TAXATION LAWS AMENDMENT BILL (NO. 3) 1997 Explanatory Memorandum

apply the special tracing rules for listed public companies to the provisions relating to capital losses incurred in a year of income in which there has been a change in the majority ownership of a company;

extend the revenue loss provisions so that they correspond to the provisions of the 1997 Act; and

make consequential amendments and some minor technical changes to ensure the provisions operate as intended.

Date of effect: The amendments relating to the new tracing rules for capital losses will apply to the 1996-97 year of income and all later years of income. The amendments to the revenue loss provisions of the 1997 Act will apply from 1 July 1997, immediately after the commencement of that Act. The consequential and technical amendments have various dates of effect.

Financial impact: There should be no significant impact on the revenue as the changes mainly ensure the 1936 Act and the 1997 Act are aligned in their operation.

Compliance cost impact: The new tracing rules should result in a reduction in compliance costs for listed public companies. This is because the provisions streamline the requirements for determining continuity of majority underlying ownership of a listed public company.

The amendments to the revenue loss provisions of the 1997 Act should have no impact on compliance costs as the amendments merely align the operation of the 1936 Act with the 1997 Act.

To the extent that the consequential and technical amendments clarify the operation of the proposed provisions, there should be a reduction in compliance costs.

CGT exemption: disposing of small business retirement assets

Amends Schedule 1 of the Bill relating to the new capital gains tax (CGT) retirement exemption provisions for taxpayers disposing of small business assets to:

allow taxpayers to ignore years prior to the 1992-93 year of income when working out the period an individual was a controlling individual, provided it is favourable to the taxpayer to do so;

amend the Termination Payments Tax (Assessment and Collection) Act 1997 to ensure that the CGT exempt component of an eligible termination payment is not subject to the superannuation contributions surcharge; and

insert an application clause into the new CGT retirement exemption provisions to ensure the amendments apply to assets disposed of on or after 1 July 1997.

Date of effect: The exemption from tax on capital gains made by small business taxpayer's on the disposal of some or all of their active assets if the proceeds are used for retirement will apply to assets disposed of on or after 1 July 1997.

Compliance cost impact: The amendment reducing the period that taxpayers need to keep records will reduce compliance costs. Taxpayers will not be required to establish that an individual is a controlling individual where records have not been kept beyond the five year period generally required under the record keeping provisions of the Income Tax Assessment Act 1936.

Research and development activities

ensure that, where a taxpayer conducts different R&D activities in one year, the formula used to calculate deductible 'residual feedstock expenditure' properly reflects the R&D activity to which the particular feedstock expenditure relates;

ensure a deduction for core technology expenditure is allowable in the year the expense was first incurred;

make provision for a balancing adjustment where post 23 July 1996 pilot plant is disposed of prior to the completion of the R&D activity;

change a heading in the depreciation table in subsection 73B(4H) for post 23 July 1996 pilot plant; and

Date of effect: The amendments implement relevant provisions as originally intended and announced on 23 July 1996; they have effect, therefore, from that date.

Financial impact: As the amendments merely ensure relevant provisions apply as originally intended, any effect on the revenue has already been counted.

Compliance cost impact: The amendments will have minimal impact on compliance costs.

Deductions for gifts

Amends the income tax law to allow income tax deductions for gifts made to certain funds and organisations.

Proposal announced: The Treasurer announced two of the measures during 1996 (one of which was announced jointly with the Minister for Communications and the Arts) and one in 1997.

Financial impact: The amendments do not have any significant impact on the revenue.

Sale of mining rights

Inserts additional items into Schedule 2 of the Bill to amend the Income Tax Assessment Act 1997. The amendments are necessary to achieve a consistent application of that Act, with effect from 1 July 1997, with the amendments to the Income Tax Assessment Act 1936 contained in Schedule 2 of the Bill.

Financial impact: Nil as the amendment will ensure the provisions dealing with the sale of mining rights apply as originally intended.

Purpose of the amendments

1.1 Schedule 14 of the Bill introduced amendments (the current year capital loss provisions) to the Income Tax Assessment Act 1936 (the 1936 Act) to further allow, in certain circumstances, companies to offset capital losses against capital gains realised in a year of income in which there has been a change in the majority underlying ownership of the company. The Bill also made associated amendments to the 1936 Act dealing with the rectifying of anomalies in the revenue loss provisions, and the capital gains tax (CGT) consequences of subvention payments.

1.2 The proposed amendments are mainly consequential upon the recent enactment of the Income Tax Assessment Act 1997 (the 1997 Act). Specifically, the amendments will extend the special tracing rules for listed public companies contained in the 1997 Act to the current year capital loss provisions contained in the Bill. In addition, the amendments to the revenue loss provisions in the Bill will be extended to the corresponding provisions of the 1997 Act.

1.3 Amendments are also proposed to the Income Tax (Consequential Amendments) Act 1997 (the ITCA Act) as a result of the introduction of the new current year capital loss provisions in the Bill. Finally, minor technical amendments will be made to the Bill to ensure the provisions operate appropriately.

Date of effect

1.4 The amendments relating to the new tracing rules will apply to the 1996-97 year of income and all later years of income. The amendments to the ITCA Act and the revenue loss provisions of the 1997 Act will apply from 1 July 1997, immediately after the commencement of the respective Act. The dates of effect for the technical amendments are outlined in paragraphs 1.49-59.

Background to the legislation

1.5 The Bill introduced amendments to the 1936 Act which aligned the rules governing the recoupment of current year capital losses with the analogous rules relating to revenue losses (the current year revenue loss provisions). Those amendments extend a company's ability to offset current year capital losses against current year capital gains in certain circumstances where there has been a change of majority underlying ownership of the company in the year of income. The amendments also operate to deny capital losses in circumstances where those losses are used as part of a tax avoidance scheme. The amendments are based on the current year revenue loss provisions contained in the 1997 Act.

1.6 The revenue loss provisions of the 1997 Act contain special tracing rules for listed public companies which assist those companies to establish whether there has been a change in majority underlying ownership of shares of the company. If the majority underlying ownership test is not satisfied (and the same business test is failed), then the company will be required to calculate its taxable income and tax loss for the year under the current year revenue loss provisions.

1.7 The proposed amendments to the Bill will extend the special tracing rules for listed public companies to the current year capital loss provisions contained in the Bill. The tracing rules will assist listed public companies and their wholly owned subsidiaries to determine whether they have satisfied the majority underlying ownership tests for the purposes of the new current year capital loss provisions.

1.8 The Bill also introduced amendments to rectify anomalies in the revenue loss provisions dealing with the injecting of capital gains into a company for the purpose of offset against deductions. The proposed amendments will ensure that the anomalies are also removed from the 1997 Act.

Explanation of the amendments

Tracing the ownership of shares in a listed public company

1.9 The Bill introduced new Division 3A of Part IIIA of the Act, which sets out how to determine the net capital gain or loss of a company for a year of income where the majority underlying ownership of the company has changed and the company does not satisfy the same business test. New Division 3B of Part IIIA contains the tests which determine whether the company has maintained majority underlying ownership of its shares.

1.10 Divisions 3A and 3B are to be modified by the special rules for listed public companies, and their 100% subsidiaries, contained in proposed Divisions 3CA, 3CB, 3CC and 3CD of Part IIIA of the 1936 Act [amendment 13]. The rules will provide an alternative for establishing the continuity of majority underlying ownership of shares in a listed public company. The rules are designed to assist listed public companies trace who owns their shares.

1.11 These special rules are based on the analogous provisions contained in the 1997 Act. The equivalent provisions in the 1997 Act are:

1.12 A detailed discussion of the special tracing rules can be found in chapter 8 of the Explanatory Memorandum to the 1997 Act.

1.13 The new rules will differ from the standard test for continuity of majority underlying ownership in new Division 3B in two major aspects:

• testing for ownership will be periodic rather than at all times during the income year;

• when a company is required to establish who are its ultimate beneficial owners the following rules will apply:

(a) all registered shareholdings of the company that are less than one per cent will be taken to be owned by a notional shareholder; and

(b) direct or indirect holdings of a complying superannuation fund, complying approved deposit fund or certain types of company will be deemed to be beneficially held by that fund or company.

1.14 This means the notional shareholder, fund or company will beneficially own the relevant shares for the purposes of establishing if the company has maintained majority underlying ownership.

1.15 To determine whether the current year capital loss provisions in Divisions 3A and 3CA will apply, (that is, whether the majority underlying ownership and same business tests have been failed), regard will now be had to Divisions 3B, 3C, 3CB, 3CC and 3CD. [Amendment 10]

1.16 The definitions for the purposes of the proposed new special tracing rules are contained in new section 160JA [amendment 9]. Division 3E of the Bill, which outlines when a person has a 'shareholding interest' in a company, has been omitted [amendment 15]. 'Shareholding interest' is defined in section 175-65 of the 1997 Act. The term 'constituent document' has also been omitted from sections 160ZNN and 160ZNO and replaced with 'constitution', which is defined in section 995-1 of the 1997 Act [amendments 11 and 12].

Proposed Division 3CA - Calculating a net capital gain or net capital loss

1.17 Proposed Division 3CA modifies the way in which Division 3A applies to a listed public company and its 100% subsidiaries. Division 3A details how to calculate a net capital gain or net capital loss of a company for a year of income in which there has been a change in majority underlying ownership and the same business test is not satisfied.

1.18 The tests for finding out whether a listed public company has maintained majority underlying ownership are now contained in proposed Divisions 3CB, 3CC and 3CD. [New section 160ZNSA]

1.19 A company can choose that Division 3CA will not apply to modify the operation of Division 3A. The company must choose on or before the day it lodges its return for the year of income, or before a later day if the Commissioner allows. [New section 160ZNSE]

1.20 New subsection 160ZNSB(1) provides that Division 3CA will only apply to a company where the company is a listed public company at all times during the year of income (the test period). Division 3CA will also apply to a company which is not a listed public company if the company is a 100% subsidiary of a listed public company at all times during the subsidiary's year of income [new section 160ZNSD]. In this case, Division 3CA will apply as if the subsidiary company were a listed public company.

1.21 A listed public company and its wholly owned subsidiaries will satisfy the majority underlying ownership test for the purposes of Division 3A if there is no abnormal trading in the company's shares during the test period [new subsection 160ZNSB(2)]. If there is abnormal trading but the company has maintained substantial continuity of ownership as between the start of the test period and the time of the abnormal trading, the company will also be taken to have satisfied the majority underlying ownership test [new subsection 160ZNSB(3)].

1.22 If there is abnormal trading and no substantial continuity of ownership, the company will be taken to have failed the majority underlying ownership test [new subsection 160ZNSB(4)]. In this case, if the company satisfies the same business test for the rest of the year of income (the same business test period) after the first abnormal trading, the company will not be subject to Division 3A [new subsection 160ZNSB(5)].

1.23 If the company is required to calculate its net capital gain or net capital loss under Division 3A, the income year is divided into periods according to when there is a failure to maintain majority underlying ownership. [New section 160ZNSC]

Proposed Division 3CB - Tests for determining ownership

1.24 Proposed Division 3CB contains the tests for determining whether a listed public company has maintained the same owners as between two points in time. Proposed Divisions 3CC and 3CD contain rules to assist the company to satisfy these ownership tests. [New section 160ZNSF]

1.25 If there is substantial continuity of ownership as between the start of the test period and another time (test time) during the test period, then a company will be taken to have maintained majority underlying ownership.

the same persons (not companies) have more than 50 per cent of the voting power in the company both at the start of the test period and immediately after the other test time; and

the same persons (not companies) own the rights to more than 50 per cent of the company's dividends and capital distributions both at the start of the test period and immediately after the other test time. [New section 160ZNSG]

1.27 To determine whether a condition in section 160ZNSG is satisfied, an ownership test for that condition must be applied. The ownership tests basically provide that the ownership rights can be held directly or indirectly through one or more interposed entities [new sections 160ZNSH, 160ZNSI and 160ZNSJ]. There is provision for tracing through interposed entities to disclose the ultimate beneficial owners.

1.28 The rules in Division 3B (generally designed to overcome arrangements affecting beneficial ownership) also apply for the purposes of an ownership test. [New section 160ZNSK]
Proposed Division 3CC - How to treat shareholdings of less than 1 per cent

1.29 Proposed Division 3CC modifies how the ownership tests apply to a listed public company (head company) if the company has voting, dividend or capital shareholdings of less than 1 per cent [new section 160ZNSM]. The Division will also apply where another listed public company is interposed between the head company and certain persons (none of them companies). The certain persons are those who control the voting power in the head company indirectly through the interposed company or have the right to receive for their own benefit, and indirectly through the interposed company, any dividends or capital distributions the head company may pay [new section 160ZNSN]. The interposed company must have voting, dividend or capital shareholdings of less than 1 per cent [new subsection 160ZNSN(3)]. These rules will assist listed public companies to satisfy the ownership tests in Division 3CB.

1.30 When applying the ownership tests at a particular time, a company will not be required to trace through to the ultimate beneficial owners where the registered shareholding is less than 1 per cent (except where those shares are part of a substantial shareholding). The total of such holdings will be treated as if they were held by a single notional entity and the ownership rights attached to those shares will be taken to be the rights of that notional shareholder only. The notional shareholder will be treated as a person other than a company. [New subsections 160ZNSO(1) and 160ZNSO(3)]

1.31 Similarly, if another listed public company is interposed between the head company and those persons, all shareholdings of less than 1 per cent in the interposed company will be treated as if they were held by a different single notional entity, which will also be treated as a person other than a company [new subsections 160ZNSO(2) and 160ZNSO(3)]. Again, the company will not have to trace through the interposed company to the persons who beneficially own those shares in the interposed company.

1.32 For each of the ownership rights, the notional shareholder will be taken to have rights no greater than those it had at the start of the test period. [New section 160ZNSP]

1.33 Division 3CC will not apply to the head company unless, at the ownership test time, all the voting shares in the company have the right to receive more than 75 per cent of any dividends the company may pay or any distributions of capital of the head company. [New section 160ZNSR].

1.34 Division 3CC will not apply for the purposes of section 160ZNSB if the Commissioner considers it reasonable to assume that the head company would not satisfy the ownership test if it were not for the rules in Division 3CC. [New section 160ZNSS]

Proposed Division 3CD - Superannuation and approved deposit funds

1.35 Proposed new Division 3CD contains rules in regards to interposed superannuation funds, approved deposit funds and special companies which will assist listed public companies to satisfy the ownership tests in Division 3CB. [New section 160ZNST]

1.36 A listed public company will not have to trace through any complying superannuation funds, complying approved deposit funds or special companies that are interposed between the company and certain persons (none of them companies). The certain persons are those who control any of the voting power in the company (indirectly through the fund or special company) or have the rights to its dividends or capital (directly and indirectly through the fund or special company). [New subsections 160ZNSU(1) and 160ZNSV(1)]

1.37 If the fund or special company has more than 50 members, the fund or company will be treated as a person other than a company who holds the respective ownership rights [new subsections 160ZNSU(2) and 160ZNSV(2)]. If the fund has 50 members or less, each member will be treated as a person other than a company who controls a fixed proportion of the ownership rights [new subsections 160ZNSU(3) and 160ZNSV(3)].

1.38 Sub-item 41(1) of Part 2 of Schedule 14 of the Bill has the effect that the proposed special tracing rules for listed public companies will apply to the current year capital loss provisions from the 1996-97 year of income.

Revenue loss provisions - amendments to the 1997 Act
1.39 As discussed at paragraph 1.8 above, the Bill introduced amendments to rectify anomalies in the revenue loss provisions of the 1936 Act. Proposed Part 4 of Schedule 14 of the Bill will amend the revenue loss provisions of the 1997 Act to reflect the amendments made to the revenue loss provisions in the Bill. [Amendment 18]

1.40 Amendments to Division 175 of the 1997 Act are proposed to ensure that the provisions dealing with the derivation of income for the purpose of offsetting deductions will also deal with the accrual of capital gains for the same purpose. This is necessary because a revenue loss is deductible against a net capital gain. The amendments are:

1.41 The corresponding amendments to the 1936 Act are outlined in paragraphs 14.79 and 14.81 of the Explanatory Memorandum to the Bill.

1.42 As a consequence of the amendments to sections 175-10 and 175-20, subsection 995-1(1) of the 1997 Act, which contains the definitions for the purposes of the Act, will be amended to replace the definition of injected income with a definition of injected amount.

1.43 The current year revenue loss provisions in the 1997 Act dealing with the calculation of a notional taxable income or notional loss for a particular period in a year of income, and also the calculations of taxable income and tax loss, will be amended. Amended subsection 165-65(3) will ensure that a company's taxable income for a year of income, calculated under the current year revenue loss provisions, will include a net capital gain for the year. The corresponding amendment to the 1936 Act is outlined in paragraph 14.45 of the Explanatory Memorandum to the Bill.

1.44 In addition, new paragraph 165-70(3)(f) will ensure that a company's tax loss for a year of income will be calculated by taking into account any net capital gain accrued in the year of income.

1.45 Also, as discussed in paragraphs 14.43 and 14.44 of the Explanatory Memorandum to the Bill, new subsection 165-60(6A) will prevent a net capital gain from being included in the calculation of a notional taxable income or notional loss.
1.46 Finally, for the reasons set out at paragraphs 14.46 and 14.47 of the Explanatory Memorandum to the Bill, new subsections 165-60(2A) and 165-60(7) will exclude section 97 and section 98A amounts that are capital gains.

1.47 New section 170-25 of the 1997 Act will now include the CGT consequences for the payment for a transferred tax loss. Specifically, a capital gain will not accrue to a payee company because of the receipt of consideration for the transfer of a tax loss. In addition, a capital loss will not be incurred by the payer company because of the giving of the consideration for the amount of the tax loss.

1.48 The amendments to the 1997 Act, contained in Part 4 of Schedule 14 of the Bill, will apply from 1 July 1997, immediately after the commencement of that Act. [Amendment 1]

Technical amendments

1.49 The technical amendments outlined in paragraphs 1.50 -55 will apply from the 1996/97 year of income. The dates of effect of the remaining amendments are discussed below.
Subvention payments

1.50 The Bill introduced provisions dealing with the CGT consequences of subvention payments. New subsection 160ZP(12) of the Bill deals with the taxation consequences for a payer company which gives consideration to a payee company for the transfer of the whole or part of a net capital loss.

1.51 However, subsection 160ZP(12) currently states that the transferred loss will be treated as a capital loss or a net capital gain incurred by the payer company. Amended subsection 160ZP(12) will provide that the loss will be treated as a capital loss or a net capital loss incurred by the payer company. [Amendment 16]

Commissioner's amendment period

1.52 Item 40 of the Bill amended subsection 170(13) of the 1936 Act. The amendment sought to extend the Commissioner's power to amend an assessment within six years after the date upon which tax became payable under an assessment, for the purpose of giving effect to new section 160ZND and Divisions 3B (with some exclusions) and 3D of Part IIIA. The amendment merely provided the Commissioner with the same power that was available in respect of current year revenue losses.

1.53 However, the provisions included in the amendment are incorrect. Amendment 17 will remove the reference to Division 3B of Part IIIA (and exclusions) and replace it with sections 160ZNM to 160ZNR inclusive [amended subsection 170(13)]. The Commissioner's power to amend will then apply in a similar manner for current year revenue and capital losses. An amendment to the ITCA Act (discussed at paragraph 1.62 below) reflects this amendment.

Anti avoidance provisions

1.54 New section 160ZNV of Division 3D of the Bill provides that the Commissioner may disallow a deduction or a capital loss of a company in certain circumstances. Subsection 160ZNV(2) says that this can occur where a person obtains a tax benefit in connection with certain schemes.

1.55 The note to subsection 160ZNV(2) erroneously states that the disallowance may result in a loss or a net capital gain for the year of income. Amendment 14 will ensure the note states that the disallowance may result in a loss or a net capital loss for the year of income. [Amended subsection 160ZNV(2)]

Application date

1.56 Part 1 of Schedule 14 of the Bill, which contains amendments to the current year revenue loss provisions of the 1936 Act, applies to the 1996-97 year of income and to any later years of income (with some modification for items 5 to 15). This is outlined in item 17 of the Bill.

1.57 However, the current year revenue loss provisions are also contained in the recently enacted 1997 Act. Consequently, item 17 of Schedule 14 of the Bill will be amended to provide that the amendments contained in Part 1 of the Bill will now only apply to the 1996-97 year of income (with the same modifications for items 5 to 15). [Amendment 8]

Transfer of capital losses

1.58 Item 9 of Schedule 1 of Taxation Laws Amendment Bill (No. 2) 1997 (the No. 2 Bill) amended subsection 160ZP(7) of the 1936 Act. Specifically, the amendment provided that where the conditions in subsection 160ZP(7) are satisfied, then subsection 160ZP(7AAA) of the 1936 Act applies.

1.59 However, subsection 160ZP(7AAA) should only apply where the conditions in subsection 160ZP(7) and any other conditions contained in section 160ZP are satisfied. Consequently, amendment 20 will ensure that subsection 160ZP(7AAA) applies subject to section 160ZP and subsection 160ZP(7). This amendment will commence immediately after the commencement of item 9 of Schedule 1 of the No. 2 Bill [amendment 3].

Income Tax (Consequential Amendments) Act 1997

1.60 Part 5 of Schedule 14 of the Bill proposes several amendments to the ITCA Act. Items 236 and 237 of the ITCA Act repealed subsection 160Z(9A) and inserted a new paragraph 160Z(9)(b) into the 1936 Act. However, the Bill repealed both of these provisions and replaced them with new Divisions 3A, 3B and 3C of Part IIIA of the 1936 Act. Consequently, items 236 and 237 of the ITCA Act will be repealed to ensure the provisions of the Bill applies as intended. These items will be taken never to have had any effect. [Amendment 18 - items 61 and 64]

1.61 Similarly, the ITCA Act repealed subsection 160ZP(9A) and inserted new paragraphs 160ZP(9)(a) and 160ZP(9)(b) into the 1936 Act. This Bill proposes to repeal these provisions and replace them with a new subsection 160ZP(9), which recognises the fact that the current year capital loss provisions are now contained in Divisions 3A to 3D of Part IIIA of the 1936 Act. Consequently, items 241 and 242 of the ITCA Act will be repealed to ensure the provisions of the Bill apply as intended. These items will also be taken never to have had any effect. [Amendment 18 - items 62 and 64]

1.62 Item 248 of the ITCA Act inserted a new subsection 170(13) into the 1936 Act. However, the subsection does not contain references to the relevant provisions of the new current year capital loss provisions in the Bill. Thus, item 248 will be amended to include references to new sections 160ZND, 160ZNM to ZNR (inclusive) and to new Division 3D of Part IIIA of the 1936 Act. [Amendment 18 - item 63]

1.63 The amendments to the ITCA Act, contained in Part 5 of Schedule 14 of the Bill, will apply from 1 July 1997, immediately after the commencement of that Act. [Amendment 1]

Overview

2.1 Amends the new capital gains tax (CGT) retirement exemption provisions for taxpayers disposing of small business assets contained in Schedule 1 of the bill to:

allow taxpayers to ignore years prior to the 1992-93 year of income when working out the period an individual was a controlling individual, provided it is favourable to the taxpayer to do so;

amend the Termination Payments Tax (Assessment and Collection) Act 1997 to ensure that the CGT exempt component of an eligible termination payment (ETP) is not subject to the superannuation contributions surcharge; and

insert an application clause into the new CGT retirement exemption provisions to ensure the amendments apply to assets disposed of on or after 1 July 1997.

Background to the amendments

Amendment 4

2.2 An asset’s CGT exempt amount is the amount of the capital gain that would, but for these amendments have accrued to the taxpayer on the disposal of an asset and which the taxpayer elects to be exempt under new Division 17B.

2.3 New section 160ZZPZK in the Bill apportions the CGT exempt amount where an individual is not the controlling individual for the whole period the company or trust owns the business assets. The CGT exempt amount is apportioned according to the period the individual was a controlling individual compared to the period the company or trust owned the assets.

2.4 This section also allows the taxpayer to ignore years prior to the 1990-91 year of income when working out the period an individual was a controlling individual, provided it is favourable to the taxpayer to do so.

Amendment 5

2.5 The Government's intention is that the CGT exempt component paid as an ETP is not subject to the surcharge. This was reflected in the explanatory memorandum accompanying the Bill.

2.6 The surcharge applies to ETPs that are ETPs under paragraph (a) of the definition of eligible termination payment in subsection 27A(1) of the Income Tax Assessment Act 1936 (the Tax Act). The CGT exempt component of an ETP received by an individual as sole trader or a partner in a partnership is an ETP under paragraph (jaa) of the definition and will not be subject to the surcharge.

2.7 When a CGT exempt component of an ETP is paid to a controlling individual by a company or trust, the ETP is a paragraph (a) ETP. The application of the surcharge will depend on whether the ETP is rolled over or paid as a direct ETP to the controlling individual.

2.8 When the CGT exempt amount is paid as part of an ETP that is rolled-over, the surcharge is payable if the amount is a surchargeable contribution as defined in subsection 8(2) of the Superannuation Contributions Tax (Assessment and Collection) Act 1997. The CGT exempt component of an ETP does not fall within this definition and will not be subject to the surcharge.

2.9 When the CGT exempt amount is paid directly to the controlling individual as part of an ETP, the surcharge is payable if the amount is a termination payment as defined in subsection 7(2) of the Termination Payments Tax (Assessment and Collection) Act 1997. A termination payment is the retained amount of a paragraph (a) ETP except for the retained amount of any post-June 1994 invalidity component of such a payment. The CGT exempt component, which is a paragraph (a) ETP, will be unintentionally caught under this definition and subject to the surcharge.

Explanation of the amendments

2.10 Amendment 4 changes the period of time control must be established when apportioning the CGT exempt amount according to the period an individual was a controlling individual compared to the period the company or trust owned the assets.

2.11 The amendment will allow taxpayers to ignore years prior to the 1992-93 year of income when working out the period an individual was a controlling individual, provided it is favourable to the taxpayer to do so. However, if the taxpayer has records to establish that the individual was a controlling individual of the company or trust during years prior to the 1992-93 year of income then these years can be taken into account.

2.12 If these prior years are taken into account, then the asset’s CGT exempt amount is reduced by the lesser of the two reduction amounts calculated.

2.13 As a result of these amendments the two examples in the explanatory memorandum to Taxation Laws Amendment Bill (No. 3) 1997 are replaced with the following.

Example 1

A company acquires an asset on 1 July 1986 and sells the asset on 30 June 1998 (ie, 12 years later). The asset's CGT exempt amount is $300. Melissa was a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1 July 1989 to 30 June 1995 and again from 1 July 1996 to 30 June 1998 (ie, a total of 8 years).

As Melissa was not a controlling individual of the company for the full period the asset was owned, the asset’s CGT exempt amount must be reduced. The amount of the reduction is the lesser of the following two amounts:

the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie, ); and

the amount of the reduction if the years of income prior to 1992-93 are ignored which is $50 (ie, ).

That is, the amount of the reduction will be $50. As a consequence, the asset’s CGT exempt amount will be $250 (ie, $300 - $50).

Example 2

Assume in example 1, Louise was also a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1 July 1986 to 30 June 1991 and again from 1 July 1995 to 30 June 1998 (ie, also for a total of 8 years). In addition, Melissa’s and Louise’s exemption percentage is 50% each.

As both Melissa and Louise were not controlling individuals of the company for the full period the asset was owned, the asset’s CGT exempt amount must be reduced. The amount of the reduction is the sum of Melissa’s and Louise’s exemption percentage of the reduction amounts that would otherwise be required if Melissa or Louise was the only controlling individual.

That is, the reduction required in relation to Melissa will be $25 (ie, 50% x $50).

The reduction required in relation to Louise will be 50% of the lesser of the following two amounts:

the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie, ); and

the amount of the reduction if the years of income prior to 1992-93 are ignored which is $150 (ie, ).

That is, the amount of the reduction required for Louise will be $50 (ie, 50% x $100).

Therefore, the total amount of the reduction will be $75 (ie, $25 + $50). As a consequence, the asset’s CGT exempt amount will be $225 (ie, $300 - $75).

2.14 Amendment 5 ensures that the CGT exempt component of an ETP is not a surchargeable contribution for superannuation contributions surcharge purposes. [Item 44 of Part 2]

2.15 The amendment will exclude the CGT exempt component from the definition of termination payment contained in Termination Payments Tax (Assessment and Collection) Bill 1997.

2.16 Amendment 5 also inserts the application date for this measure and ensures that small business taxpayers will qualify for an exemption from tax on capital gains made on the disposal of some or all of their active assets if the asset(s) are disposed of on or after 1 July 1997 and the proceeds are used for retirement. [Item 45 of Part 3]

Correction

2.17 Replace paragraph 1.17 of the explanatory memorandum (as introduced into the House of Representatives) with the following:

'1.17 To qualify as an ETP, the amount must be paid to the controlling individual in consequence of the termination of his or her employment.'

Overview

3.1 Amendment 7 is a corrective measure which amends section 73B of the Income Tax Assessment Act 1936 (the Act) to ensure that amendments made by the Taxation Laws Amendment Act (No. 3) 1996 operate as intended and announced on 23 July 1996.

Summary of the amendments

Purpose of the amendments

ensure a deduction for core technology expenditure is allowable in the year the expense was first incurred; [Items 1E and 1F]

Date of effect

Explanation of the amendments

Items 1A to 1C, 1H - Feedstock formula

Example (this example shows how the intended result can be distorted if a taxpayer has feedstock expenditure relating to more than one R&D activity and the feedstock output of one activity is worth more than the feedstock input, while the feedstock output of another is worth less than the feedstock input)

D Residual Feedstock 300 800 1400 1100
Expenditure (100%)
(Lesser of A or B)

The result should be that, of $1500 feedstock input, $400 is eligible for the concessional 125% deduction while $1100 is deductible at 100%. By allowing the two different R&D activities to be combined, the formula produces the result that $400 is eligible for the concessional deduction and $1400 for deduction at 100%, i.e. $300 more altogether than was actually expended on feedstock.

Items 1E and 1F - Core technology calculation

Item 1G - Paragraph citation

Item 1D - Pilot plant depreciation table

Item 1J - Post 23 July 1996 pilot plant balancing amount

4.1 Amendment 20 introduces Schedule 14A to the Bill. Part 1 of the Schedule amends the Income Tax Assessment Act 1936 while Part 2 amends the Income Tax Assessment Act 1997.

4.2 This Schedule will allow income tax deductions for gifts of $2 or more to the funds/organisations listed in paragraph 4.3. This will be done by listing them in tables 5, 6 and 12 of the gift provisions in each of the relevant Acts. The index to the provisions in each of the relevant Acts will also be updated.

Item	Fund/organisation	Gifts made after	Gifts made before
	New Listings
5.2.10	Australian National Korean War Memorial Trust Fund	1 September 1996	2 September 1998
6.2.23	AAP Mawson's Huts Foundation Limited	17 March 1997	No limit
12.2.2	Australia Foundation for Culture and the Humanities Ltd.	8 November 1996	No limit

Background to the amendment

5.1 The amendments to Taxation Laws Amendment Act (No. 2) 1997 contained in amendments 3 and 20 are explained in Chapter 1 - Gains and losses.

5.2 The amendments also amend the Taxation Laws Amendment (Private Health Insurance Incentives) Act 1997 (PHII).

5.3 An increase of the medical expenses rebate threshold was announced in the 1996 Budget. The Government introduced amendments to the PHII to provide for the threshold increase to complement the incentives under the PHII. The Parliament subsequently passed the threshold increase at half the proposed level ($1250 instead of $1500).

5.4 There was a drafting error in the amendment that inserted the medical expenses rebate amendments into the PHII. The amendments became Schedule 3 of the PHII. The Schedule clause at the front of the PHII states that "...each Act that is specified in a Schedule to this Act is amended...as set out... in the Schedule concerned...". The error is that Schedule 3 to the PHII does not specify an Act and therefore the amendment is technically deficient. The omission was overlooked.

Explanation of the amendment

5.5 Amendment 3 provides that the amendment to Schedule 3 of the PHII is taken to have commenced immediately after the PHII.

5.6 Amendment 20 inserts the title of the Act to be amended, the Income Tax Assessment Act 1936, by Schedule 3 of the PHII into the Schedule.

Background to the amendments

6.1 The Income Tax Assessment Act 1997 (97 Act), which applies from 1 July 1997, contains a rewrite of provisions dealing with exempt income from the sale, transfer or assignment of mining rights. The rewrite (section 330-60) effectively reinstates the exemption as it existed in the Income Tax Assessment Act 1936 (36 Act) prior to the amendment passed in the Senate on 12 December 1996.

6.2 An amendment to the 97 Act is therefore required to give the same outcome for the 1997-98 and later income years as is being proposed by the amendments in TLAB No.3.

Explanation of the amendments

6.3 The amendments are necessary to ensure continuation of the effect of the amendments in Schedule 2 of Taxation Laws Amendment Bill (No.3) 1997 (TLAB No.3) from 1 July 1997.

6.4 The amendments also limit the reduction of exempt income from the sale of mining rights where any exploration and prospecting expenditure (EPE) was incurred in relation to general mining and quarrying.

Reduction of exempt income

6.5 The 97 Act at paragraph 330-60(2)(b) requires the exempt income to be reduced by the general mining EPE in that area that has been, or can be, deducted (referred to as deducted) under section 122J of the 36 Act. Without a further amendment to the 97 Act, exempt income derived up to 20 August 1996 would be reduced by the amount of the general mining EPE deducted both before and after 20 August 1996 and the amount of quarrying EPE deducted up to 30 June 1997.

6.6 This further amendment to the 97 Act will ensure that the exempt income, derived from a contract for sale entered into after 7.30pm on 20 August 1996, is only reduced by the general mining and quarrying EPE deducted before that time. This amendment recognises that, as income derived after that time is assessable, EPE incurred after that time, should be deductible. Exempt income, derived from a contract of sale entered into up to that time, will be reduced by the general mining and quarrying EPE deducted. [Items 4 and 5]

6.7 The same principle will be adopted in applying paragraph 23(pa) of the 36 Act to determine the amount of exempt income from the sale, transfer or assignment of a mining right. Namely, the exempt income will only be reduced by the general mining and quarrying EPE deducted before 7.30pm on 20 August 1996.

6.8 Paragraph 330-60(2)(b) of the 97 Act reduces the exempt income by only the general mining EPE that is deductible under section 122J of the 36 Act. The 36 Act, however, reduces the exempt income by the general mining and quarrying EPE deducted under Division 10 of Part III of the 36 Act. The amendments will provide consistency in the operation of the law contained in the 36 and 97 Acts. The exempt income under the 97 Act will be reduced by EPE deducted under Division 10 of Part III of the 36 Act. This includes EPE within the meaning of both 122J (general mining) and 122JF (quarrying). [Items 6 and 7]

Correction

6.9 The following corrections are made to Chapter 2 of the Explanatory Memorandum (as introduced into the House of Representatives):

Paragraph 2.1 - insert 'or before' before '20 August 1996' where referred to in the third dot point.

Paragraph 2.8 - insert 'or before' before '20 August 1996' where last occurring.

6.10 These corrections address some potentially misleading statements in that Explanatory Memorandum. The corrections restate the requirement in the law that, in order to obtain the exemption, a taxpayer must be a bona fide prospector on or before 20 August 1996.

Commonwealth of Australia Explanatory Memoranda

TAXATION LAWS AMENDMENT BILL (NO. 3) 1997

General outline and financial impact 1Chapter

Gains and losses

CGT exemption: disposing of small business retirement assets

Research and development activities

Deductions for gifts

Sale of mining rights

Purpose of the amendments

Date of effect

Background to the legislation

Explanation of the amendments

Tracing the ownership of shares in a listed public company

Proposed Division 3CA - Calculating a net capital gain or net capital loss

Proposed Division 3CB - Tests for determining ownership

1.28 The rules in Division 3B (generally designed to overcome arrangements affecting beneficial ownership) also apply for the purposes of an ownership test. [New section 160ZNSK]Proposed Division 3CC - How to treat shareholdings of less than 1 per cent

Proposed Division 3CD - Superannuation and approved deposit funds

Technical amendments

1.49 The technical amendments outlined in paragraphs 1.50 -55 will apply from the 1996/97 year of income. The dates of effect of the remaining amendments are discussed below. Subvention payments

Commissioner's amendment period

Anti avoidance provisions

Application date

Transfer of capital losses

Income Tax (Consequential Amendments) Act 1997

Overview

Background to the amendments

Amendment 4

Amendment 5

Explanation of the amendments

Example 1

Example 2

Correction

Overview

Summary of the amendments

Purpose of the amendments

Date of effect

Explanation of the amendments

Items 1A to 1C, 1H - Feedstock formula

Items 1E and 1F - Core technology calculation

Item 1G - Paragraph citation

Item 1D - Pilot plant depreciation table

Item 1J - Post 23 July 1996 pilot plant balancing amount

Background to the amendment

Explanation of the amendment

Background to the amendments

Explanation of the amendments

Reduction of exempt income

Correction

General outline and financial impact 1
Chapter

1.28 The rules in Division 3B (generally designed to overcome arrangements affecting beneficial ownership) also apply for the purposes of an ownership test. [New section 160ZNSK]
Proposed Division 3CC - How to treat shareholdings of less than 1 per cent

1.49 The technical amendments outlined in paragraphs 1.50 -55 will apply from the 1996/97 year of income. The dates of effect of the remaining amendments are discussed below.
Subvention payments