. [Schedule 9, item 19, paragraph 376-125(4)(c)]

73. This will include any of the following expenditure in delivering or
distributing the film:

acquiring Australian classification certificates;

sound mix mastering licenses;

re-versioning the film in Australia;

freight services provided by a company in Australia for delivery of
contracted deliverables in relation to the film; and/or

storing the film in a film vault in Australia.

[Schedule 9, item 23, subsection 376-170(2)]

DCR is a company based in Australia specialising in making films with
significant Australian content.

DCR has just completed making a film and incurs certain expenditure in
distributing the film prior to the end of the income year in which the film
is complete.

DCR incurs qualifying Australian production expenditure in applying to the
Classification Board for a censorship certificate for the purpose of
distributing or broadcasting the film in Australia. Acquiring an
Australian classification certificate is required prior to distributing or
broadcasting a film.

DCR incurs qualifying Australian production expenditure in acquiring a
Dolby license. A Dolby license is an example of a sound mix master
license.

DCR incurs qualifying Australian production expenditure in re-versioning a
film. Re-versioning a film includes activities such as creating audio
descriptions of the film; creating a special version of a feature film so
the film can be distributed on DVD (as opposed to in a cinema); or creating
a different version so the film is suitable for overseas broadcasters, for
example, language translation.

DCR incurs qualifying Australian production expenditure on freight services
provided by a company in Australia for delivery of contracted deliverables
in relation to the film, otherwise known as 'agreed deliverables'. 'Agreed
deliverables' includes the physical items (specific formats of the film)
that the producer and a distributor agree are necessary to be delivered to
the distributor in order for the film to be distributed. An example of a
deliverable is an 'interneg' which is required to make a print of the film

DCR incurs qualifying Australian production expenditure on storing the film
in a film vault in Australia. Storing the film in a vault is storing the
original master versions of the film in safe and secure conditions so that
the film can be preserved, copied and accessed as necessary.

All of the listed distribution costs in this example are specifically
included types of qualifying Australian production expenditure allowed
under the producer offset.

If these specific distribution costs were not included as qualifying
Australian production expenditure, DCR would not be able to claim such
distribution costs as they do not relate directly to making the film.

Marketing costs

74. Expenditure that relates to publicising or otherwise promoting the
film (press expenses, still photography, promotion, video tapes,
public relations and other similar expenses) is excluded from
production expenditure, even if it is incurred during production,
unless it is qualifying Australian production expenditure.

75. Certain publicity and promotion expenditure on publicist services
provided in Australia, promotional stills, trailers and press kits
(with Australian-owned copyright) that is incurred after the
completion of the film but prior to the end of the income year in
which production is complete can be counted as qualifying
Australian production expenditure. [Schedule 9, items 21 and 23,
section 376-135 and subsection 376-170(2)]

Further to Example 9.9.

DCR completes the film on 24 May 2012.

DCR incurs qualifying Australian production expenditure on unit publicist
fees and on a study guide on 15 June 2012, that is, after completion of the
film. These marketing costs are incurred prior to the end of the income
year in which the film is complete, that is, before 30 June 2012.

A unit publicist will often be on set throughout production and can remain
working on publicity after a film is complete to prepare the film for
release. A study guide is created to help teachers interpret films for
school students and may be done after production is complete.

DCR will be eligible to claim the producer offset on the qualifying
Australian production expenditure incurred on the unit publicist fees and
on the study guide.

If the amendment had not been made to include marketing costs incurred
after completion of the film but prior to the end of the income year in
which production if complete, DCR would not be able to claim the marketing
costs spent on unit publicists fees and on the study guide as qualifying
Australian production expenditure.

Short-form animated documentaries

76. A short-form animated drama is eligible for the producer offset. A
short-form animation is a program of one episode or a collection of
episodes, predominantly utilising cell, stop motion, digital and/or
other animation, of not less than one quarter commercial television
hour in total duration. This means, for example, that a collection
of six five-minute animated episodes (30 commercial minutes) would
be regarded as a short-form animation, as the film will be at least
one quarter of a commercial hour. A short-form animation is
limited to a drama and therefore excludes a documentary.

77. A 'short-form animated drama' is replaced with 'short-form animated
film' to include short-form animated dramas and documentaries.
[Schedule 9, items 8 to 11 and 16, subparagraph 376-65(2)(c)(v),
subsection 376-65(4), paragraph 376-65(4)(a) and subsection 376-
65(6)]

GST exclusion

78. In calculating a company's total production expenditure and
qualifying Australian production expenditure, the GST-inclusive
cost has previously been used to calculate the offset payable for a
certified production. This was irrespective of whether the company
was able to claim input tax credits under Division 11 of the A New
Tax System (Goods and Services Tax) Act 1999 (GST Act).

79. A company's production expenditure and qualifying Australian
production expenditure on a film now excludes the GST. This is to
address a situation of providing an offset (additional tax benefit)
in respect of an amount not incurred but is reimbursed to the
taxpayer. [Schedule 9, item 28, section 376-185)

NLR Films is a film production company based in Australia.

In May 2012, NLR Films contracts a digital effects company to perform some
effects work for a large budget feature film, and incurs $2.2 million of
expenditure. This $2.2 million in expenditure is inclusive of the GST.

NLR Films is responsible for making the arrangements for all the post,
digital and visual effects work on the film that is carried out in
Australia.

Because NLR Films' qualifying Australian production expenditure on the film
is not less than $500,000, NLR Films meets the expenditure threshold for
the post, digital and visual effects offset.

In determining the amount of qualifying Australian production expenditure
for the post, digital, and visual effects offset, NLR Films will only be
able to claim the offset on the GST exclusive amount, that is, $2 million.
The amount of the offset would be calculated at 30 per cent of the $2
million.

If the amendment had not been made to exclude the GST amount, NLR Films
would have been able to claim the post, digital, and visual effects offset
on the GST inclusive amount. The amount of the offset would have been
calculated at 15 per cent (previous post, digital, and visual effects
offset rate) of $2.2 million.

Changes to the location offset

Amount of the offset

80. The rate of the location offset is increased from 15 per cent to
16.5 per cent of the total of the company's qualifying Australian
production expenditure on a film. [Schedule 9, items 1 and 3,
paragraph 376-2(3)(b) and section 376-15]

Gomez Film is a company established in Australia to carry out the
Australian component of a feature film, The Three Chipotles. This film is
shot in 2012 in both Australia and Mexico, taking account of the
requirements of the script.

In January 2012, Gomez Film incurs $50 million of expenditure in making the
film, comprising $25 million of qualifying Australian production
expenditure and $25 million of other production expenditure.

Because the amount of qualifying Australian production expenditure is a
least $15 million, Gomez Film is eligible for the location offset for The
Three Chipotles. The amount of the offset is calculated at 16.5 per cent
of $25 million.

If the rate of the location offset remained at 15 per cent, the amount of
the offset would have been 15 per cent of $25 million.

Financing expenditure

81. For the location offset, certain financing expenditure incurred in
Australia prior to the end of the income year in which the film is
complete can be claimed as qualifying Australian production
expenditure. [Schedule 9, item 20, section 376-135]

82. This includes any of the following:

insurance related to making the film [Schedule 9, item 22, subsection 376-
150(1)];

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film [Schedule 9,
item 22, subsection 376-150(1)]; and/or

fees for incorporation and liquidation of the company that makes or is
responsible for making the film [Schedule 9, item 22, subsection 376-
150(1)].

GST exclusion

83. In calculating a company's total production expenditure and
qualifying Australian production expenditure, the GST-inclusive
cost has previously been used to calculate the offset payable for a
certified production. This was irrespective of whether the company
is able to claim input tax credits under Division 11 of the GST
Act.

84. A company's production expenditure and qualifying Australian
production expenditure on a film now excludes the GST. This is to
address a situation of providing an offset (additional tax benefit)
in respect of an amount not incurred but is reimbursed to the
taxpayer. [Schedule 9, item 28, section 376-185]

Changes to post, digital and visual effects offset

Amount of the offset

85. The rate of the post, digital and visual effect offset is increased
from 15 per cent to 30 per cent of the total of the company's
qualifying Australian production expenditure on a film. [Schedule
9, items 2 and 4, paragraph 376-2(3)(c) and section 376-40]

KevTech is a visual effects company based in Australia.

In June 2012, KevTech performs some visual effects work for a feature film,
and incurs $1 million of qualifying Australian production expenditure.
KevTech is the company responsible for all the post, digital, and visual
effects work in Australia for the film.

Because KevTech's qualifying Australian production expenditure on the film
is at least $500,000, KevTech is eligible for the post, digital and visual
effects offset. The amount of the offset is 30 per cent of $1 million.

If the rate of the post, digital and visual effects offset remained at
15 per cent, the amount of the offset would have been 15 per cent of
$1 million.

Financing expenditure

86. For the post, digital and visual effects offset, certain financing
expenditure incurred in Australia prior to the end of the income
year in which the post, digital, visual effects work is complete
can be claimed as qualifying Australian production expenditure.
This will include any of the following:

insurance related to making the film [Schedule 9, item 22, subsection 376-
150(1)];

fees for audit services and legal services provided in Australia in
relation to raising and servicing the financing of the film [Schedule 9,
item 22, subsection 376-150(1)]; and/or

fees for incorporation and liquidation of the company that makes or is
responsible for making the film [Schedule 9, item 22, subsection 376-
150(1)].

GST exclusion

87. In calculating a company's total production expenditure and
qualifying Australian production expenditure, the GST-inclusive
cost has previously been used to calculate the offset payable for a
certified production. This was irrespective of whether the company
is able to claim input tax credits under Division 11 of the GST
Act.

88. A company's production expenditure and qualifying Australian
production expenditure on a film now excludes GST. This is to
address a situation of providing an offset (additional tax benefit)
in respect of an amount not incurred (reimbursed to) by the
taxpayer. [Schedule 9, item 28, section 376-185]

Application and transitional provisions

89. The amendments as they relate to the producer offset apply to:

films for which production assistance (other than development assistance)
has been approved by the film authority on or after 1 July 2011; or

in any other case, films for which production expenditure is first incurred
in, or in relation to, pre-production of the film on or after 1 July 2011.

[Schedule 9, subitem 31(3)]

90. The amendments as they relate to the location offset apply to films
commencing principal photography or production of the animated
image on or after 10 May 2011. [Schedule 9, subitem 31(1)]

91. The amendments as they relate to the post, digital and visual
effects offset apply to post, digital and visual effects production
in Australia that commences on or after 1 July 2011. [Schedule 9,
subitem 31(2)]

Index

Schedule 1: Removing tax issues facing special disability trusts

|Bill reference |Paragraph |
| |number |
|Clause 4 |1.63 |
|Part 1, item 3, section 118-105 |1.30 |
|Parts 1 to 3, items 5, 9 and 12 |1.62 |
|Part 1, item 4, section 118-215 and |1.28 |
|subsections 118-218(1) to (3) | |
|Part 1, item 4, subsections 118-218(1) and |1.29, 1.34 |
|(2) | |
|Part 1, item 4, subsections 118-218(1) to |1.32, 1.34, |
|(3) |1.38 |
|Part 1, item 4, subsection 118-218(3) |1.29 |
|Part 1, item 4, subsection 118-218(4) |1.39 |
|Part 1, item 4, section 118-220 |1.43 |
|Part 1, item 4, section 118-220 and |1.51 |
|subsection 118-225(1) | |
|Part 1, item 4, section 118-222 |1.54 |
|Part 1, item 4, subsection 118-225(1) |1.46, 1.53 |
|Part 1, item 4, paragraphs 118-225(2)(a), |1.46, 1.48 |
|(3)(a) and (c) and subsection 118-225(4) | |
|Part 1, item 4, paragraphs 118-225(2)(b), |1.57 |
|(3)(b) and (c) and subsection 118-225(4) | |
|Part 1, item 4, subsection 118-227(1) |1.44, 1.56 |
|Part 1, item 4, subsection 118-227(2) |1.44 |
|Part 1, item 4, subsection 118-227(3) |1.55 |
|Part 1, item 4, section 118-230 |1.59 |
|Part 2, item 6, section 118-85 |1.21 |
|Part 2, item 6, paragraph 118-85(1)(b) |1.22 |
|Part 2, item 6, subsection 118-85(2) |1.22 |
|Part 2, items 7 and 8, subsection 128-15(4) |1.24 |
|(item 1 in the table) and (after item 3A in | |
|the table) | |
|Part 3, items 10 and 11, definitions of |1.19 |
|'principal beneficiary' and 'special | |
|disability trust' in subsection 995-1(1) | |

Schedule 2: Pacific Seasonal Worker Pilot Scheme

Schedule 3: TOFA and PAYG instalments

|Bill reference |Paragraph |
| |number |
|Item 1, subsection 45-120(2C) |3.10 |
|Item 1, subparagraphs 45-120(2C)(a)(ii) and |3.15 |
|45-120(2C)(b)(ii) | |
|Item 1, subsection 45-120(2D) |3.18 |
|Item 1, subsection 45-120(2E) |3.20 |
|Item 2 |3.22, 3.23 |
|Subitems 3(1) and (2) |3.24 |
|Subitems 3(3) and (5) |3.30 |
|Subitems 3(4) and (6) |3.31 |
|Subsection 3(7) |3.33 |
|Paragraph 3(7)(d) |3.34 |
|Subitems 3(7) and (8) |3.36 |
|Subitem 3(9) |3.37 |

Schedule 4: Notification of TOFA transitional elections

Schedule 5: Farm management deposits

Schedule 6: Temporary loss relief for merging superannuation funds

|Bill reference |Paragraph |
| |number |
|Item 1, section 310-1 (note 1) of the ITAA |6.10 |
|1997 | |
|Items 2 to 4, item 11 of Schedule 2 to the |6.11 |
|Tax Laws Amendment (2009 Measures No. 6) Act| |
|2010 | |
|Item 5, subitem 11(2) of Schedule 2 to the |6.9 |
|Tax Laws Amendment (2009 Measures No. 6) Act| |
|2010 | |
|Item 6, Schedule 2 to the Tax Laws Amendment|6.16 |
|(2009 Measures No. 6) Act 2010 | |

Schedule 7: Penalty notice validation

Schedule 8: Ancillary funds

Schedule 9: Film tax offsets

|Bill reference |Paragraph |
| |number |
|Items 2 and 4, paragraph 376-2(3)(c) and |9.85 |
|section 376-40 | |
|Items 5, 6, 25 and 27 |9.61 |
|Item 7, paragraph 376-55(4)(g) |9.51 |
|Items 8 to 11 and 16, subparagraph |9.77 |
|376-65(2)(c)(v), subsection 376-65(4), | |
|paragraph 376-65(4)(a) and | |
|subsection 376-65(6) | |
|Items 12 to 14, subsection 376-65(6) |9.49 |
|Items 15, 17 and 18, subsection 376-65(6) |9.50 |
|Item 19, paragraph 376-125(4)(c) |9.72 |
|Item 20, section 376-135 |9.57, 9.81 |
|Items 21 and 23, section 376-135 and |9.75 |
|subsection 376-170(2) | |
|Item 22, subsection 376-150(1) |9.58, 9.82, |
| |9.86 |
|Item 23, subsection 376-170(2) |9.58, 9.59, |
| |9.73 |
|Items 24 and 26, subsection 376-170(4) |9.68 |
|Item 28, section 376-185 |9.79, 9.84, |
| |9.88 |
|Items 29 and 30, subsection 960-50(6) |9.65 |
|Subitem 31(1) |9.90 |
|Subitem 31(2) |9.91 |
|Subitem 31(3) |9.89 |

-----------------------
Q1

Q2[pic]

Q3[pic]

Q4[pic]

Q2[pic]

Q3[pic]

Q4[pic]

Heyward Ltd begins to apply the TOFA provisions on 1 July 2010.

2010-11 return lodged
(which includes TOFA gains and losses).

The Commissioner issues a new PAYGI rate based on the amended instalment
income definition.

Heyward Ltd starts to apply the amended definition.

2010-11 year

2011-12 year

2012-13 year

The Commissioner issues a PAYGI rate based on the existing definition of
instalment income.

Q2[pic]

Q3[pic]

Q4[pic]

Q2[pic]

Q3[pic]

Q4[pic]

Long Ltd begins to apply the TOFA provisions on 1 July 2011.

2011-12}~

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... � � � � � � � � � �
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h~V jh�W�h�W�U[pic]mH return lodged
(which includes TOFA gains and losses).

The Commissioner issues a new PAYGI rate based on the amended instalment
income definition.

Long Ltd starts to apply the amended definition.

2011-12 year

2012-13 year

2013-14 year

The Commissioner issues a PAYGI rate based on the existing definition of
instalment income.

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